Trustees should not be caught off-guard by retrenchment exercises, says Old Mutual

As the effects of the credit crisis work their way through the South African economy and investment markets, spare a thought for retirement fund trustees whose world is different nowadays. Trustees are being asked very challenging questions by their members while coming to terms with a rapidly changing environment.

Megan Butler, head of research at Old Mutual Actuaries and Consultants (OMAC), says the good news for many Trustees is that while the cause of the recent market crash might not have been foreseen, the risk of market downturns themselves is something that trustees monitor regularly as part of an investment policy.

But while many funds have the investment risks under control, Trustees should be careful of being caught off-guard by retrenchment exercises.

“Retrenchment exercises are difficult and complex. In the midst of the industrial relations requirements, it is easy to lose sight of the very real risks that the company retirement fund and, for that matter the company itself, faces.”

She says inappropriate handling of the retirement fund aspects of retrenchment can have serious governance implications or can result in the fund facing unsustainable costs. In addition, it could lead to investment penalties or insolvency.

There are a number of practical considerations for funds. For example, if the retrenchment exercise is large, the group life assurers can increase the premiums. Trustees may need to trim costs in other areas to compensate.

“Given the difficult conditions that many employers face, appropriate liability management is critical. Employers with Defined Benefit Pension plans and post retirement medical aid liabilities risk a worsening solvency position if retrenchment issues are not dealt with proactively.”

She says that Trustees and employers also have a responsibility to ensure members facing retrenchment receive communication and advice around their retirement fund benefits.

“Lack of clear, consistent communication to members forced to leave their fund due to retrenchment often results in them turning to HR staff for advice. This can have unfortunate consequences for the member who is being advised and the HR staff giving the advice in contravention of the Financial Advisory and Intermediary Services Act. This can even lead to Pension Fund Adjudicator cases against the fund or employer.”

She says it is the responsibility of employers and retirement fund Trustees to encourage members to keep their retirement fund savings invested for as long as possible and not cash them in when exiting their jobs prior to retirement age.

She adds that funds and employers also need to ensure that members are advised about the effect that retrenchment could have o­n their death and disability cover.

“While most companies that offer retirement benefits usually include some level of life cover, when a member leaves a fund (i.e. as a result of changing employer or being retrenched), their life cover will invariably fall away.

"Now, more than ever, it is crucial that employees understand all the options available to them.”