A safer pension fund industry

The increased importance of the role of pension fund trustee, as well as a stronger focus on corporate governance among service providers, should contribute significantly towards making the retirement fund industry fairer and safer for members of pension funds.

Scandals in the retirement fund or related industries generally give trustees the jitters because the appointment of competent service providers to a pension fund is an essential part of trustees' fiduciary duties," says Deon Booysen, consulting actuary at Simeka Consulting and Actuaries. "Trustees can be held personally liable if they do not perform these duties in the best interest of members."

Service providers scrutinised

"For their own protection and in the interests of members in the fund, new and smaller pension funds have notably sought quality service providers since the revelation of scandals involving unscrupulous financial service companies such as Fidentia and practices in the industry such as bulking," says Booysen. "Trustees are increasingly favouring larger, better known service providers with the experience and expertise to deliver on their contracts."

In turn, most service providers now clearly highlight the proper corporate governance they have in place, as well as provide complete fee disclosure, he says.

According to Booysen, "while the Fidentia debacle resulted in trustees examining service providers more closely, very few pension funds have since changed their providers. This is not surprising since most retirement funds are with regulated service providers."

The Fidentia case

Fidentia was different in that it was a trust and not a retirement fund, which operates within a very well developed legislative framework. There was no regulatory body overseeing Fidentia's operations and checking on fund governance and compliance.

Reviews vital

"There should be a strong reason for trustees to want to end a relationship with a service provider, as appointing new providers and re-establishing relationships is an onerous task," says Booysen. "Service providers should be replaced where the provisions of the contract are not being fulfilled, or where delivery is consistently below par."

"Having said this, a frequent review of providers is a necessity." He advises that trustees should rebroke group risk at least every three years if not annually and review their administrator every three to four years. "In some instances there are barriers to changing service providers. Many funds have not fulfilled the actions specified in the Pension Funds Second Amendment Act of 2001, which requires funds to complete a surplus apportionment exercise," says Booysen. "Until this exercise is completed, it does not make sense for funds to replace their service providers."

Keeping trustees in check

He says there may also be some inertia from trustees themselves. "Unlike professional trustees, who are paid to keep abreast of legalities and spend time on a fund, some employees appointed as fund trustees may not have as much time, skills, training and financial astuteness to make informed decisions on their service providers' corporate governance."

"The Financial Services Board's Circular PF130, 'Good Governance of Retirement Funds' issued in June 2007, highlights the importance of the role of the trustee through its rigorous list of requirements for the sound operation of a board of trustees," says Booysen. "The FSB is putting in place more onerous checks and balances to ensure that trustees fulfill their role and act in the best interests of their funds. This can only benefit members."