Unsung heroes: Pension fund trustees have more responsibility than ever before
03 June 2013 | Magazine Archives FAnews & FAnuus | Employee Benefits | Pieter Cronjé, FIA
Saving for retirement is not easy. Volatile market returns, unsuitable investment choices and excessive administration costs can erode the capital available to savers at age 65. Most of these factors are beyond the fund member’s control, which explains why pension fund trustees play such an important role in securing a brighter retirement, says Pieter Cronjé, Chair of the Employee Benefits Executive Committee, Financial Intermediaries Association of Southern Africa (FIA).
The Pensions Fund Act requires that a pension fund appoint at least four persons to its Board of Trustees. Half of this number must be appointed by the employer and the rest are elected by the members of the fund. In umbrella funds the fund sponsor appoints the trustees with the added requirement that there is at least one independent trustee.
Realistic replacement ratios
Trustees have oversight over countless tasks including ensuring that the fund complies with legislation, communicating with and educating fund members, making investment decisions and taking care of day-to-day operational matters.
"Perhaps the most important task performed by trustees is to set and agree the main objective of the pension fund,” says Pieter Cronjé, Vice-chair of the Employee Benefits Committee at the Financial Intermediaries Association of Southern Africa (FIA). The FIA believes that this objective should include ensuring an adequate replacement ratio for each pension fund member upon retirement.
The replacement ratio is the saver’s salary in retirement expressed as a percentage of his or her final gross salary. So, for example, if Joe earned R500 000 in the year before he retired, and received a R300 000 pension in retirement, his replacement ratio would be just 60%. Experts quote the ‘holy grail’ of replacement ratios at around 75%, though surveys published by Alexander Forbes suggest that local retirees struggle to achieve 50%.
In order to set and communicate achievable objective trustees must keep abreast of the prevailing risks and trends in the retirement environment. Recent ‘big impact’ events include the shift from defined benefit to defined contribution and the introduction of umbrella funds, but trustees are also concerned about the reduction in yield brought about by rising administration and fund management costs, insufficient returns due to inappropriate asset allocation strategies within funds and the growing need for financial education.
Mandates and portfolios
What can trustees do to improve replacement ratios? One way is to focus on the return generated on invested funds. Fund managers (by offering greater investment choice to members) and the regulator (Regulation 28 enforces sensible asset allocations) already do their part in this regard. The trustees must in turn ensure that the mandate given to asset managers and the portfolios that are selected are suitable to achieve the fund’s objectives.
A second focus is on administration, compliance and investment costs. The most obvious cost savings come from achieving economies of scale. Concerns over spiralling costs have driven consolidation in the industry over the past decade with Trustees of smaller funds opting to move from stand-alone to umbrella arrangements.
Regulation has contributed more than its fair share to rising costs. Modern day trustees have to ensure that both their funds and service providers to the fund strictly adhere to the Consumer Protection Act, the Financial Advisory and Intermediary Services (FAIS) Act, the Financial Intelligence Centre (FICA) Act and Regulation 28, to name a few.
Addressing member behaviour
After considering the risks associated with rising costs and poor investments performances trustees must tackle perhaps the biggest risk of all, member behaviour. Trustees can influence member behaviour through carefully designed forms, default choices and ensuring access to financial and risk advisors as soon as benefits become payable. By facilitating access to proper advice trustees can ensure that members make the right decision with their accumulated capital when leaving the fund.
Rising compliance costs and poor investment returns present challenges to both trustee and fund member. Trustees can do little to change macroeconomic factors… Instead they should play an active role in changing member behaviour and thereby impact positively on the retirement savings environment.
