Serious structural problems with the management of retirement funds

There are serious problems regarding the management of retirement funds. Often trustees are blamed when things go wrong and the suggested solution is better training for trustees. Both the diagnoses and solution are incorrect.

The problems evident in the management of retirement funds are neither the 'trustees' nor their training. Examining the issue of retirement fund management in greater detail results in a better diagnosis and solution.

Directors not trustees

Firstly it is not clear that legally the so-called 'trustees' are in fact trustees. The Pension Funds Act does not call them trustees but calls them members of the board. That is probably closer to the truth. Their role is closer to that of directors of a board of a company than trustees. To the extent that it can be argued that all directors are trustees, the same can be said of retirement fund 'trustees'.

Now, when looking at the role of directors in general the same can be said of them as is said about retirement fund trustees - whenever something goes 'wrong' it is the fault of the directors. In attempting to hold directors accountable for everything that goes 'wrong', directors are confused with deities. It is assumed that they are all knowing, all wise, all powerful and present at all times, at all places. It is only if they were deities they could be responsible for all the things they are accused of. Normal mortal beings could never do (or more correctly do what everyone thinks they should have done) all the things they stand accused of.

Real role of directors - oversight not management

Understanding that directors are normal human beings and not deities, the role of directors should be more realistically assigned. In running any institution, a division between oversight and management must be made, but usually is not. Directors are responsible for the oversight of the institution, not the management of that institution.

When I was first asked to join a board of a company, I asked advice from one of my more experienced friends and his answer was simple, 'do you have confidence in the management of the company?' The truth of the situation is that if the management of the company is incompetent the company will not succeed.

An important role of the board of directors is to ensure that qualified and competent senior management is in place. A good board of directors will not make a company succeed where the management is incompetent. The real role of directors is that of oversight not management. This is increasingly forgotten as directors are increasingly sucked into managing companies and not fulfilling their oversight role. Thus, for example, directors are increasingly sitting on audit committees, which have widely expanded mandates, enterprise wide risk management committees also with wide mandates and so on. It seems to me that the German company management structure is closer to the correct system where two boards exists: a board of directors and a management board.

Missing managers

The real problem with the management of retirement fund is not the trustees but the management. There are no professional managers. What is needed is not to train trustees but to train retirement fund managers. What is needed is qualified, trained and paid retirement fund managers. What is not needed is trustees trained in managing retirement funds.

Trustees, like directors, meet about four times a year for a few hours at a time. It is really impossible for these trustees, under these circumstances, to manage a retirement fund. As in the case of the company, the managers must manage the fund. The main role of the trustees is to ensure that suitably qualified and experienced persons are appointed to manage the institution.

Sea of confusion

Currently, the management of retirement funds is disjointed. Funds are not managed in a holistic fashion. The individual disciplines involved are adrift in a sea of confusion. As a result trustees are forced into attempting to manage the fund.

Here is an example. The payment of death benefits are governed by s37C of the Pension Funds Act and trustees are routinely blamed for making wrong payments. If trustees attempted to deal, correctly, with benefit payments in terms of s37C, no-one would ever be paid. To make the 'correct' decision requires many hours of detailed consideration after spending a great deal of time collecting all the relevant information. This has to be done by someone who is very familiar and experienced with the provisions of s37C. In reality this can never be done by the board of trustees where this item may be but one item on a very full agenda.

What therefore is needed is a recommendation, supported by a full report, supported by documentation, made to the board of trustees. In reality the decision should not be made by the trustees but by the qualified, trained and experienced manager. The board in carrying out its oversight responsibility ensures that the manager, in making the recommendation, is competent, has correctly applied his mind to the issue and is following a well defined procedure which gives effect to the provisions of s37C. In reality a board will be lucky if it gets a verbal report about paying some or other beneficiary.

The same can be said about other decisions. Another example will be the withholding of the employee's contributions in the case of alleged dishonestly, also regulated by the Act. Where an employee has, through dishonesty, caused his employer to suffer a loss, say for example through fraud, the retirement fund is authorised to withhold withdrawal benefits. Again the board of trustees will be lucky if it gets anything more than a verbal request to withhold the benefits, whereas what is needed is a recommendation supported by detailed analysis of the facts, tested against the relevant statutory provisions and supported by written documentation. All this should be carried out by a trained, experienced and competent manager.

Managing the managers

It seems clear to me that part of the 'problem' with 'wrong' decisions made by retirement funds is that, structurally, it is the institutional system which is wrong. Trustees are not managers. Emphasis should be directed at developing well-trained managers and trustees trained in the role of oversight. The emphasis should not be in trying to train trustees to be managers but training full time managers to be managers of retirement funds.