The effect of complex regulation on Pension Fund Trustees

01 February 2013 Grant Field, FedGroup Financial Services

Increasing regulatory demands are fuelling issues facing Pension Fund Trustees. What are the effects of complex regulation on Pension Funds? More importantly, where does this leave the Trustee?

According to its legal definition, the term "Trustee” refers to a "person who holds property, authority or a position of trust or responsibility for the benefit of another”. In its broad sense, the term is bestowed upon an individual who has a legal obligation to administer assets for another person’s benefit.

Due to the importance that a Pension Fund plays in the financial well-being of its members, Pension Fund Trustees play a vital role in managing the long term provision of funding for retirement. Given independent authority, these Trustees make decisions according to their best judgment, ensuring that member interests are protected at all times. However, with this authority, comes onerous responsibility.

Two classes of Trustees

The management of Pension Funds is balanced by two classes of Trustees – the professional Trustee and the part time or member-elected Trustee. Each of these classes bring a unique stance which helps to ensure the effective management and governance of Funds. While the professional Trustee holds significant expertise, the part time Trustee is usually closer to the needs of the Fund member. Regardless whether professional or part time, both classes of Trustees are confronted by complex regulation.

Regulatory demands

The role of Regulation has at least one primary objective that is common with the role played by the Trustees – to ensure the financial well being of funds and its members. Be it through Acts, such as the PF130, or legal notices, regulatory documents define the playing field for Pension Fund management. While regulation is necessary, its format is unnecessarily complex and creates a burden on Trustees.

Due to its complexity, Trustees are often unaware of regulatory stipulations, which blur the understanding of their responsibilities and obligations. This is especially true for the part time Trustee, who does not necessarily have the background needed to decipher regulatory documents that are filled with legal and industry specific jargon.

Regulation does not ensure honesty

It is also questionable whether regulation is adhered to, whether understood or not. The heart of this concern is routed in acting in the spirit of the law versus acting in the letter of the law. The mere existence of regulation does not always ensure honest parties of those entrusted to protect the interest of others. Trustees are entrusted with the responsibility to safeguard the Pension Funds of hard working South Africans, and should do so with integrity, regardless of the complex regulatory burden.
What about the Fund?

In line with regulatory stipulations, a Trustee’s duty includes making recommendations to the fund administrators. Should the understanding be lost between the regulation and the Trustee, then this recommendation made to the administrator can only be flawed.

One would think then, that the Fund is better off in the hands of the professional Trustee, who understands the complexity of the regulation. This is not always the case. Professional Trustees, who understand the complex regulation, are faced with time consuming check lists and administration that dictates the management of Pension Funds.
In a world, where time is money, the only effect that complex regulation seemingly has on a fund, is added overhead. It is therefore questionable whether the fund benefits from such complex regulation, as the regulatory burden is borne by the very members it is trying to protect.
Where does this leave the part time Trustee?

Although a challenged role, there is a need for the part-time Trustee in governing the investment of assets to achieve the long-term provision of funding for retirement.

Simplification of regulation and guidance from the Regulator could ease the regulatory burden facing both the professional and part time Trustee. Ultimately, focus needs to be placed on what really matters, the fund, and its member’s needs.

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