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Protection for the retirement industry

01 October 2014 Greg Preston, FQ Financial Skills

The specialities of the retirement funds industry in South Africa have become more complex as the demands of funds, trustees, members and representative bodies have grown. An emerging trend is that members are becoming more aware, trustees are becoming wiser and products are becoming more varied.

At the same time there has been an alarming increase in fraud perpetrated against funds, liability arising through maladministration, administrators acting against specific fund mandates and errors through the daily pressure of administration.

Are you appropriately covered?

It is essential for funds and Boards of Trustees to set a quantum of fidelity and professional indemnity cover.

There has been a huge reliance on the fund’s short-term advisers to recommend a level of cover, taking into account assets, levels of insured benefits and members’ shares of fund, but it must be admitted that this has been an inexact science.

The question that arises from this inexact science is a serious one; how much liability would an intermediary face if an inappropriate level of cover was recommended? In answering the question there are two issues which must be examined: what is the fiduciary duty of the intermediary and what tool can be utilised to select an appropriate level of cover?

The word of the wise

A “fiduciary” is someone who is obliged to act in the interests of others. The core of a fiduciary duty is the obligation of loyalty and informed advice. Funds rely on the intermediary for informed advice. The relationship is based on confidence, but trustees have an obligation to ensure that the confidence is well-founded.

Advice must be unfettered by conflicts of interests or by the intermediary’s own personal agenda. It is clear, therefore that an intermediary carries risk in terms of the advice given to funds. In light of the many unhappy cases in the retirement funds industry, the need for a tool to guide intermediaries and trustees is apparent. This leads us to the second point: are there any available tools?

Mitigating risk

In recognition of the gap in the market, Camargue Underwriting Managers commissioned risk actuaries, consultants, administrators, assessors and moderators from the pension fund industry to explore the feasibility of creating a tool that would assess each fund’s limit of liability. Expertise was drawn from Marsh Africa (actuarial and consulting expertise) and FQ Financial Skills (Board assessments and fund due diligence).

The ultimate tool

The LIMIT Tool has been created and is now available to fill this gap in the market. In designing LIMIT, risk areas for funds have been identified and through analysis of claims experience these have been allocated a weighting to reflect the likelihood of risks or claims in a particular area.

A questionnaire was designed to address the risks in each category and fund trustees must complete the questionnaire giving their assessment of fund compliance and governance and their perception of risk. The fund’s annual financial statements are examined to confirm fund static and financial data which is an essential component in measuring a quantum of potential liability.

The input from the questions indicates potential areas of risk, potential training areas, areas of uncertainty for trustees as well as areas where the fund is compliant and well-governed.

LIMIT is designed to indicate the upper and lower levels of the fund’s potential limit of liability. The intermediary and trustees then have an empirical document that can be used in debating a realistic level of Fidelity and Professional Indemnity cover.

This is an exciting new product that is designed to protect the interests of funds, members and Boards of Trustees while at the same time making the role of the intermediary more professional and well-informed.

Quick Polls

QUESTION

Is relying on a primary home as a source of retirement equity still a viable strategy for South Africans?

ANSWER

Maybe, depends on location
No, too unpredictable
Not sure, 50-50
Yes, always
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