Appeal to pension funds to resist rash action in face of reform

Government will undertake extensive consultation, not only through NEDLAC but also through other forums of stakeholders, as it develops its comprehensive new system for social security and retirement provision, says Treasury Deputy Director-General for Public Finance Andrew Donaldson.

Speaking at the Johannesburg conference of the Principal Officers Association on Monday, Donaldson warned that pension fund members might take rash decisions about their pension savings or be given rash advice because of the climate of uncertainty generated by the pending changes in the industry. He urged the audience consisting mainly of principal officers and trustees of pension funds to guard against "short-termism" that would be detrimental to their members in the long run.

"In our pension reform programme particular attention will be paid to sequencing arrangements and the preservation of existing benefits," he stressed. It was probable that there would be sunset clauses for members nearing retirement age when the new dispensation came into effect.

Donaldson highlighted particular factors in the South African context that made the design of the new system particularly challenging: The imperative of redistribution of wealth and the reality of high mortality among adults of working age.

While reducing leakage out of retirement funds and ensuring preservation of contributions was a major goal, he acknowledged that "complete preservation is not a realistic option". In the face of the high death rate of parents in the prime of life "survivor benefits will be a unique and very important aspect" of the plan presently taking shape.

Donaldson also referred to the difficulties of regulating an industry which presently has more than 13 000 funds. He indicated that new requirements on reporting and disclosure were in the pipeline but added that notwithstanding instances of fraud and gross mismanagement - the industry rested on the substantial strengths of systems that had been in place for many decades.

"We have to preserve what is good and, in a managed and orderly way, change the things that have to be changed."

An international perspective on reforming pension fund management was contributed by Nigel Down, UK Institutional Client Services Director for SEI. He reflected on the impact of the Myners Report commissioned some years ago by the British Treasury to investigate the dominance of institutional investment by a handful of large players.

The Myners Report came up with a non-mandatory blueprint for change which proved sufficiently influential, he said, to break up the exclusive "club"  of investment managers. Many of the recommendations related to the decision-making and governance responsibilities of the trustees of funds.

Taking up the arguments of Paul Myners, Down endorsed the view that decisions on pension fund investment should be taken by people who have the knowledge and the skills to make such decisions. He argued strongly for intensive education of trustees and raised the question of paying trustees.

In the panel discussion that followed there was vigorous debate on how best to constitute a board of trustees that would single-mindedly safeguard the interests of fund members.

Attorney Rosemary Hunter argued for greater professionalisation of governance in the industry by introducing a category of independent paid trustees to empower boards. She envisaged that this would reduce the inappropriate influence of third parties on board members employers who protected their interests at the expense of members, service providers who treated retirement funds as a "product" and trade unions that allowed extraneous considerations to dictate their investment decisions.

Jan Mahlangu, Retirement Funds Co-ordinator for the Congress of South African Trade Unions, countered that the payment of trustees was only likely encourage them to "turn the pension fund into their own little spaza shop". Citing the shop steward system that forms the backbone of the union movement, he advocated approaches that would increase the direct accountability of trustees to the members of pension funds.

The key issues of pension fund governance, investment and policy reform form three streams around which the two-day conference is structured. It concludes at lunch time today -Tuesday 12 June.