Defining The Role Of Retirement Fund Trustees

The recent developments in the retirement funding industry illustrates the need for a drastic transformation of the industry in areas such as disclosure, transparency and the management of potential conflicts of interests.

"The conduct of the industry has come under close scrutiny from regulators and even parliament," says Rob Williams, CEO of Aon Consulting. "Despite the potential erosion of confidence in the retirement funding industry, stakeholders need to recognise that retirement funds can continue to play an important role in helping individuals save for retirement; whilst at the same time provide important risk benefits such as Group Life and Disability benefits."

Trustees have a critical role in the sound management of retirement funds and it is this very role that has also come under close scrutiny. Williams says trustees have a fiduciary duty to act with the utmost care, diligence and good faith at all times and to look after the interests of all members, irrespective of the constituency that elected or appointed them. "In examining potential conflicts of interests, Trustees need to ensure that there is an alignment of interests to the members of the Fund. Where potential conflicts may arise, Trustees must be vigilant to recognise these and ensure that these conflicts are either eliminated or carefully managed."

Williams concedes that Retirement Funds are difficult mechanisms to understand, due largely to complex legislation and practice. Even the experts and consultants themselves may not agree on the interpretation of laws, regulations and practice notes.

"Trustees are not expected to be experts in a variety of disciplines in order to understand every aspect of the Fund, but are expected to get expert advice where necessary and to carefully apply their minds in making decisions," Williams says. "Although Trustees may delegate duties, they cannot abdicate their responsibilities. The decisions made by Trustees will affect the livelihood of the members they serve, which means they need to make sound decisions. Poor decisions may not only place the retirement funds at risk, but there may be personal risks to the Trustees, who could be sued in their personal capacity."

Ultimately the main purpose of Retirement Funds is to maximise the proceeds at retirement for members. This can be achieved by a combination of maximizing the amounts going towards retirement as well as the investment returns, subject to an acceptable level of risk.

Williams notes that one of the more difficult decisions Trustees face is in defining the optimum level of risk and retirement benefits. "For Defined Contribution Funds, the contribution may be capped, meaning that monies directed to risk and expenses directly reduce the amount available for retirement."

There is a delicate balance in providing adequate risk cover for those who die or get disabled and those who retire or leave. Trustees may even consider providing a core level of risk benefits to all members, with those requiring additional risk benefits purchasing these benefits themselves.

Defining a suitable investment strategy for the Fund requires careful consideration after understanding and appreciating the risk profile of the Fund.

"Another important decision for Trustees is to decide how to translate the investment returns earned in the market into bonuses awarded to members," he says. Traditionally, Funds operated on the basis of an interim and final bonus rate, where Trustees decided on an interim bonus rate at the beginning of the year, and awarded a final bonus at the end of the financial year.

This would typically be on the advice of the Actuary, taking into account the investment returns earned by the Fund. The advantage of this approach was that the bonuses awarded were smoothed from year to year, and this aimed to ensure that the savings showed a steady progression till retirement. Trustees would normally have an investment declaration philosophy that guided them on bonus declarations."

As a result of legislation, there has been a trend towards Funds becoming fully unitised, where the member earns the actual investment returns. Under this arrangement, the returns earned by the member are not smoothed and the member earns the actual investment returns in the market. "The member may, however, choose a more conservative investment portfolio to reduce the potential volatility in returns," Williams says. Here Trustees need to carefully consider the investment options for members and ensure members are well educated about the decisions they face. Default investment portfolios should be provided for those who are not able to choose a suitable investment portfolio.

"As we head towards the post surplus distribution era, the ground rules affecting the retirement funding industry are changing," he continues.
"South Africa's retirement funding industry is the custodian of the savings of millions of members and which has some of the most advanced infrastructure in the world now has to adopt to sound governance principals.

"Stakeholders, including Trustees and service providers, need to operate in an absolutely honest, transparent and professional manner - otherwise we can expect regulators to become more prescriptive in how the industry is run.
All parties must have confidence that the savings of the nation are in good hands and that every aspect of running retirements funds is based on sound governance principals," concludes Williams.