Plugging the Leaks - the right checks and balances can save retirement fund members millions

Members and trustees of pension funds may give little thought to the processes that lie behind their retirement investments, focusing only on investment returns.

But recent instances of poor corporate governance in the retirement industry, such as at Fidentia, have highlighted the importance of having excellent processes in place to plug the potential leaks that take place.

Most of these leaks are seldom anything so spectacular as outright fraud or negligence, but usually little things such as poor reconciliation of cash flows with the value of the investments held.

"These and other discrepancies can happen quite easily and can add up for the member over an extended period," says Angela Weinstein, director at Investment Solutions.

Types of errors that can be identified and avoided include: deviations from mandate; non-timeous investment of cash flow; calculation errors; incorrect fees levied; late/non-payment of interest; shares incorrectly loaded onto portfolios;  inaccurate valuations,  non recognition/non payment of corporate actions.

"A multi-manager should be in a unique position to be able to provide these checks and balances on a daily," says Weinstein.

"Errors can be identified, and managers informed so that these errors can be rectified."

"We have had to build extensive administrative capabilities that keep up to date with the regulations that affect retirement funds and the industry as a whole. We are therefore in a strong position to advise on key checks and balances that should be conducted by most retirement funds," she says. "Retirement funds do not always have the systems and procedures to be able to do this themselves."

"Our process has timeously detected many errors, ensuring that incorrect values have not been used in the daily process, thereby avoiding negative financial implications for clients. Unfortunately where errors are picked up after the values have been used we have to claim any financial losses back from the manager.

It is essential for trustees to ensure that when the initial agreements are negotiated with the manager that the agreement specifies the course of action to be followed should for example incorrect valuations be received from the managers. This typically ensures that you are able to claim and be reimbursed for any losses that may arise due to an error i.e. you need to hold the manager accountable for the information that he supplies (they need to stand behind their values).

Money claimed in this way can be substantial, says Weinstein. Investment Solutions has managed to claim back some R30 million from investment managers due to errors made, she says.

"However this pales into insignificance when compared with the R1.54 billion in errors picked up in the last eighteen months, before they could have an impact on fund values," she points out. These errors were identified, advised to the asset managers, and corrected prior to our unit prices being calculated thus ensuring accurate valuations for our client. 

"Funds not performing these daily checks would not have the ability to detect these errors let alone correct them," she points out.