PwC survey puts retirement fund management under the spotlight

Effective management is crucial to the retirement fund industry in South Africa. Trustee boards are accountable to members for a key part of their life savings. Accordingly the position of trustee carries with it great responsibility.

The PwC survey represents the responses of 110 chairpersons from a wide spread of retirement funds from very large to fairly small with assets totalling over R80 billion. The survey also compares the South African survey results with an equivalent PwC survey completed in the UK a year ago.

The PricewaterhouseCoopers Survey on Effective Management of South African Retirement Funds reveals that in general, funds are managed in accordance with the specific rules of the funds as well as with applicable legislation. Most trustee boards believe that they are up to date with all legislative requirements, but most of them indicate that they have not assessed compliance with the King II principles of corporate governance.

Gert Kapp, PwC National Retirement Fund Leader, says the survey results are representative of existing practices. "Besides establishing the state of the industry, the survey can also offer a benchmark against which trustees can compare various aspects of their fund and improve effective management."

Kapp says that UK funds are ahead of the local industry in terms of business planning, establishing governance policies, evaluating trustee effectiveness and addressing conflicts of interest. "But SA funds outperform in the areas of linking decisions to fund rules and legislation, good and regular communication to members and investment strategy in the defined contribution environment."

The SA survey indicated that 29% of trustee meetings are either not fully attended or that not all trustees have read the papers in advance. For an average trustee board comprising eight trustees, Kapp says this means that at least two trustees per meeting would make little or no contribution. Some funds do not ask for trustee input when setting the agendas, which means the advisors of these funds would tend to play an unduly influential role in this.

Although most funds are aware of the importance of good governance, only a third have a formal governance mandate that is used for steering management processes and decision making. Kapp says that we lag behind the UK in this respect as most trustee boards have never actually evaluated just how effective or ineffective they are.

Another area where SA trustees need to improve is in how they address conflicts of interest. Verwey Wiese, PwC Cape Town director says that only 15% of funds surveyed have a formal policy in place to identify conflicts. "Most of the smaller funds have not even considered a process for managing such conflicts of interest. Conflicts of interest may result in funds incurring higher costs than necessary or paying for services that are not required in order to meet members' real needs.

Wiese says the response to the question on the assessment of trustee knowledge was alarmingly negative. "Local funds have made little or no assessment of trustees knowledge and understanding relevant to their funds operations. Understanding of the Pensions Fund Act is a key aspect of this knowledge but certainly not the only key area in which trustees need to acquire knowledge and understanding in order to be effective.  Trustees of UK pension funds are way ahead, reviewing their knowledge of legislation and industry practices regularly. In SA, nearly half the funds have never done a formal assessment of trustees' knowledge."

Wiese pointed out that a previous UK survey, before their 2004 change in legislation, showed similar negative results and this only improved after legislation. "Perhaps the time has come for South Africa to take a serious look at trustee knowledge requirements and consider legislation as the means to achieve the desired outcome." 
 
In both jurisdictions, there is room for improvement on the follow up on risk exceptions. Where a particular risk has been identified, the fund then needs to formally follow up on how it is being addressed and whether its impact on the fund activities has been adequately mitigated. The risk and how it is being managed must be monitored on an ongoing basis.

Wiese says that an area for improvement in the industry is in two way communication with members. "Funds need to establish formal mechanisms to seek out members views, not just on an ad hoc basis. They should go beyond the minimum communication requirements as set by legislation. Transparent communication is essential between all parties, particularly with the industry receiving such prominence in the press over the past few years."

The survey shows that on the management of defined contribution funds, SA funds are well advanced. They give considerable thought to the range of investment options they offer members. They also put considerable effort into communicating the risk/return relationships taking into account members' risk profiles.

Kapp concludes that "The insights that we have gained through this survey enable us to provide practical advice to funds on where they stand on the road to effective management and what next steps are likely to be the most pertinent."