Retirement Fund Trusteeship - Is There a Case for Independence?

A retirement fund trustee board is similar to a company's board of directors. The second King Report on corporate governance (King 2) requires companies to appoint non-executive directors to assist in the running of a companys affairs. But what of retirement funds that have billions of Rands in members' savings?

According to Frank Magwegwe of Investment Solutions, the Pension Funds Act provides for the appointment of trustees by employers and members, with members appointing at least 50%.

"In South Africa, there is no legal requirement for the appointment of independent trustees to retirement fund boards, and to appoint an independent trustee, the funds rules have to be amended. However, given the onerous responsibilities of trustees, and the difficulty retirement funds have in finding well-qualified trustees from within organisations, there may be a case for the appointment of well qualified and experienced independent trustees," says Magwegwe.

An independent trustee can be defined as a person who has no "interests" in the assets of the retirement fund and is not associated with or connected to the employer. However, all trustees may be held liable jointly and individually for any loss suffered by the fund due to the actions or omissions of the trustees if they have acted in an improper manner.

"There are many potential advantages to appointing independent trustees," says Magwegwe. "The obvious one is independence -- meaning not influenced by the often divergent views of the employer.

"Independent trustees, because they are impartial, can resolve differences within trustee boards, and introduce greater objectivity. Those with expertise in investments, pension law and other specialist fields can encourage a board be more effective in resolving complex issues. Also, with the frequent changes to trustee boards, independent trustees can provide much needed continuity."

Magwegwe says this is not to downplay the advantages of the current model, which "certainly aligns the interests of stakeholders in a pension fund. Trustees from within a company work closely with members and are often in the best position to react to their needs," he says.

"There is also a strong body of opinion that retirement fund boards should not appoint independent trustees," says Magwegwe. The belief is that because there are no barriers to becoming an independent trustee, the risk of trustee boards appointing unqualified and unsuitable independent trustees is high. Also, the fees for independent trustees are paid from the retirement funds assets, which some trustee boards feel cannot be justified.

Magwegwe says trustee boards need to weigh the cost of these fees against the implicit costs the retirement fund could incur due to poor trustee knowledge.

"The complexity of the retirement fund arena --  the number of possible investments, member choice, pension legislation, surplus apportionment -- as well as the burden of responsibility a trustee must bear, makes a case for bringing the specialised skills of non-aligned individuals into the running of a board of trustees," says Magwegwe.