The FSB comes marching in.....carrying a giant stick

Stealthily, and without much fanfare, the Financial Services Board published Circular PF 130: "Good Governance of Retirement Funds" on its website on 22 June 2007.  This document is likely to change the face of retirement fund trusteeship.  Drawing on elements of the draft revised Regulation 28, proposed reforms to pension fund regulation issued by Treasury in 2004 and many of the sad lessons learnt from the failure of governance in the Fidentia debacle, the FSB has issued a rigorous list of requirements for sound operation of a board of trustees. 

The issues addressed in PF 130, and the implications thereof, are almost too numerous to mention.  PF 130 requires that all boards of trustees put in place a documented code of conduct, which outlines their duties and obligations, a fund-specific investment policy statement and a communication strategy to members.  In addition, it compels all retirement funds to introduce a performance appraisal system for its trustees. All these need to be reviewed annually, as well as being available for regulatory inspections and communicated to members.  In addition, the circular emphasises the roles and responsibilities of the board members, and addresses the issue of how to deal with conflicts of interest.  PF 130 places an obligation on new board members to receive comprehensive training.  It also requires that all board members maintain an up to date understanding of risk management, investment risks and strategies, benefit structures, legal issues, regulatory and compliance requirements, taxation, actuarial and reform issues.  It is an intimidating list, and one which should terrify most trustees into realising how onerous their responsibilities really are.  The circular explicitly allows for engagement of experts where trustees do not have the required skills, but calls on the trustees to ensure the quality and independence of the advice given.
There are many more daunting requirements.  One is a call for a risk management policy for each retirement fund, whereby the trustees identify all risks facing the fund and list controls and monitoring procedures with respect to those risks.  These need to be communicated to members.

For the first time since Regulation 28 was published in the mid 1980s, an entire appendix to the circular deals with the investment of retirement funds' assets.  Stopping short of an abolition of Regulation 28, the appendix lists minimum requirements of a comprehensive investment policy statement, and hence documentation of each retirement fund's investment strategy.  PF 130 requires that the document includes details of investment performance evaluation criteria, the asset manager review process, evaluation of members' risk profiles, consideration being given to management fees, brokerage and custodial charges, a shareholder activism policy, treatment of derivatives and scrip lending and so on. The requirements are diabolically detailed and, it is fair to say, that no fund should proceed further without employing the services of expert investment consultants. 

It is impossible to cover the entire content of PF 130 in a brief note.  It is sufficient to say that most financial services intermediaries will have their hands full training trustees on its implications.  It closes many loopholes, it exposes shortcomings and it places trusteeship in the spotlight.  There are no negatives.  It will be expensive to implement, even more so to administer, but so be it.  Better safe than sorry.  "At Sygnia we are absolutely thrilled with PF 130.  For the past four years we have based our entire business model on the principles now exemplified in PF 130.  All our multi-manager investment products are customised to the requirements of funds only after they have a detailed investment policy statement in place.  Benchmarks, risk profiled strategies, appropriate manager selection, complete fee transparency and detailed reporting feature as part of our service offering.  We have banged the drum of corporate governance within retirement funds since 2003.  Now our views and the way Sygnia structures its investment products for its retirement fund investors have been validated", says Magda Wierzycka, CEO of Sygnia Asset Management.

Click here to download the FSB Circlular No 130 (PDF File 2MB)

Click on each Annexure to download the PDF file

Annexure A to PF 130  (772KB)

Annexure B to PF 130 (951KB)

Annexure C to PF 130 (69KB)