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Good governance of retirement funds

13 July 2007 Gareth Stokes

On 11 June 2007 the Financial Services Board (FSB) circulated a document titled "Circular PF No. 130 Good Governance of Retirement Funds." The document sets out a number of 'best practice' principles for the good governance of a retirement fund. It outli

The circular notes that a fundamental requirement for a board of trustees is always "to act with the utmost good faith towards the fund and in the best interests of all members." It is also important for the board to accept that "they stand in a position of trust or fiduciary relationships with funds and therefore must act with integrity."

Circular 130 identifies three areas of governance, namely: governance by the board (the governance structure), governance by the board of the operation of its funds (the governance mechanism) and the management of relationships in the governance of the fund. Today's article is the first in a series of three which will briefly examine the key principles in each of these categories. Here then a summary of the four principles outlined under the governance structure heading.

Principle 1 Roles, responsibilities and accountabilities of the board

The FSB circular immediately sets out the key functions of the board. The first requirement is that "the board is responsible and accountable to the members for the administration of the fund, including the prudent investment of fund assets." Board members cannot absolve their accountability to members of the fund by delegating tasks to sub-committees. 

A board of trustees operates as a team and should respect the rules of the fund and the various decision making mechanisms outlined therein. The circular suggests that mechanism to resolve 'deadlocks' in decision making processes be included in the fund rules. The circular also defines the roles and responsibilities of the chairperson and principal officer of the board of trustees. It is important to note that the principal officer should not also serve as the chairman of the board.

The final sub-heading in this section deals with conflicts of interest. It is recommended that the board and principal officer take appropriate actions to resolve conflicts of interest as they become evident. "The proper resolution by the board of any conflict of interest is necessary for promoting the credibility of the governance of the fund."

Principle 2 Composition and competency of the board

This principle stresses the importance of selecting individuals with the correct mix of skills when establishing a board of trustees. The complexities of the retirement fund environment result in Circular 130 making specific reference to professional trustees (independent trustees from recognised professions). The circular is quite prescriptive where umbrella funds are concerned, stating that "at least 50% of the board of multiple-employer funds and retirement annuity and preservation funds should be independent."

The board of trustees may delegate various tasks to sub-committees. These sub-committees should perform oversight roles within "an appropriate written mandate" in which its roles and authorities are defined. Sub-committees could be established to assist on matters like audit and administration, investment and legal issues.

Principle 3 Board orientation and education

In the preamble to the principles being discussed here, the FSB notes that "the accountability requirement of the board means that collectively and individually the board members may be held liable for any breach of the governance which results in any loss to the fund"

This statement highlights the importance of education for trustees in the retirement fund environment. Trustees should receive "rigorous and comprehensive"training to ensure they are familiar with both the legislative and regulatory environment the fund operates under. The cost of this training should be borne by the fund. Circular 130 stresses the importance of continued education on the topics of "isk management, investment risks and strategies, benefit structures, legal issues, regulatory and compliance requirements, taxation, actuarial and reform issues."

Principle 4 Board assessment and breach of conduct

Circular 130 recommends that both the board of trustees and any sub-committees established by the board be subject to performance appraisals on an annual basis. This process would establish "he effectiveness of the board, the principal officer and the sub-committees, and highlight where improvements should be implemented."

Contravention by any board member of the fund's code of conduct should result in appropriate censure. The circular stipulates that such censure (which may include suspension or dismissal) should only occur after the consideration of defence arguments presented by the board member concerned. "The objective of action by the board against a trustee is to preserve the integrity of the board and its governance role."

Space constraints mean that this article only scratches the surface of all the provisions and recommendations contained in Circular 130. The document is available on the FSB website ( and offers an easy to read introduction to a wide range of aspects affecting retirement fund trustees. The second instalment in this series will cover governance mechanisms and will be available online on Friday, 20 July.

Editor's thoughts:
Individuals elected to positions as trustees have a responsibility to the members of the fund to ensure that they have the skills to properly perform their duties. As the role of the trustee becomes increasingly complex, we can expect the demand for professional or independent trustees to increase. Can smaller retirement funds afford the services of independent trustees? Send your comments to


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