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Managing stakeholder relationships in retirement funds

27 July 2007 Gareth Stokes

In today's feature article we summarise the final section of the Financial Services Board (FSB) document titled "Circular PF No. 130 Good Governance of Retirement Funds." The section deals with the management of stakeholder relationships and provides bes

Circular 130 is important in light of the current regulatory environment which demands more personal accountability for administrative decisions from pension fund trustees. In our first article we covered the principles discussed under the heading "Governance by the board." Last week we examined "Governance by the board of the operations of the fund." This category is also known as the governance mechanism and is the second of three categories introduced in Circular 130.

Today we focus on the "Management of Stakeholder Relationships" in the governance of retirement funds. The pension fund environment is made up of an intricate combination of fund members, beneficiaries, employers, trustees, regulators and service providers and it is thus appropriate that communication features prominently in retirement fund administration.

Principle 9 Communication and access to information

Good governance requires that the fund policies and rules are clearly communicated and understood. This principle investigates the best practices required to ensure that communication in a retirement fund is up to scratch. All board members and trustees should have access to sufficient information regarding the fund to enable them to make proper decisions.

One of the specific recommendations contained in Circular 130 it for the board to create a Communication Policy to govern how the fund communicates with members and beneficiaries. The principle doctrine which applies here is "Communication to members and beneficiaries should be informative, transparent and fair and display accountability." The Communication Policy should include comprehensive information on both operating activities and funding activities engaged in by the fund.

Operating activities include benefit calculations, changes to fund rules and changes to the regulatory environment. Funding activities include financial data and extracts from financial reports, funding status and methods, changes in the investment strategy, fund return as measured against specific benchmarks and contact details for the administrator of the fund.

Principle 10 Protection of member and beneficiary rights

Members of a retirement fund have a right to the disclosure of certain information regarding the investment performance of the retirement fund assets. This requirement ties in with the principle of communication discussed in the preceding paragraphs. The communication policy should "reflect the board's commitment" to provide relevant information and thus engender credibility and trustworthiness in the fund's administration.

In addition to recommending that the board hold an Annual General Meeting, Circular 130 stipulates that the board communicate with members at least once a year. This communication should include "the fund's investment performance, the average costs per member and fees and disbursements paid to independent board members."

Finally, the fund should also make its members aware of any Pension Fund Adjudicator or other regulatory determinations made against the fund and detail any deviations from fund rules. Both principle 10 and principle 11 highlight the importance of transparency and full disclosure as key components of good governance in retirement funds.

Principle 11 Employer and sponsor

"The board is independent of the employer / employee relationship." This is the key concept outlined in this section of Circular 130. The importance of this point should be viewed in the light of how many trustees and members of the board are also employees of the fund sponsor (or employer).

Principle 12 Service providers

Circular 130 provides a number of clear recommendations regarding the appointment and contractual obligations of service providers. Of utmost importance is that service providers should not "derive any benefit from fund assets and resources, other than those terms contractually agreed to in the signed service level agreements."

Special care should be taken to ensure that the appointed service providers are fit to perform their appointed tasks. The board has to evaluate the service provider on its skills and competencies, track record, fee-structure and internal polices. The board should also independently check the references provided by the service provider and establish an appropriate benchmark to measure service provider performance where appropriate.

Why should board members pay such careful attention to appointing service providers? The circular states that "Boards are held accountable for any actions and decisions taken by their mandated sub-committees, agents, office bearers and duties outsourced to service providers." Since the board provides a mandate to the service provider to perform certain functions on its behalf, individual board members can be held liable for the actions of the service provider.

Principle 13 Regulatory authorities and effective supervision

The final principle of good governance which should be adopted by all boards of trustees is to ensure that "the requirements of any regulatory body, particularly those of the registrar, are complied with and that any query from such regulatory authority is dealt with expeditiously and thoroughly." This requirement is particularly important in today's heavily regulated pension fund industry. Individual trustees are held more accountable for their actions than ever before. "Good governance requires the application or appropriate and cost effective policies and processes to cater for the specific needs of different funds."

To assist trustees in implementing the various suggestions on good governance contained in Circular 130, a number of standard documents have been circulated with the circular. These documents can be adapted by funds to meet their unique needs and requirements.

This is the final article in the FAnews Online series on the provisions and recommendations contained in Circular 130. Of course, we are only able to scratch the surface of the best practices introduced in this circular. If you wish to read the entire document, it is available on the Financial Services Board (FSB) website at www.fsb.co.za.

Editor's thoughts:
Communication is an essential function to ensure the successful management of a retirement fund. Do you believe that the communication processes employed by the industries retirement fund administrators is adequate? Send your comments to
gareth@fanews.co.za

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