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Recommendations on Board of Trustee Governance

20 July 2007 Gareth Stokes

The role of the pension fund trustee is coming under increasing scrutiny, especially in light of the current regulatory environment which demands more personal accountability for administrative decisions. To assist trustees, the Financial Services Board (

The document sets out a number of 'best practice principles' for the good governance of a retirement fund, outlines the complex environment in which the trustee operates and emphasizes the importance of fund administration in terms of the applicable legislation and fund rules.  Last week we covered some of the main principles recommended in the category "Governance by the board."

In today's article (the second in a series of three) we examine 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. Next week we will publish another article which will focus on the management of stakeholder relationships in the governance of the fund.

The main operational activity of the board of trustees is the investment of fund assets through the appointment of appropriate service providers. Circular 130 makes mention of four principles in this category to guide best practices to facilitate this task.

Principle 5 Internal controls and governance mechanisms

"The primary function of the board in relation to the business of a fund is to ensure that it exercises a rigorous oversight function." To fulfil this function it is essential that the board of trustees clearly identifies and assigns operational responsibilities. Individual board members or service providers who have been delegated task should report back to the board on a regular basis to allow for the assessment of their performance.

In addition, the board should carry out the following oversight tasks: regular assessments of the persons involved in the operation of the fund in terms of service level agreements, mandates and performance contracts; review of the services and fees associated with fund operations; review of the information processes, operations software systems and accounting and financial reporting employed in the administration of the fund; monitoring and resolution of conflicts, protection of confidential information; and perform regular reviews of the fund's compliance with regulatory and statutory requirements.

Principle 6 Expert advisors

We mentioned in the first article in this series that the range of skills required to properly administer a pension fund is daunting. Circular 130 acknowledges that the board of trustees will often require specialist skills, either in the form of independent trustees sourced from an appropriate profession, or in the form of expert advisers. Specialists should be remunerated appropriately by the fund.

Specifically, expert advice may be required in the fields of accounting, actuarial, investment and law. Engaging the services of a professional adviser does not absolve the board of their responsibility in accepting or acting on the advice. The board must still independently assess the advice and obtain second opinions if they deem it necessary.

Another recommendation contained in this section of the circular is that the board appoint, control and communicate with all professional expert advisers, especially where the appointment of such an expert is at the suggestion of a service provider.

Principle 7 Risk management

Proper risk management is an essential element in any fund management activity. The board of trustees needs to include a risk management policy as a vital part of their governance of the pension fund. Pension fund trustees should apply their minds to ensure that risks are identified in line with the type of fund. "Each type of risk is identified in the fund according to the nature of the fund and an applicable process or control put in place to manage it."

The circular also points out that "Risks which do not have financial consequences are equally important in a fund's risk management strategy." Poor communication by the fund is used as an example of a non-financial risk element.

Principle 8 The investment performance of fund assets

Circular 130 acknowledges the importance of the investment performance of pension fund assets. The circular states: "The proper management of the investments of the fund is a critically important component of the governance of the fund."

There are a number of steps the board of trustees should take to ensure the proper management of invested funds. The first is to provide a clear mandate to the fund's service providers. To avoid ambiguity, the board of trustees should clearly indicate to the investment managers which benchmarks will be used to measure their performance.

The board should issue a fund investment policy statement to all stakeholders of the pension fund. This statement should be updated annually and include who the fund's investment advisers are, who the custodians of investments are and whether the fund has a socially responsible investment policy amongst other items.

This article only scratches the surface of the provisions and recommendations contained in Circular 130. If you wish to read the entire document, it is available on the FSB website at Our final instalment in this series will be available online on Friday, 27 July and will include comments on the management of stakeholder relationships in the governance of the fund.

Editor's thoughts:
The board of trustees has to ensure that retirement fund assets are managed to provide the benefits as promised in the rules of the fund. Do you agree that decisions about the suitable investment of fund assets are one of the main functions of the board of trustees? Send your comments to


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