TRUSTEE EMPOWERMENT

Problems in practice

Greater professionalisation of trustees is a great concept.
But if they continue to shy away from training, a great vision will blur.

Marcus . . . bold originator

The key proposal, in my view, is that workers will now have the right to elect at least 50% of (pension fund) board members. Concerns expressed by employers and public commentators that workers’ representatives do not have the experience or expertise are not adequate grounds for negating this proposal. Rather, it is an ideal vehicle to ensure that such
trustees are empowered and trained so that they can make effective, informed decisions. After all, it is their future that they are deciding on.
Part of building SA, enhancing the ideal of a new patriotism, is skills development. The challenge to business and the retirement fund industry is not simply to bemoan the lack of skills, but to seize the opportunity
to ensure that training takes place, including expanding the extensive training programmes that many institutions already have in place. We should not forget that trustees are not only required to administer funds, but are also there to make sure that management fulfils its obligations
and functions in terms of agreed mandates. Gill Marcus, then the Deputy Minister of Finance,
introducing the second reading parliamentary debate on the Pension Funds Amendment Bill in 1996.

Something’s gone wrong with the legislated 50/50 employer/employee model. The idea that
member or employee-elected trustees become more representative, more skilled, more empowered and more influential is in danger of slipping into reverse. Start with skills development. There’s no shortage of trustee-training courses on offer. The shortage is in the number of trustees drawn to attend. Does the fault lie with content of the courses, or in the time commitments required to participate, or in a lack of incentive to attend?

Sithole . . . judgment and wisdom paramount

There are myriad factors, none easy to pinpoint and overcome. Courses offered by service providers are often dismissed, usually without justification, as a
soft-sell for product. Content and presentation might
miss their mark, being too much under or over the
heads of targeted participants, depending on their
varying levels of financial sophistication. Time is
invariably a constraint, either removing the trustee
from the workplace or causing a sacrifice of leisure
hours.

Then there’s the question of incentive. The basis
for trustee election is merely popularity. There’s
no minimum qualification. Neither is there generally
any remuneration other than a stipend per board
meeting attended.

“Only 20% of employers grant preparation time
and 37% allow time for attendance of trustee training, indicating only moderate levels of support,” a survey by PricewaterhouseCoopers has found. “Only 13% of all funds pay some sort of remuneration or contribution to the cost of attending training. By not remunerating trustees or contributing to the cost of attending training, trustees may be inclined not to attend training that is critical to enabling them to fulfil their fiduciary responsibilities.”

To be a trustee is an act of supreme devotion. For no money worth mentioning, apart from
occasional gifts now strictly controlled (at least in theory), trustees are burdened with an awesome set of fiduciary obligations that attract personal liability if unfulfilled. The duties and responsibilities of member-elected trustees, who aren’t paid, are no different from those of professional trustees, who are. They must, or should, spend hours preparing for board meetings. They must, or should, be familiar with the rigorous host of compliance and governance requirements. They must, or should, attend programmes that keep them updated with
legislative and regulatory changes. They must, or should, have the wherewithal to appoint and
monitor specialists in the various areas of fund administration.

So should they be paid? Of course, in principle, for precisely the same reasons that company directors are paid. But they’d have to be paid by the funds, thus adding a potentially large layer to funds’ costs and thus subtracting from returns for members. There are other variables: factors that will determine appropriate payment levels such as time, expertise, fund size and performance; whether the trusteeship work is part of, or in addition to, an employee’s regular job; contract terms that relate remuneration to value added, and so on. Too troublesome to address, these issues are left to drift. The upshot is pressure on member-elected trustees. Either they get up to speed, or they get out. National Treasury’s policy document, ‘A safer financial sector to serve SA better’, gives them no leeway to continue the dilly-dally on training and offers no differentiation from professional trustees. “Trustees must have the relevant education, experience and skills to make investment decisions consistent with the best interest of the pension fund
and its beneficiaries,” says the document. “The impetus for demanding high levels of expertise . . requires application of fit and proper standards . . . mechanisms to achieve proper training...and the use of independent professional trustees. Government is also considering making it a statutory requirement that trustees be fit and proper with certain minimum qualifications which should be achieved within a fixed period from the date of appointment”.

This is a quantum step from the way that FSB chair Abel Sithole believed to be a trustee’s main
function. He saw it as the appointment of specialists in each area, then to monitor and manage their performance.

“To do this it is necessary to have an idea of what each specialist area does,” he wrote a few years back. “What counts is judgment and wisdom, which can be enhanced by education and experience but is not dependent on them.”

Who then is to take responsibility? Employers are inclined to be disissive, according to the PwC
survey, taking trusteeship to be a voluntary service and excluding it from their employees’ performance appraisals. Financial institutions, on the other hand, have skin in the game because they need to attract pension-fund business. Several offer excellent courses, without charge to trustees, but are frustrated by the lack of take-up.

The original Financial Sector Charter, which followed the Nedlac summit in 2002, recognised
that pension fund trustees “play a critical role in influencing the flow of funds”. Accordingly, it
added, “initiatives will therefore be developed to enhance their understanding of investments in
general . . .”

Further on, under the sub-head of shareholder activism, financial institutions undertook to
“encourage training and awareness programmes for all shareholders regarding the impact of indirect shareholding”. Union trustees of pension funds, being amongst the largest indirect shareholders, were specifically identified.

The new charter, ready for gazetting, contains no similar provisions. In fact, there’s not even a
mention of trustees. Skills development is confined to black employees.

It’s possibly inevitable that, as increasing numbers of standalone funds are absorbed into
umbrellas, workplace trustees will become fewer and less important. The trade off for higher
professionalisation at the level of umbrellas, sponsored by insurers, could be a switch in the power balance back to the institutions.

Should that happen, it will deflate the vision that Gill Marcus enunciated all those years ago. It’s not too late for trustees themselves to remedy.