Boards of Trustees of Retirement Funds

This is the sixth in our series on the boards of trustees of retirement funds, sponsored by Liberty Life to inform trustees in the public interest. Liberty Life does not endeavour to promote, through the content, its own products or services.

Until a few years ago the control of occupational retirement funds rested entirely in the hands of the employer, but with the move towards the empowerment of people, members may now have equal representation on the board of trustees (also called the board of management) of a retirement fund. The board members are called trustees.

Due to the highly technical content of the material presented in previous articles, we will recap the salient points covered in previous articles for the sake of clarity and ease of reference.

BACKGROUND

It is a privilege, but also a great responsibility, to serve as a member of the board of trustees of a retirement fund.

In terms of the 1998 amendments to the Pension Funds Act the rules of the retirement fund must stipulate how trustees are to be elected.

The following must be included in the rules of the fund:

• Constitution of the board of trustees
• Procedure for the election of board members
• Appointment and terms of office of board members
• The procedure to be followed at meetings
• The voting procedures at board meetings
• The quorum that has to be present at a board meeting
• Mechanism for the breaking of deadlocks
• The duties and powers of the board of trustees

There is no set procedure for the election of trustees, although the election process must comply with the principles of equity and fairness.

The employer appoints some trustees and others are elected by the members – members have the right to elect at least 50% of the members of the board.

A board should have at least four trustees (the Registrar may allow fewer than four if it is impractical or unreasonably expensive). If a board consists of four members or less, all members shall constitute a quorum.

One of the board members is usually voted to act as the chairperson. This person has, inter alia, the casting or second vote (in addition to an ordinary vote) to break any possible deadlocks. If the chairperson does not have a casting vote, the dispute may be settled by mediation or arbitration.

KNOWLEDGE

A trustee should know his or her duties and powers, and the legislation which governs these.

The most important acts which trustees must be aware of and ensure that the fund complies with, are:

• Pension Funds Act
• Income Tax Act
• Divorce Act
• Tax on Retirement Funds Act
• Financial Institutions (Investment of Funds) Act
• Long-Term Insurance Act
• Inspection of Financial Institutions Act
• The Constitution of the Republic of South Africa

Trustees can be held liable for losses resulting from any action that contravenes the common law of trusts, and should therefore also have a thorough understanding of the South African law of trusts.

In order to assist trustees, the Financial Services Board issued Circular PF 98 to provide clearer guidelines on their fiduciary duties.

In the past, certain practices occurred which could be regarded as unfair labour practices, for example unfair discrimination on the grounds of race, sex, age, disability, etc. These are addressed in the Labour Relations Act and members can refer any disputes to the Commission for Conciliation, Mediation and Arbitration (CCMA).

OBJECTIVES OF THE BOARD

It is the duty of the trustees to direct, control and oversee the operation of the fund on behalf of the members. A trustee stands in a position of trust and must therefore be of sound mind, competent, credible and have legal capacity.

Once elected, the primary objective of a board of trustees is to see that the provisions in the rules of the fund are carried out and acted upon correctly. Basically, the board of trustees must:

• take care of members’ interests at all times, especially in the event of:
  • amalgamation
  • transfer of part of or all of the fund’s assets to another fund
  • splitting of fund investments amongst more than one investment manager
  • terminations
  • reduction of contributions by an employer
  • increase in the level of members’ contributions
  • withdrawal of a participating employer
• act with care, diligence and good faith
• avoid conflicts of interest
• act with impartiality in respect of all members’ interests

FIDUCIARY DUTIES

A fiduciary duty is the duty of utmost good faith (uberrimae fides) and is imposed by law. Disclosure is an important element of acting in good faith, and can be done by means of annual benefit statements, newsletters and annual fund reports.

The trustees are in a position of trust and it is their duty to look after the property of the fund. They must exercise their powers to the benefit of the fund and in such a manner as to always act in the best interest of the fund and of course its members.

They have to avoid conflict between their own interests and those of the fund, never abuse the power given to them and act in good faith towards the fund at all times.

Trustees cannot contract out of their fiduciary duties. A trustee’s duties are imposed by law and cannot be delegated to anyone else. Advice may be sought from experts, but ultimately any decisions or actions will be the trustee’s own responsibility.

Due to their general nature, sections 7C and 7D of the Pension Funds Act do not give crystal clear guidelines on the fiduciary duties of trustees or how they are to be put into practice. In order to assist trustees, the Financial Services Board issued Circular PF 98 to provide clearer guidelines in this regard.

GENERAL DUTIES

When a board of trustees is appointed, their powers vest jointly in them and decisions must be taken together.

It is the duty of trustees to direct, control and oversee the running of the retirement fund in the best interest of the members.

Trustees must:

• ensure that proper registers, books, and records of the operations of the fund are kept, including minutes of board meetings
• ensure that the fund employs proper control systems
• ensure that appropriate and adequate information is communicated to the members of the fund
• take all reasonable steps to ensure that contributions are paid timeously to the fund
• obtain expert advice on matters where they lack sufficient expertise
• ensure that the rules, operation and administration of the fund comply with the relevant acts

Trustees are responsible for managing the monies paid to fund members (and/or their dependants) when they retire, become disabled or die. These payments are funded by the contributions that employees make during their working lives. For many employees this will be their sole source of income during retirement and trustees therefore have to act responsibly when it comes to the payment of contributions into the fund. That is why the Pension Funds Amendment Act, No. 94 of 1997, lays down specific requirements with regard to contribution payments.

ADMINISTRATIVE DUTIES

Many administrative duties must be performed to ensure that retirement funds run smoothly and comply with the law:

• Ensuring that new members joined the fund in accordance with the fund’s eligibility conditions
• Paying claims
• Collecting, banking and investing contributions
• Arranging risk insurance (death and disability), paying premiums and submitting claims
• Keeping accounts and issuing fund statements

Larger companies normally perform these duties themselves (self-administered funds), and only arrange the risk insurance with an insurance company. They may or may not handle the investment of the fund monies or employ the services of a fund manager. Some funds are administered by insurance companies that perform all these functions.

BREACH OF DUTY

Should trustees breach their fiduciary duty and it constitutes a criminal offence, the trustees can be prosecuted under the Financial Institutions (Investment of Funds) Act, which prescribes a penalty of R10 000 or 10 years imprisonment, or both. There could also be action by the fund for breach of trust and the trustees could be liable for any losses suffered by the fund as a result of negligence. The employer can sue the trustees for any losses the employer suffered as a result of negligence, including the possible removal from office.

MANAGEMENT OF THE FUND

Trustees must:

• know the rules and financial situation of the fund
• ensure that the administrator keeps proper records of any movements of members in or out of the fund
• ensure that they receive regular statements of account showing the fund’s financial position
• know where fund assets are invested
• take control of the assets of the fund – if they lose control, it is their duty to regain control and to initiate legal action to do so if necessary

MEETING PROCEDURES

The rules of the fund must contain clear guidelines regarding the meeting procedures of the board. The board of trustees can establish an acceptable protocol for meetings to be effective and productive.

A proper agenda should be followed at each meeting, including:

• approval of quarterly management accounts/annual financial accounts
• performance of fund investments
• any amendments to the rules
• payment of benefits, bonuses, pension increases and gratuities
• review and possible upgrading or increase of benefits
• movements of members and pensioners
• membership statistics
• analysis of actuarial or other relevant reports
• general business, e.g. pending litigations
• communication with members

It is recommended that meetings take place at least once every four months. Trustees should be informed of meetings well in time – at least 21 days for an annual meeting and 14 days for other meetings.

Meetings must be properly minuted and any decisions should be duly recorded in a minute book.

TERMINATION OF A FUND

When a fund terminates, the trustee/s must ensure that an independent liquidator is appointed. The Registrar of Pension Funds must approve the appointment. The trustees’ duties then cease.

The liquidator must ensure that the fund is wound up in accordance with the rules of the fund and the provisions of the Pension Funds Act.

CORPORATE MERGERS AND TAKEOVERS

The trustee/s must ensure that the members’ best interests are taken care of and that the transferred benefits are protected. This is especially so if the receiving fund is in deficit.

The trustee/s must liaise closely with the fund valuator and together with the employer consider the need for any amendments to the rules and the strategy to be followed to protect members’ benefits. In terms of section 37A of the Pension Funds Act, no benefit provided for in the rules of the fund may be reduced retrospectively. The Registrar of Pension Funds will therefore not approve any amendment to this effect.

The trustee/s must inform and advise members of the transferring fund of different structures in the new fund and the effect on their ultimate benefits.

CONTRIBUTIONS

Section 13A of the Pension Funds Act, which regulates the payment of contributions to a retirement fund, was amended in 1997 (the Pension Funds Amendment Act, No. 94 of 1997). The amendments came into effect in April 2001.

The amendments introduced time frames within which contributions must be paid to fund administrators and compel the employer to provide the board of management with minimum information regarding the contributions.

The amendments also provide for the payment of interest if contributions are not paid, and for the transfer of benefits within the prescribed periods.

The administrator of the fund must appoint a person that will be responsible for checking the receipt of contributions that the employer pays.

All employers are compelled to do a monthly reconciliation of contribution payments. Certain minimum information required in terms of the Act can either accompany the contribution payment or the employer can submit it to the fund or fund administrator within 15 days after the end of the month in which the contribution falls due.

If the employer fails for a period of 90 days to pay contributions to the fund and to provide minimum information to the board of management, the trustees must ensure that:

• the matter is referred to the attorney-general for prosecution,
• the Registrar is informed of this, and
• the members are informed of the employer’s non-compliance in order to enable them to take appropriate action in terms of any processes that are in place.

If contribution payments fall in arrears or a short payment is made, a writ (i.e. a form of written command) of execution can be issued. The assets of the employer can be attached and sold in execution to settle outstanding contributions. The employer can also be criminally prosecuted.

ROLE OF THE TRUSTEES IN RESPECT OF CONTRIBUTIONS

The trustees of the fund may delay taking any action until they receive the next month’s report. However, if the employer gives no acceptable reasons for the non-payment, or if contributions were not paid within the required seven-day period, the trustees must ensure that:

• the principal officer or authorised person informs the members of the fund about the employer’s non-compliance, and
• that the Registrar is advised of the action taken.

If the employer fails to pay the full contributions within 90 days, the principal officer or authorised person must report the matter to the attorney-general (i.e. institute criminal proceedings) and inform the Registrar of Pension Funds accordingly.

TRANSFER OF BENEFITS

If a member elects to transfer his or her benefits on termination of membership, the fund must transfer such benefits to the new fund within 60 days of receipt of written notice to that effect.