Retirement Funds – Fiduciary Duties of Specific Persons

This is the third last article 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.

The trustees of a fund need to take an active interest in and exercise their discretion in respect of every aspect of the fund and its business. For this reason trustees need to have a detailed knowledge of the duties of all other parties involved in the fund.

In this article we take a closer look at these parties.

Fiduciary duties of specific persons

Trustees need to have a detailed knowledge of the duties of the other persons employed by the fund.

The principal officer

Every fund must appoint a principal officer. The principal officer must reside in the Republic of South Africa and must be appointed in accordance with the rules of the fund.

The principal officer may serve in the capacity of principal officer and trustee simultaneously. The Financial Services Board, however, require that he or she should not serve as chairman and principal officer at the same time.

Fund documents must be signed by at least three persons, namely the chairman, the principal officer and an ordinary trustee.

If the principal officer has already been appointed at the time of the registration of the fund, the name of the principal officer must be disclosed to the Financial Services Board.

If the principal officer has not been appointed at the time of registration, the person managing the business of the fund must notify the Registrar of the name of the principal officer within 30 days of the registration of the fund.

The principal officer has the following duties:

He must ensure that the fund complies with the Act and the regulations thereto.
He must advise the Registrar of Pension Funds of any changes in the rules of the fund.
If a fund consolidates its rules, the principal officer must forward a copy of the consolidated rules to the Registrar.
Within six months after the end of the fund’s financial year, the principal officer must inform all members of the fund of all amendments that may have been effected to the rules during the particular financial year.
The board of trustees and the principal officer must produce a certificate to accompany the valuation report. The certificate must confirm that such valuation report reflects the true position of the fund, and that a copy of the report has been sent to every participating employer.
The principal officer must sign all documents, other than the rules and the annual accounts and statements, on the first page together with a trustee and the chairman of the board.
The principal officer must submit the financial statements on behalf of the fund to the Registrar within six months of the end of the fund’s financial year.

The principal officer is the official representative or contact person of the fund with the Financial Services Board.

The investment manager

The most important duty of the investment manager is to ensure that the fund has money available to pay benefits as and when they fall due, and that the fund’s assets are invested in such a way that the optimum returns are achieved subject to an acceptable level of risk.

In determining the type of investments in which to invest the fund’s assets, the investment manager must have regard to:

The need for diversification of investments in order to minimise risk.
The stability of the particular investment.
The membership profile. A fund with a high proportion of pensioners must invest in a way that will keep the fund sufficiently liquid so that regular retirement benefit payments can be met.
The fund manager must manage assets in a way that will satisfy the fund’s objectives in the form of an optimum return.

The fund valuator

The Pension Funds Act requires certain funds to appoint a valuator. The valuator must be approved by the Registrar and is an actuary who is experienced in the valuation of retirement funds.

The valuator’s primary duty is to evaluate the financial soundness of the fund by valuing assets and liabilities and to advise on:

The contributions required for funding benefits.
The financial soundness of benefits.
The interests of particular members in the fund.
The rate at which the fund commutes pension benefits for cash, if this is appropriate.
The increase that can be granted to pensioners.
The amount of past service that can be recognised in the fund in return for the benefits brought into the fund (usually from a previous fund) by new members.
Membership profiles, for example the ratio of members on pension to actively employed members, or the age pattern of withdrawals.
The fund’s valuator must in conjunction with the trustees consider the financial history of the fund to determine the surplus entitlement and surplus apportionment of former members, pensioners, active members and the employer.

The valuator must examine the expected income from, and capital growth on, the investments held by the fund as compared to the expected benefit outflow, and must advise the trustees whether he feels the choice of investment is appropriate to the fund’s requirements. In this regard the valuator must work closely with the fund’s investment manager.

The valuator must take account of whether the contribution inflow is adequate to meet the outflow of benefits. Any shortfall has to be made up by income from the assets of the fund. He must advise the trustees as to whether the fund is likely to produce sufficient investment income or not.

Where significant outflows are expected, such as in a provident fund where the full interest of the member is paid out on retirement, the valuator must advise the investment manager so that the fund can ensure that it has sufficient liquid assets to meet the expected disinvestment.

The valuator’s duty of providing this advice is achieved through periodic valuation of the fund, which must be performed every three years. The valuation follows a format laid down in the Pension Funds Act and regulations prescribed by the Registrar.

When making the periodic valuation, the valuator must estimate future withdrawals, deaths, disabilities, ill-health retirements, early retirements, normal retirements, mortality after retirement, the levels of salary, pension increases and investment returns.

In all his calculations the valuator must take into account the interests of the employer, the trustees, the members and the regulatory authorities. It is the valuator’s duty to act as a watchdog for the regulatory authorities and he must report infringements of the Registrar’s directives.

The fund auditor

It is the auditor’s fiduciary duty to ensure that the necessary books of account, annual financial statements and auditor’s report are drafted in accordance with appropriate, Generally Accepted Accounting Practice. Also, it must comply with the Pension Funds Act and other requirements of the Registrar and the Commissioner for the South African Revenue Service.

The annual financial statements should fairly represent the financial state of affairs of the fund and must include:

A balance sheet/statement of funds and net assets.
An income statement/revenue account.
Notes to the financial statements.
The auditor’s report.
The valuator’s report.
The trustees’ report.
Any other statements or reports as may have been presented to members.

A report by the valuator should form part of any annual financial report and must express an opinion on the financial soundness of the fund.

The auditor must also ensure that the fund’s investments are in accordance with the prudent investment guidelines as determined by regulation 28 to the Pension Funds Act.

The auditor must institute and conduct regular audits, ensure that the accounting system is both effective and working efficiently and introduce the appropriate audit checks and balances where necessary. He must also liaise closely with the fund’s valuator and investment manager on matters such as asset valuation, investment performance and expected future capital and income growth.

Where an insurer is the fund administrator, the auditor must be satisfied and certify that the insurer’s accounting systems and controls are adequate for retirement fund administration, and that such administration is carried out in compliance with the provisions of the Pension Funds Act.

The employer

The employer owes the fund certain fiduciary duties. These fiduciary duties arise because the employer has, by establishing a fund, entered into an agreement with his employees to help provide for their retirement, and because the money contributed to the fund, both by the employer and the employee, constitutes trust money.

The most important fiduciary duty of the employer is the duty to act with the utmost good faith, care and diligence when dealing with the affairs of the fund and to exercise his authority in a fair and reasonable manner.

The employer is, inter alia, expected to exercise this fiduciary duty when:

designing benefit structures and setting up the fund.
appointing the trustees.
paying contributions.
paying benefits.
determining increases to, and updating benefits.
ensuring that all eligible employees join the fund.
ensuring that members are not allowed to leave the fund or receive benefits from it unless they are genuinely leaving his service.

It is the employer’s duty to cooperate fully with the trustees and administrators of the fund, particularly with regard to furnishing details of salary increases, marriages and staff turnover.

The fund administrator

The fund administrator is responsible for the efficient running and administration of the fund. The administrator must ensure that the various fund employees, the trustees and the participating employer perform their particular duties promptly.

All the fiduciary duties relating to administrative matters, investment of fund monies, running the affairs of the fund, and so on, equally apply to the administrator. More specifically, the administrator must ensure:

that all eligible employees are members of the fund.
that it monitors the payment of the contributions by the employer to the administrator.
that it monitors the receipt of minimum information that must be submitted by the employer to the administrator.
that the necessary documentation regarding the admission of new members is obtained from the members/employers and advised to the insurer or investment manager where applicable.
that the necessary documentation regarding the cessation of membership is obtained from members/employers and advised to the insurer or investment manager where applicable.
that adequate records of member and employer participation in the fund are maintained to enable the accurate determination of any benefits accruing to the member.
The timeous payment of benefits due to members or other interested parties on cessation of participation.
Compliance with the fund rules, the requirements of any trust deed, any statutes and regulations affecting the operation of the fund, and with any contracts and policies which the fund is party to.
Timeous referral of any matter requiring the attention of any officer of the fund. In particular, the administrator should provide regular and detailed reports to the trustees on all material matters, such as the membership profile, member movements, benefit payments made and contributions received.

The liquidator

Whenever a registered fund is to be terminated, an independent liquidator must be appointed to oversee such termination. This appointment must be approved by the Registrar.

The liquidator must be completely independent of the fund. Once appointed, the liquidator steps in the shoes of the trustees and the board of trustees terminate. The fiduciary duties applicable to the trustees are equally applicable to the liquidator.

The former trustees have a duty to assist the liquidator by furnishing any information he may require.

The liquidator must as soon as possible deposit the preliminary accounts with the Registrar. The preliminary account must show the assets and liabilities of the fund at the commencement of liquidation, and also the way in which it is proposed the assets should be realised and the liabilities discharged.

The preliminary account must lie open for inspection at the registered office of the fund, the Registrar’s office and in the appropriate Magistrate’s Court for the district for a period of 30 days. The liquidator has a duty to advertise this fact.

Once the liquidator has finalised the liquidation and paid all claims, he must send the Registrar a final liquidation and distribution account, showing the assets and liabilities of the fund on the date of distribution and the manner in which the assets have been realised and liabilities discharged.

Once the Registrar is satisfied that the accounts are correct and that the liquidation has been completed, he will cancel the registration of the fund. The liquidator should ensure that such cancellation is in fact effected.