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Send  Share  RSS  Twitter  16 May 2012

RETIREMENT FUNDS: Retirement Fund Faces Higher Standards Of Governance


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South AfricaÂ’s retirement fund industry has undergone significant regulatory changes, with higher standards of governance being imposed on trustees, according to PwCÂ’s 2012 Retirement Fund Strategic Matters and Remuneration Survey released today.

The majority of trustees (72%) believe that the South African retirement fund industry is appropriately regulated from the perspective of protecting members. Some participants emphasised the importance of the role played by the Regulator in the effective monitoring and supervision of compliance with legislation. However, a number of trustees also felt that the industry is possibly over regulated and that legislation is not focused sufficiently on the key risk areas from the perspective of protecting members.

Tom Winterboer, PwC Financial Services Leader for Southern Africa and Africa says: “Fund trustees face more scrutiny and oversight than ever before, particularly in the wake of the recent economic uncertainty which has raised higher levels of governance and seen some significant regulatory changes in the industry. In South Africa, the most far-reaching changes have been the introduction of the revised Regulation 28. This imposes a much higher level of governance on trustees in relation to investments, which now needs to be monitored on a ‘look-through’ basis. Compliance is required not only at fund level but also at member level.

Education of Trustees About Fund

There is a renewed focus on fund trustees’ obligations to take into account the members’ needs in deciding how to invest the assets to meet those needs.”

The PwC 2012 Retirement Fund Strategic Matters and Remuneration Survey collates the responses of 228 participants representing a total asset base of R708 billion across a wide range of funds from large to small. It offers a benchmark against which trustees can compare various aspects of their fundÂ’s working and strategies with those of their peers.

The aim of the survey is to identify trends in roles and remuneration of trustees and principal officers and shed light on the stance retirement funds currently take on trustee education and on various aspects of corporate governance and risk management.

The study covers four focus areas: trustee remuneration; the education of trustees; principal officers and their remuneration; and aspects of regulation and risk management.

Gert Kapp, Retirement Fund Leader for PwC, Southern Africa, says: “It is not surprising to note that the majority of participants (73%) feel that the latest regulatory changes for funds and the industry as a whole will result in an additional cost for members of funds.”

The three top areas of regulatory changes expected to have the most additional cost for members of funds were compliance with Regulation 28; compliance with section 13B by investment and benefit administrators; and compliance with proposals contained in recent amendments to the income tax laws.

The majority of participants (68%) felt that there was scope for simplification or a reduction in costs in the operation of their funds. “This suggests that respondents believe that fund arrangements and operations are more complex than necessary or desirable and in our experience this is often the case,” says Kapp.

Following on from PwCÂ’s previous Retirement Funds surveys in 2007 and 2010, adherence to sound principles of governance remains a high priority for trustee boards. Most participants fell into one of two evenly matched camps: one that saw the King III Report on Corporate Governance as valuable for funds and the other that felt Pension Fund (PF) Circular 130 provided sufficient guidance on fund governance.

Remuneration of Fund Trustees and Principal Officers

In the 2010 survey, less than half of South Africa’s retirement funds (45%) said they remunerated their trustees. “Contrary to our expectation of seeing some increase, this percentage remained unchanged this year,” says Kapp.

Although the Pension Funds Act is silent on remuneration, the Trust Act states that a trustee is entitled to remuneration provided for in the trust deed or, where no provision is made, to a reasonable remuneration.

He says that the bulk of funds who remunerate trustees see the value in doing so in that they are expected to provide a higher level of care or be prepared to take on more responsibilities.”It is therefore not clear why certain of the large standalone retirement funds do not pursue this lead.”

The annual remuneration for the majority of chairpersons (57%) was in the range of R1 – R100 000.

For standalone funds, 60% of trustees earned between R1 and R50 000, compared to 77% of specialist funds. The top earning trustees for both specialist funds and standalone funds (4%) earned an average annual remuneration of between R200 000 and R300 000 per annum.

The main board still appears to determine the level of trustee remuneration for standalone funds, according to 71% of the respondents. For specialist funds, the sponsor continues to be the main driver of the level of remuneration. Interestingly, the boards and board committees of umbrella funds determine the level of trustee remuneration for the majority of these funds.

Both standalone and specialist funds are of the view that workload is the main factor in determining the level of remuneration.

The study also showed that 58% of funds remunerated the principal officer, compared to 47% in the 2010 survey.

Principal officers have a pivotal role to play in the day-to-day running of retirement funds. “It was interesting to note that principal officers earned more remuneration annually than the chairpersons of boards,” says Kapp. Standalone funds pay bigger cheques to principal officers with 63% of those that do remunerate paying more than R400 000 per annum.

Specialist funds pay less than R250 000 per annum in 67% of cases, possibly indicating that sponsors are picking up the bulk of remuneration.

Education of Fund Trustees

Johannes Grové, PwC Partner in the Retirement Division, says: “The sheer scale of pension fund investments, coupled with the attendant economic, political and administrative risks, places an enormous responsibility on boards of trustees to govern these arrangements wisely.

It is important that trustees equip themselves with the required skills and knowledge to enable them to discharge their obligation towards fund members in the best possible manner.”

Grové points out that it is positive to note that two-thirds of participants indicated that the training needs of trustees had been assessed.

The majority of training provided to trustees focuses on the roles and responsibilities of trustees, fund governance, the requirements of the Pension Funds Act and an understanding of investment products.

He says it is worrying to note that three percent of respondents indicated that no training was provided to trustees. “This may be less of a concern for professional trustees who see to their own continued education and training, but is alarming in relation to member trustees, who may well lack the experience knowledge to deal with the complex issues that trustees need to face and take action on.” Furthermore, 13% of member trustees had no tertiary education. Unless this is compensated for through long experience in the retirement fund industry, these trustees’ training needs require special attention.

The results of the study indicate that, on average, trustees spend 27 hours annually in training and attending industry events. Whether this is enough is a question that can only be answered by each individual trustee after carefully considering his or her responsibility towards the fund members whose retirement benefits are being managed, says Grové. “Trustees should take care that enough time is set aside to equip them with the knowledge they may well lack.”

Risk Management of Funds

Kapp says it is positive to note that the majority of participants (81%) has completed a detailed annual review of the risks faced by the fund, as required by PF Circular 130.This represents a slight improvement on the responses to a similar question posed in PwCÂ’s 2007 survey where only 75% of funds had a proper risk assessment in place.

One of the most favoured ways to manage and monitor fund risks was to use external auditors to perform testing on specific focus areas.

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