Retirement fund members have to do more to ensure that the people they elect as trustees of their funds are adequately trained and act in the interests of members.
Few of us realise that decisions made by trustees can have a significant impact on how much money we will have when we retire, or even whether we will be able to retire financially secure.
Based on the evidence that Personal Finance has - and which we have published over the years - the administration of some retirement funds leaves much to be desired.
Many things that take place at the administrative level - with or without the approval of trustees - can undermine our ability to retire with financial security.
These issues are not only about how our retirement savings are invested. They cover a lot of other things from costs, the payment of commissions, proper benefit structures and, more recently, the fair distribution of any surplus your fund may have.
At the annual convention of the Institute of Retirement Funds (IRF) this week, retirement fund trustees and service providers took quite a lot of flack for not acting in the best interests of fund members.
Dube Tshidi, the deputy chief executive of the Financial Services Board (FSB), berated trustees for not doing enough to protect your interests.
Tshidi says trustees have failed to:
- Educate themselves sufficiently about their duties, often accepting the training provided by service providers as the final word on what they should know.
- Deal with conflicts of interest. For example, trustees should not accept the services of a consulting company which also supplies a service to the fund, such as investing its assets.
- Take sufficient interest in bodies such as the IRF, which is, in effect, being controlled by retirement industry service providers.
- Take sufficient care to ensure that they, personally, do not get into a conflict of interest situation by, for example, accepting gifts and incentives from service providers.
It is up to trustees to act in our best interests, but we also need to ensure that the people we elect as trustees have the skills to do their jobs and do, in fact, do them.
As members of a retirement fund, it is our responsibility to:
- Insist that the trustees who stand for election are qualified to represent our interests. If they do not have the necessary qualifications, candidates should give a commitment that they will obtain these qualifications.
- Demand an assurance that your trustees will not accept gifts or other incentives from service providers, whether these gifts are nominal or generous, such as luxurious trips abroad to watch World Cup soccer games - as one company did.
I have refrained from naming the company concerned as Personal Finance will soon publish research on all the companies that provide services to retirement funds showing what incentives they offer trustees.
It is troubling that service providers are prepared to put temptation the way of trustees and often do not seem to see anything wrong with it, despite the practice being repeatedly condemned by the Minister of Finance, Trevor Manuel, and Tshidi.
- Insist on regular feedback from your trustees about decisions made by your fund, and an explanation for such decisions. Trustees will soon be obliged to draw up an investment strategy for your fund. As a fund member, you should be included in this process.
- Insist at these report-backs that your trustees tell you what they are doing to stay abreast of changes affecting the retirement industry. For example, new products are constantly being brought to market.
Your trustees can also keep abreast of changes by belonging to the IRF, attending its conventions and other meetings; and by standing for election on IRF committees so that you are represented when the IRF holds talks with the government and the FSB.
Incidentally, by the end of the convention this week, a substantial number of name tags had not been claimed. In other words, some trustees paid (with your money) to attend the convention and then did not pitch.
- Ensure that trustees take decisions that will prevent conflicts of interest arising. Your trustees must tell you which companies are servicing your fund. You should insist that the same or associated companies should not be providing services which involve them assessing each other's performance.
The most important conflict of interest to guard against occurs when the same company - or an associated company - is the fund's asset consultant and is also managing the assets.
Another conflict arises when an asset management consultant also provides a product. This has been a major problem with guaranteed structured products, where funds have been steered into these products, often inappropriately, with the adviser scoring big commissions.
It is in the area of conflicts of interest that trustee training provided by service providers is most wanting. It is not in the interests of many service providers to ensure that these conflicts of interest do not arise.
- Ensure that your trustees keep a tight check on costs. The fees charged by service providers are creeping up. I am a trustee and when the retirement fund with which I am involved recently started drafting investment strategy, I was stunned by what some consultants wanted.
Your trustees must tell you what service providers are being used; how and why they were selected; and how much they are being paid.
In another instance, an asset manager of the fund on which I serve as a trustee demanded an increase in the management fee, without offering any additional services. This fee is a percentage of the assets under management. The asset manager was told to take a jump.
Trustees simply have to learn to say "no". Every hike in fees, or any extraordinary fees, will result in a lower pension for you.
- Commissions. Millions of rands are needlessly being paid in commissions to consultants and brokers.
It has become an absolute racket, and it is becoming imperative that the FSB intervenes. In the meantime, however, you must ensure that your trustees do something about it.
One major racket is transferring or out-sourcing to life assurance companies the responsibility for paying pensions to members.
For this service, maximum commissions of 1.5 percent are permitted in terms of the Long Term Insurance Act. Many of the forms sent to trustees state that this is the "statutory" amount, so trustees believe they have no choice but to pay up. But 1.5 percent is the maximum commission allowed, not the compulsory rate.
A commission payment of about R24 million is currently being disputed in court by two Johannesburg municipal pension funds. The commission was paid to actuarial consultants NBC, which acted as consultants to, and administrators of, the fund. If ever there was a conflict of interest, this was it.
There is no reason why a consultant who is being paid a fee should be reaping additional amounts.
Again, if these types of commissions are paid, it is you, the retirement fund member, who is paying up and whose benefits will be reduced.
These commissions are also something to watch if your fund needs to change asset managers as a result of a new investment strategy; or changes group life assurance contracts.
Your trustees should also be watching the new practice of asset managers paying undeclared kickbacks to consultants. Again, this is something the FSB should be looking into.
By checking on your trustees, you are protecting your own pension.
Judge Davis on the Fedsure trail
I could not agree more with High Court Judge Dennis Davis in demanding an independent commission of inquiry into the virtual collapse of Fedsure. The FSB's investigation found that numerous bad practices at Fedsure resulted in policyholder expectations not being met and the loss of R600 million in retirement fund values.
I remain absolutely baffled by how the FSB concluded that there had been "no bad faith" on the part of Fedsure's management. This is despite the FSB's numerous other conclusions that clearly revealed the enormous abuse of policyholder and retirement fund assets.