Retirement fund trustees will have work harder at protecting members' interests, while using their funds' financial muscle to ensure that companies are good corporate citizens.
New draft regulations issued in terms of the Pension Funds Act will oblige the trustees of retirement funds to do a lot more in future to protect the interests of you, the fund member.
Trustees heard some hard truths in opening speeches at the annual conference of the Institute of Retirement Funds (IRF) held in Johannesburg this week:
- Abel Sithole, the president of the IRF, says trustees have to do more to prevent retirement funds from being fleeced by both the government - by way of additional taxes - and retirement fund service providers - through increasing costs;
- Jeremy Andrews, the chief actuary at the Financial Services Board (FSB), says trustees will have to take far more responsibility in ensuring that members' savings in retirement funds are properly invested;
- Bill Haslam, the deputy chairman of the FSB, says trustees must play a more effective role in ensuring that South Africa's companies are better corporate citizens; and
- Anthony Asher, the head of the Actuarial Science School at the University of the Witwatersrand, says trustees should play a bigger role in bringing about black economic empowerment in South Africa.
The issue of retirement fund trustees' responsibility to members was a major issue throughout the conference, with repeated warnings that members can sue trustees if they do not do their jobs properly.
Sithole says retirement savings are a soft target for both government and retirement fund service providers, because fund members do not directly feel the effects of an increase in either the taxation of funds or the fees charged by fund administrators.
"It is up to trustees to ensure that funds are not fleeced either by government or companies," he says.
Sithole says trustees must use platforms such as the IRF to send the message that "enough is enough".
Haslam, who was the keynote speaker at the conference, says private sector retirement funds probably control 18 to 20 percent of the companies on the JSE Securities Exchange.
Until recently, the JSE was effectively controlled by five companies which ensured that standards of corporate governance were maintained. But the opening up of the South African economy has erased this stabilising factor, Haslam says.
It is now up to shareholders to ensure good corporate governance. Part of the fiduciary duties of retirement fund trustees is to ensure high standards of governance in companies in which their funds own shares.
It is no longer good enough to simply sell shares if fund trustees or their asset managers do not like what is happening at a particular company. Selling a large number of shares when the value of the shares is down can undermine the value of the fund members' savings.
"Trustees have a fiduciary duty to maximise returns, and ensuring good corporate governance is part of this."
Haslam says that in the United States it has been shown that companies with good corporate governance provide better profits.
The items on the "to-do" list for trustees include:
- Ensuring good returns on their funds' investments;
- Ensuring corporate governance. Haslam says this includes such things as making sure that there are strong, independent directors on the boards of companies, and keeping a close check on executive remuneration. (This includes ensuring that golden handshakes are stopped and that share options that have become valueless because the share value has dropped below the price at which the options were issued are not replaced with a new scheme);
- Ensuring that companies follow socially responsible programmes by, for example, identifying ways in which the private sector can get involved in the development of the country; and
- Voting on resolutions put to shareholders. This includes placing an obligation on the managers of the assets of a retirement fund to report to the trustees on resolutions and how they voted on behalf of the fund.
Haslam says there is an opportunity for specialist "voting services" to be established that could investigate companies, attend shareholder meetings, and vote on behalf of the trustees of a number of retirement funds.
Asher says that trustees should also play a greater role in ensuring that proper black economic empowerment takes place in South Africa.
He says that currently black economic empowerment has resulted in the enrichment of a few people, which "to my mind is almost corrupt".
He says that more than half of the members of retirement funds are black, and if trustees used their voting power, more effective black empowerment would take place in the boardrooms of corporate South Africa.
He says the combined strength of private sector and state retirement funds can control more than half the value of the JSE.
Asher says trustees must tell their asset managers that unless they take a stronger stand on issues of social responsibility, such as black economic empowerment, they will be fired.
Trustees could also put pressure on companies to create jobs rather than cut jobs for the sake of short-term benefits. In the long run, only companies that create employment will generate long-term growth and improved profits, Asher says.
Other articles on the Institute of Retirement Funds conference:
Trustees must lead the way to shareholder activism