Trustees in for a rough pension ride

Published Feb 11, 1998

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The next 12 months are likely to see dramatic changes in the way retirement funds operate and many pension fund trustees are unaware of the responsibilities they will be carrying, says Graeme Kerrigan, joint managing director of employee benefit consultants, Alexander Forbes.

He warns that if pending legislation is approved, trustees will be far more accountable to members and could be liable in their personal capacities for the consequences of their decisions.

"Pending legislation for the joint management of retirement funds will mean that all funds will have to be jointly managed by member-elected trustees by no later than December 15, 1998.

"That is in less than 12 months time and many trustees have little or no experience of managing a retirement programme. They will need extensive training to prepare them for their new role."

Kerrigan says it is less certain that the Katz Commission recommendations will be implemented this year. "It seems the government is in no hurry to change the structure of retirement taxation legislation now that retirement fund income is taxable and is generating revenue for the fiscus. But it is possible that the tax burden could increase this year."

Another legislative issue that is influencing the structure of the retirement funds market is the current and pending legislation on ownership and access to retirement fund surpluses.

Kerrigan says a recent judgment in the High Court has put in doubt the ability of a company to continue with a contribution holiday from surpluses in a retirement fund. The case is on appeal and the outcome could have a significant impact on the industry.

Meanwhile the Financial Services Board has made progress in drafting and lobbying for legislation which will allow companies to gain access to surpluses in retirement funds, provided they have met a number of reasonably stringent requirements and have the approval for the refund from members and pensioners.

"This legislation could be enacted in 1998 and, assuming companies are successful with their applications, could result in significant revenue for the fiscus."

Other issues affecting the industry are the continued move from defined benefit to defined contribution funds, the trend for defined contribution funds to offer a choice of investment portfolios and a move by funds to outsource their pension liabilities.

"The move to defined contribution has been a trend for nearly 15 years but it is only in the 1990's that the majority of non-trade union members has moved to defined contribution.

"This move has coincided with a period of relatively high investment returns, which has ensured that the transition has been viewed positively by most members who have moved. But there are problems in communicating choice, particularly to members who have little or no investment knowledge," says Kerrigan.

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