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INFLUENCE: FIT AND PROPER

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Are you fit enough for your board’s marathon, asks Julanie Basson

Ask any runner standing at the start of a 42 km marathon and they will tell you the fitter and better prepared you are, the easier the gruelling race will be. Many runners, including me, have attempted to run a marathon very well knowing that they have not done enough preparation. The result, a very hard and tough day out on the road.

Being in a fit and proper state as a board member is very similar. If you fulfil your duties as a board member of your fund only once you have received proper training and equipped yourself with the required level of skill, you will feel more confident to take on the enormous responsibilities assigned to you. Your supporters, being the members of the fund, will also have much more confidence in you, knowing that their hard-earned retirement savings are in good hands and well looked after. But if you choose to head into the boardroom unprepared and without the required skill set, you will be facing some very challenging situations, decisions and consequences.

Board members approving their fund’s annual financial statements confirm that during the period under review they have, to the best of their knowledge and belief, complied in the execution of their duties with the requirements imposed by Pension Funds Act legislation and the rules of the fund. This includes that they have:

  • Ensured that proper registers, books and records of the operations of the fund were kept, inclusive of proper minutes of all resolutions passed by the board of the fund
  • Ensured that proper internal control systems were employed by or on behalf of the fund
  • Ensured that adequate and appropriate information was communicated to the members of the fund, informing them of their rights, benefits and duties in terms of the rules of the fund
  • Took all reasonable steps to ensure that contributions, where applicable, were paid timeously to the fund or reported where necessary in accordance with section 13A and regulation 33 of the Pension Funds Act
  • Obtained expert advice on matters where they lacked sufficient expertise
  • Ensured that the rules and the operation and administration of the fund complied with the Pension Funds Act and all  applicable legislation
  • Ensured that fidelity cover was maintained and that this cover was deemed adequate and in compliance with the rules of the fund, and
  • Ensured that investments of the fund were implemented and maintained in accordance with the fund’s investment strategy

Although many of the functions and responsibilities above are often outsourced to service providers, the ultimate responsibility for them remains with the board. Board members have to ask themselves, ‘Am I equipped and knowledgeable enough to understand, review and assess compliance by the service providers and the fund to all requirements of the Pension Funds Act and other applicable laws and regulations? Am I comfortable subscribing to and putting my signature on the statement above?’

The Registrar of Pension Funds recently emphasised that the duty of the Regulator is to protect fund members. Similarly, board members of retirement funds have a fiduciary responsibility to act in the best interests of members of the fund. When things go wrong, the board will be the first point of call and will have to answer to the Regulator, and therefore will be accountable in all respects. Whilst board members may seek advice from industry experts and appoint independent professional board members, the onus is still on each and every board member to understand the impact of decisions made, policies implemented and controls put in place to protect the fund against risks. It is not appropriate to rely on that one knowledgeable board member.

The Registrar recognises the need and value of well governed funds and recently issued a draft information circular for comment which deals with prescribed training for members of boards of funds in terms of section 7A of the Pension Funds Act. Sections 7A(3)(a) and (b) stipulate the following:

 ‘(3)(a)    A board member appointed or elected in accordance with subsection (1) must attain such levels of skills and training as may be prescribed by the registrar by notice in the Gazette, within six months from the date of the board member’s appointment.
‘(b)         A board member must retain the prescribed levels of skills and training referred to in paragraph (a), throughout that board member’s term of appointment.’

As indicated in the information circular, the purpose of the power given to the Registrar in terms of section 7A(3) is to improve the governance of retirement funds and should not be seen as a move to replace elected or appointed board members with ‘professional’ board members. Indeed, it is clearly explained that it is not the intention that each board member must have the same knowledge and skill set in discharging their fiduciary obligation.It is, however, expected that each board member should at least have a minimum level of skill and knowledge to engage in all important board discussions.

The immediate challenge is that there is no standard of minimum requirements against which to measure the knowledge and skills of retirement fund board members. For example, does a chartered accountant or actuary already have the required minimum skills to be a representative of a retirement fund board?

After consultation with various industry stakeholders, the Registrar decided that such an objective measure would best be provided by a special purpose occupational qualification, accredited by the South African Qualifications Authority (SAQA). It is proposed that the Financial Services Board (FSB) be the development quality partner and that it should work closely with expert practitioners and Batseta, the agreed assessment quality partner, to develop an ‘occupational profile’ and training modules.

To date, six draft training modules have been prepared, canvassing:

  • The governance, strategic direction and control of a fund
  • Primary and subordinate legislation and the common law applicable to the governance, management and operation of a fund
  • The rules and operations of a fund
  • The governance of a fund’s assets
  • Requirements for compliance with financial soundness, financial management, and financial reporting standards and laws, and
  • Management of a fund’s risks

Draft ‘knowledge’, ‘practical skills’ and ‘work experience’ modules have also been prepared.

The introduction of training initiatives is certainly a step in the right direction. The Registrar is seeking to promote willing compliance with the new standards and welcomes input from industry.

The retirement fund landscape is driven by retirement reform initiatives and the need to improve savings, and member expectations are evolving at a rapid pace.
If we consider a few topical matters currently under discussion, a vast combination of knowledge and skills is required from board members to implement the required new initiatives and steer their fund in the right strategic direction on behalf of their members.

These matters include:

  • Deferred membership upon retirement
  • Harmonisation of contributions to pension and provident funds
  • Introduction of default investment products, annuities and preservation options within all funds
  • Cost-saving initiatives, and
  • Increased focus on hedge funds and private equity investments

The educational framework has been set by the Regulator. It is now for the boards to embark on a journey of assessing, evaluating and building the required skill base to enter their marathon with confidence.

Change is the only constant. Are you fit and proper and well prepared?

Author:  Julanie Basson CA(SA) is a Director at PwC