Friday, October 07, 2005

A majority of South African employees make their savings through membership of a pension fund. The money contributed by employees, as members, to a pension fund is aimed at providing a safety-net post retirement, by ensuring that the member has an income in his old age. It is  for the aforesaid importance of pension fund savings that members should start monitoring the investment activities of pension funds in order to avoid disappointment when the pension benefits become payable.
Although pension fund members tend to entrust the responsibility of investing pension fund assets in the hands of the board of trustees of a particular fund, the time has come for members to take a personal interest in the investment activities of their pension funds. In fact, monitoring the investment activities of pension funds is more imperative for members of defined contribution funds because the members of such funds are entitled to whatever the fruits (be they sweet or bitter) of the investment may prove to be.
In order to effectively monitor the investment activities of pensions funds members must be aware of the duties incumbent upon trustees when investing pension fund assets, as provided for by the Pension Funds Act No. 24 of 1956 (“the Act”) and by the guidelines issued by the Financial Services Board (“FSB”). Arguably one of the main responsibilities of the board of trustees is to ensure that the capital in pension funds is appropriately invested, thereby generating an investment an investment return that will meet the fund’s long term objectives.
Although the Act does not expressly provide that the board of trustees of a fund has a duty to invest and to manage the fund’s investments, such a duty is implicit in the fiduciary duties of trustees. Engaging in investment activities enables a fund to preserve the real value of the fund’s assets, thereby maintaining an appropriate funding level. In a defined contribution context the duty would be to invest the funds in a manner likely to preserve value in an inflationary environment. According to the Act, a board of trustees is obliged to direct, control and oversee the operations of a fund in accordance with the applicable laws and the rules of the fund. In pursuing the aforementioned objective the board must, inter alia-
·         take all reasonable steps to ensure that the interests of members in terms of the rules of the fund and the provisions of this Act are protected at all times;
·         act with due care, diligence and good faith;
·         avoid conflicts of interest;
·         act with impartiality in respect of all members and beneficiaries.
Due to the extent of liability faced by trustees the FSB in PF Circular 98 (General guidelines on boards of pension funds and their objects and duties) adapted governance principles contained in King II Code on Corporate Governance to be applicable to pension funds. The purpose of the Circular is to provide guidance to the trustees for, inter alia, the good governance of the fund’s investments. As a good governance tool and best practice, trustees are encouraged to draw up an investment policy for the fund which should include, inter alia, procedures for monitoring investment performance and appropriateness of investments.
The duties of trustees when investing fund assets have been consolidated in the enclosure to PF Circular 75 (Guidelines for prudent investment management to aid trustees, officials and their advisors prepared by the Actuarial Society of South Africa). Under the heading dealing with investment principles, the guidelines provide, inter alia, that:
·         Investments should be made in a professional manner applying sound business principles and with proper diligence. Investment in fields where special expertise is required should be made with the help of such expertise.
·         Investments should be reviewed at regular and frequent intervals. Regular and timeous investment performance reviews are essential to ensure that good investment results are regularly achieved.
·         All investments carry a degree of risk. Where a currency risks is taken, in order to increase diversification or for some other reason, it should be limited in extent so that the stability of the fund is not jeopardised.
The Pension Funds Adjudicator also had occasion to deal with the investment duties of trustees and outlined the following guidelines:
·         Trustees would not be acting as section 7C requires them to do, in the interest of members or with due care, diligence and good faith, if they attempted to invest the fund’s moneys themselves, not having the necessary expertise or knowledge to do so.
·         Trustees cannot abdicate all responsibility for the investment performance once they have delegated this duty. They retain a residual duty as regards the investment of the fund’s monies as one of the key operations of a fund, which the trustees must direct, control and oversee.
·         Part of their duty of diligence, care and good faith involves a consideration of whether the person to whom the power of investment is delegated is a suitable person. Furthermore it must involve the duty to monitor the performance of the delegee.
Whether or not an investment can be said to have been prudent or made with due care and diligence is a question which can only be decided on the facts of each case and bearing in mind that circumstances change. In relation to the risk associated with investments in securities, the Supreme Court of Appeal stated that, it must not be overlooked that every investment in shares carries with it the inherent risk of capital loss. Therefore, a trustee exercising due diligence and care will consider the risk associated with investment in shares. The extent to which it will be prudent to invest in the share market must necessarily depend on the circumstances of each case. Generally speaking, however, a trustee will as far as is practicable seek to spread the investments of the pension fund over various forms of undertakings in order to obtain a balance of stability and growth in the capital value of the pension fund in the income it produces.
Courts in the United Kingdom and the Adjudicator in South Africa have said that, a trustee’s performance when making pension fund investments is not judged by success or failure i.e., right or wrong. Neither prophecy nor prescience is expected of trustees and their performance must be judged not by hindsight but by facts which existed at the time of the occurrence. The performance of the trustees will be assessed on the basis of the facts which existed at the time when investment in the structured product was made. The issue in this regard will be whether the trustee acted prudently at the time. Prudence entails, inter alia, assessing the risk associated with the chosen investment product and taking appropriate steps to protect the interests of members.
Trustees’ duties do not stop once they have made an investment. Trustees have a duty to review the investments of the pension fund from time to time. As such, it is apparent that trustees have an on-going duty to review the investments made by a fund. The circumstances of the fund and the nature of the investment will determine the frequency of such revision and the steps that have to be taken in order to avoid adverse consequences to the assets of the pension fund.
Members are entitled to rely on the trustees of a pension fund to engage in investment activities in their interest. Furthermore, members should hold trustees responsible for any negligent and adverse consequence to their benefits occasioned by the investment activities of the fund. Although not required by the Act, it is prudent and incumbent upon members of pension funds to monitor and apply their minds to the investment reports issued by pension funds from time to time. Although the average member may not have the skills required for monitoring the investment activities of pension funds, such members should approach the trustees and/ or the Administrators of the fund for assistance. The days of trusting the ‘middleman’ to look after a member’s pension interest are gone, members have to take personal interest in their own fate.