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 The Role of Independent Trustees By Roy Zazeraj Do we need them? In South Africa, independent trustees have been used by some retirement funds for many years. Their use has been a low-key issue - until recently! Now, various hot industry issues have helped fuel a healthy debate on the need and role of independent trustees (also known as professional trustees, or expert trustees). These issues include the inadequacies of the Pensions Funds Act and its regulations, the need to improve regulatory compliance (including a whistle-blowing role), the need to control umbrella funds, the need for more trustee expertise and the need for good governance generally. There are those that believe that independents can play a growing and significant role in improving matters. But, the use of independents is by no means universally accepted. In the accompanying article, Mickey Lowther looks at the current debate between Labour and the FSB on this issue, including the proposal by the Registrar of Pension Funds for a panel of expert trustees. The advantages The debate, and my own experience, leads me to believe there are strong arguments in favour of greater use of suitably qualified independent trustees. However, this needs to take place within a formalised and well-managed structure. Independent trustees can and should bring the value of - - no (or very limited) conflicts of interest, In the context of the hot issues mentioned above, these add significant value and represent new imperatives. The legal situation The Pension Funds Act does not require that a trustee be a member of the fund, but this might be specified in fund rules. Rules can, of course, be changed, if needed and if accepted by the Registrar. Providing the rules allow for it, an employer could appoint an independent trustee, or members could elect one. So there is currently no real legal constraint on the use of independent trustees, and their duties and responsibilities would be identical to those of any other trustee. Paragraph 6.1 of circular PF No. 96 specifies that in order for Umbrella Funds to be exempted from the requirement for member-elected trustees, they must have at least one independent board member. The FSB's discussion document on Umbrella Funds (dd 7 October 2002)) suggests amending this to at least fifty percent independent board members. The "surplus legislation" (Pension Funds Second Amendment Act) establishes the role of "former member representative" and this too can be filled by an independent (whether a trustee or not) - again with the advantages listed above. It is suggested that the proposed rewrite of the Pension Funds Act fully clarify the role and requirements of an independent trustee, to ensure maximum value is gained from their contribution. What is independent? Whether these trustees are termed "independent", "professional" or expert, the main advantages revolve around their expertise, experience and position of independence. Expertise and experience are relatively easy to establish and monitor, their independence sometimes less so. Independence is taken to refer to the fact that they have no business or financial links to the employer, employee bodies (for example trade unions that members belong to), the fund sponsor (if not the employer) or any of the fund's service providers. There should consequently be no conflict of interest and independent trustees should be required to sign a declaration (perhaps repeated annually) to testify to their independence or at least declare any potential conflicts. Questions need to be addressed around who puts forward, influences, appoints, and evaluates independent trustees and fair remuneration. Remuneration of independents itself presents a potential conflict of interests, for if the independent trustees are reliant on the income from trustee duties, they might be less willing to displease the company, the sponsor, the board chair, or blow any whistles. Other advantages Current limitations on good retirement fund governance include the lack of knowledge, experience, independence and capacity of many company-appointed or member-elected trustees. The world of retirement funding has increased in complexity in recent years - even for small funds- and requires regular involvement and training to stay abreast of events. Where trustees are full-time employees of the company or organisation involved, their trustee duties typically represent a small percentage of their working lives. Often trustee meetings are only held three or four times a year, and this is the only time they become actively involved in the affairs of the fund. And even then, many trustees are not very well prepared or active in the meetings. These company- employed trustees know that their progress in the organisation is solely dependent on how they do their main job - so no prizes for guessing where their time-pressed priorities lie. The situation is slightly better in the case of Umbrella Funds, where the sponsor-employed trustees are generally expert and knowledgeable, involved in the industry etc, but they too have other jobs to attend to. I have seen even conscientious and willing company-employed trustees battling to meet their trustee obligations due to high workloads and conflicting priorities. Independent trustees (as in the case of non-executive directors) should be appointed for (apart from their independence) the contribution they can make to the fund and its interests. This includes their specific qualifications, expertise, experience, knowledge of the industry - and regular involvement in it (see "what to look for" below). Apart from their potential contribution to the fund and its members, other trustees (less expert or with different expertise) stand to gain from their presence. A systematic transfer of knowledge could even be written into their contracts. The issue of capacity could also arise here. Independent trustees will in most cases (unless retired) have other trusteeships - or jobs, as lawyers, accountants, actuaries, consultants etc. The King commission addressed the issue of company board members restricting the number of boards they serve on, in order to be able to make a meaningful contribution. The same criteria should be applied here. What to look for This brings me to the key question of what to look for in an independent trustee. To start with one would be looking for the same qualities as for any other trustee - a person willing and able to perform their well-documented (although not always well understood) common law and statutory duties. These have been written about at great length and form the core of most trustee training courses, so they won't be discussed here. Next is the issue of "true" independence, as mentioned above. The consultant to the fund is not independent. Neither is the company auditor, a non-executive director of the company, the fund auditor, the fund's consulting actuary, the investment advisor, the fund administrator etc, if they are currently acting in those capacities. People who once served in those capacities, and have good knowledge of the fund and its industry environment, would be acceptable. Then we need to look at expertise. The use of independent trustees allows the trustee board to appoint people who bring unique or added competencies. These include appropriate qualifications, knowledge, skills or professional memberships (such as in business science, actuarial science, investments, administration and systems, law, accounting etc). Appropriate experience is, as always, important, and maybe even more important than qualifications. However, I would argue that an education up to grade 12 level represents a minimum eligibility requirement to be an independent trustee. The currency of these competencies remains important, due to the rapidly changing nature of (especially) our regulatory and investment environment. Involvement in the retirement fund and related industries is a recommendation. So is some involvement in industry bodies (for example attending the meetings of The Institute of Retirement Funds, The Pension Lawyers Association, the Actuarial Society of Southern Africa and the Insurance Institute of South Africa) and other retirement fund trusteeships. These learnt skills and qualifications are an essential part of the reason for appointing independent trustees. But, as mentioned in "The Role of the Retirement Fund Chair" (Pensions World SA March 2004) value-based skills should also have a strong bearing in selecting an independent. Thanks to a study by the Chartered Institute of Accountants of South Africa, we can list (and adopt) them here as a. intellectual honesty Trustees should also not neglect to consider the potential credibility of the person amongst members. Given the company and industry history, union sensitivities and even tribal and national politics, would the person be acceptable to a majority of members? Remuneration We also need to address the vexed question of remuneration for independent trustees. Trustees working for the employer are not normally remunerated by the fund for their time and services - these being assumed to be part of their duties as a paid employee. Such non-payment could be part of our current dilemma. Maybe funds should start paying them to ensure the trustee role is taken more seriously and people aspire to become competent trustees. The situation for independents is a little different. It is accepted that funds must pay for various professional services. The same argument naturally applies to independent trustees, who apply their acquired expertise for the benefit of members. Their remuneration needs to be seen as fair, but attractive. Many are already working in a professional capacity (such as accountants) and will be using their current rates as a benchmark. Anything less would be unattractive and not worth their time. Also, as we all know, you get what you pay for. Remuneration of trustees (all trustees?) should be considered part of the cost of good governance. Like all costs it should be considered in terms of affordability, and managed carefully. There is clearly a need for each fund to have a formal remuneration policy and for there to be transparency around trustee remuneration issues. In conclusion There is a clear need for improved retirement fund governance. In this context, there are also compelling advantages in the use of independent trustees. Consequently, I believe there is, more than ever, a great need for their appropriate use. I have already suggested that their role in retirement fund governance should be welcomed and formalised in the context of a revised Pensions Funds Act. I have little doubt that the valid concerns of those opposed to their use can be addressed through open debate and the incorporation of independents in a sound regulatory structure, appropriate for South Africa. First published in Pensions World SA in Jun/Aug 2004 Article - PWSA indep. trustees |
