PF Circular 130: Good Governance of Retirement Funds

# FINANCIAL SERVICES BOARD

Rigel Park 446 Rigel Avenue South Erasmusrand Pretoria 0181 South Africa  
PO Box 35655 Menlo Park Pretoria 0102 South Africa  
Tel +27 12 428 8000 Fax +27 12 347 0221 E-mail info@fsb.co.za  
Toll free 0800 110443 Internet http://www.fsb.co.za

| ENQUIRIES: | W MOKUPO | D. DAILLING NO.: | +27 12 428 8032 |
|------------|----------|------------------|------------------|
| OUR REF:   | 12/12/1  | FAX:             | +27 12 347 8787  |
| DATE:      | 11 JUNE 2007 | E-MAIL:        | wilman@fsb.co.za |

(To all funds, approved administrators, and insurers who underwrite pension funds)

## CIRCULAR PF NO. 130

### GOOD GOVERNANCE OF RETIREMENT FUNDS

## PREAMBLE

1. The assets of a retirement fund are administered for the main purpose of providing the benefits promised in terms of the registered rules of that fund. The board of management (sometimes referred to as trustees) therefore holds fund assets in trust for those persons who will ultimately benefit from them. They stand in a position of trust or fiduciary relationship to funds and therefore must act with *integrity*. As fiduciaries, the board, its alternates and other persons duly appointed by the board to act on its behalf, have to deal with the assets or affairs of the fund in terms of pensions law, the common law, customary law, regulations, the (registered) rules of the fund, codes of conduct and policies that apply to the fund. Trustees may be required to exercise a degree of discretion in making decisions. Therefore, not all circumstances relating to the management and functions of the board may be circumscribed or clearly defined within a legal framework. This necessitates the introduction of governance measures. Governance therefore includes values and ethical principles which require a certain standard of behaviour of the board.

2. The *fundamental principle* is that the board shall at all time act with the *utmost good faith* towards the fund and in the best interest of all members. The board should always give full and proper effect to the rules of the fund and the board should deal with all matters relating to the fund and its members in accordance with their fiduciary duties, *fairly* and with respect.

3. The stakeholders in the governance of a fund are the fund’s members (they include pensioners, former members and deferred pensioners), their dependants and, if applicable, nominees of the members (the dependants and nominees hereafter referred to as “the beneficiaries”). The other parties affected by the governance of a fund are the employer participating in the fund (other than with a preservation fund), the sponsor (if not the employer) and the Registrar (all of whom are collectively referred to as “the stakeholders”).

Board Members Dr CDR Rustomjee (Chairperson) AM Sithole (Deputy Chairperson) BM Hawksworth  
Ms JV Mogadime Ms AMM Mokgabudi Ms LM Mojela Prof PJ Sutherland Ms HS Wilton  
Executive Officer RJG Barrow

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4. Accordingly, the purpose of good governance in a fund is to ensure that –  
   4.1. the benefits provided for in terms of the rules of the fund are actually delivered;  
   4.2. the benefits are optimised and the associated investment risks are minimised, with these opposing concepts being appropriately balanced against each other;  
   4.3. the process involved in the provision of the benefits and the administration of the fund warrants that the cost implications to members and beneficiaries, is *transparent* and quantifiable by the stakeholders.

5. The board of a fund, assisted by the principal officer, is *responsible* for the governance of a fund.

6. Fundamental to the governance of a fund is the extent of the *accountability* of the board and the principal officer. The principal officer is appointed by and *accountable* to the board, and the board is *accountable* to the members and beneficiaries and the Registrar for its governance of the fund. The board is secondarily also *accountable* to the employer participating in the fund and the sponsor of the fund because, in respect of an employer, the fund fulfils one of the employment promises made by the employer, which is to provide the benefits set out in the rules of the fund; and in respect of the sponsor (if different from the employer), because the sponsor set up the fund confirming provision of the benefits in terms of the rules. This accountability for the governance of a fund is very important due to the fact that the assets of a fund are required by members and beneficiaries to fulfill a vital need on retirement, withdrawal from service, death or disability. Members and beneficiaries require legal recourse or remedies should the benefits not be provided to them as stipulated in the rules of the fund.

7. The accountability requirement of the board means that collectively and individually the board members may be held liable for any breach of the governance which results in any loss to the fund and to the members or beneficiaries in the provision of benefits. The board should adhere to the rules of the fund and should institute disciplinary measures in the event of an alleged breach by a board member. Furthermore, members and beneficiaries may request the Pension Funds Adjudicator or a court of law to determine the liability of the board.

8. The board and the principal officer should ensure at all times that their governance of the fund complies with the requirements of the applicable legislation. This means that the rules of the fund should be adhered to, the applicable legislation followed and other legal or compliance requirements should be applied. The board should obtain expert advice where necessary for this purpose.

9. With the above as background, the *principles* of governance are set out below. These are under the following headings –  
   9.1. the governance by the board of itself/ the governance structure;  
   9.2. the governance by the board of the operations of the fund/ the governance mechanism; and

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9.3. the management of relationships in the governance of the fund.

10. Every fund should have –  
    10.1. a code of conduct;  
    10.2. an investment policy statement (IPS);  
    10.3. a communication policy; and  
    10.4. a performance assessment tool for trustees which should inform their education and training policy.

11. Reference should also be made in the annual financial statements of a fund to the fact that a fund has each of these documents in existence and that they have, during the period of those financial statements, been viewed by the board and are available to beneficiaries on request or accessible on the appropriate website or through the principal officer. Communication to the board and members should be done in an adequate, appropriate and cost-effective manner to afford all parties the opportunity to understand the information and make informed decisions.

12. Any annexure(s) added to this circular should be regarded as providing guidelines for creating appropriate policies and as flexible documents which may be amended from time to time. Funds may adapt these documents to suite their unique needs and circumstances without detracting from the principles contained therein, because good governance requires the application of appropriate and cost effective policies and processes to cater for the specific needs of different funds.

## GOVERNANCE BY THE BOARD

### Principle 1: Roles, Responsibilities and Accountabilities of the Board/ the Governance Structure

#### THE BOARD

13. The board is *responsible* and *accountable* to the members for the administration of the fund, including the prudent investment of fund assets.

14. The board may, should the rules of the fund permit, delegate some of its functions to board sub-committees, employees of the fund and service providers; but such delegation does not relieve the board of accountability for the functions so delegated. The board may not abdicate from any of its functions and responsibilities.

15. The board members should act jointly. If the rules of a fund permit a decision of the board to be carried by a majority of its members voting in favour of it, then the minority should respect the majority decision. Strong objections may be minuted but the final decision should be recorded clearly. A deadlock breaking mechanism should be outlined in the rules.

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16. Irrespective of whether board members are employer-appointed, member-elected, in the employment of the sponsor or independent board members, they –  
    16.1. should endeavour to work together;  
    16.2. should trust each other and also be worthy of trust in return;  
    16.3. owe a primary duty of care to the fund and the members and beneficiaries, and are not specifically *accountable* to or required to disclose any information to that group of persons or entities through whom they were appointed or elected as a board member. To this end the board should be sensitive to managing the diversity of the board effectively to ensure that any tension, fears, disagreements, influence, affiliations, special interests, etc. do not hinder decision-making.

#### THE CHAIRPERSON

17. The chairperson of the board is pivotal in creating the conditions for overall board and individual board member effectiveness. To this end the chairperson should –  
    17.1. proactively lead the board impartially, for example, without bias in favour of the sponsor, the employer or any service provider;  
    17.2. confirm the agenda for board meetings, and review the draft minutes of such meetings;  
    17.3. manage board meetings to ensure that sufficient time is allowed for discussion of complex or contentious issues;  
    17.4. ensure that the performance of the board as a whole, the board sub-committees and the principal officer is reviewed and evaluated on a regular basis; and also to manage the performance of any board member or sub-committee that is not performing as required;  
    17.5. meet regularly with the principal officer to monitor the operations of the fund;  
    17.6. if required, act as spokesperson for the fund;  
    17.7. proactively raise issues of concern, on behalf of the board, with the sponsor, the employer, the administrator and other service providers;

#### THE PRINCIPAL OFFICER

18. The role of the principal officer is vital for the proper performance of the board. The principal officer should not be the chairperson of the board and his or her duty to the fund overrides any responsibilities or obligations arising from being in the employment of or remunerated by the employer, the sponsor or any service provider. The principal officer’s functions include –

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18.1. ensuring that decisions of the board are executed;  
18.2. ensuring that the fund complies with the formal requirements of the law, including directives from the Registrar, SARS and any other relevant regulatory authority;  
18.3. liaising on behalf of the board with service providers to the fund, unless where there is direct contact between the board and the service provider;  
18.4. contributing at board meetings even though, as principal officer, he or she does not have any vote in any decisions of the board if he/she is not a board member.

## CONFLICTS OF INTEREST

19. The fiduciary duty owed by the board and the principal officer requires that they avoid *conflicts of interest*. The following should be appreciated by the board and the principal officer in this regard –  
    19.1. the proper resolution by the board of any conflict of interest is necessary for promoting the credibility of the governance of a fund; and enhances the trust of both members and beneficiaries and any stakeholders;  
    19.2. the board should distinguish between conflicts of interest which may be structural, and therefore unavoidable, and those conflicts of interest which can be avoided or, if this does not compromise the credibility of the governance arrangements, managed appropriately;  
    19.3. a structural conflict of interest may arise where a board member finds himself or herself in a position in which his or her duties as board member conflict with his or her direct or indirect personal financial interests or the financial interests of a stakeholder in the fund (such as the employer or the sponsor), of which he or she is an employee or in which he or she is a shareholder. In such circumstances the legislation is clear: the primary obligation of a board member is to act in the best interests of the fund and the members and beneficiaries. Where a board member finds himself/ herself in a structural conflict of interest situation one should act without regard for one’s personal interests or those of the entity or persons through which he or she was appointed. This is to ensure one’s actions in such a situation may, as far as possible, be demonstrated to be no different, as if the structural conflict did not exist;  
    19.4. any conflict of interest other than a structural conflict should be avoided. The board should ensure, not only in relation to conflicts of interest as amongst the members of the board or the principal officer, but also in relation to any service provider to the fund, that a conflict of interest is removed or, if this is not possible, resolved *transparently* and defensibly. The mere disclosure of such a conflict of interest will rarely be an adequate resolution of a conflict of interest;

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19.5. potential or perceived conflicts of interest are as serious as actual conflicts of interest;  
19.6. any conflict of interest situation should be fully recorded in the board minutes, which should include details as to how the board has resolved the matter.

20. Members of the board should be able to demonstrate their *independence*. Such *independence* is essential also for the credibility of the governance arrangements, and is demonstrated by any discretion of the board being exercised in a manner which is impartial, fully informed and not influenced by inappropriate considerations. In particular the board should always consider what is in the best interests of the members, and should appreciate that the duty of good faith owed by the fund to the employer and the sponsor is subordinate to this requirement. In particular, the board should appreciate that it is not *responsible*, where the fund is an umbrella fund, preservation fund or a retirement annuity fund, for the viability of the business proposition of the sponsor in respect of such a fund.

21. Board members should respect the *confidentiality* of their functioning as a board and also the information pertaining to the fund. In particular, no board member may disclose information about the operations of the board or the fund unless authorised to do so by the board itself. Board members generally, but specifically board members in the employment of the sponsor of a fund, as well as independent board members, who may be members of various boards, need to be vigilant with respect to confidentiality.

22. Each board should have a *code of conduct* in which it outlines and confirms its duties and obligations. Every fund should also require of each board member that he or she completes an acceptance of duties form and, at least annually or at such greater frequency as the board may require, a declaration of interests. This should set out all financial and other interests as set out in the fund’s codes of good practice/ code of conduct.

### Principle 2: Composition and Competency of the Board and delegation through the use of sub-committees

23. Board members should have sufficient capacity to deal diligently and thoroughly with their duties and responsibilities. Where an employer has the power to appoint board members in terms of the rules of the fund, the employer should use this power appropriately to ensure that the board has, as far as possible, the necessary skills. To minimise conflict of interest, the employer should preferably not appoint persons to the board who would otherwise be involved in decisions on behalf of the employer in respect of the fund. In umbrella funds, preservation and retirement annuity funds, the credentials of independent board members should be verified with the various regulatory authorities and/ or licensing institutions to ensure that the independent board members appointed to the board have the necessary fitness and propriety and skills to exercise their governance responsibilities.

24. Large funds may benefit from professional trustees, namely independent board members from a particular profession such as registered attorneys, actuaries and chartered accountants where the costs are justified. It is recommended that at least 50% of the board of multiple-employer (umbrella) funds and retirement annuity and preservation funds should be independent.

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25. Independent board member should not be employees of the employer participating in the fund and neither should they be controlled by, or in common control with the employer, the administrator or the sponsor of the fund. The independent board member should preferably not provide any other services to the fund or the employer or the sponsor, other than serving as a trustee to the fund. Any variations should be dealt with in the registered rules of the fund or in the code of conduct.

26. Sub-committees of the board may be established to exercise a specific oversight responsibility or to carry out, where the rules of the fund permit it, any board-delegated responsibility. Any such sub-committee should have an appropriate written mandate which sets out clearly its functions, scope and authority, as well as the criteria or membership requirements.

27. Clear terms of reference should be set by the board for the sub-committees which should be adhered to at all times. Sub-committees should operate within the set parameters.

28. The sub-committees appropriate for each fund will vary from fund to fund but may include, amongst others  
    28.1. an audit and administration sub-committee;  
    28.2. an investment sub-committee;  
    28.3. a legal sub-committee;  
    28.4. a communication and education sub-committee;  
    28.5. a risk benefits sub-committee dealing with death and disability benefits;  
    28.6. an actuarial sub-committee in the case of a defined benefit fund.

29. Each sub-committee should be required to advise the board on risks relating to the functions to be performed by that sub-committee, and the process or controls necessary to mitigate that risk.

### Principle 3: Board Orientation and Education

30. New board members should, at the expense of the fund, post appointment and election, receive rigorous and comprehensive training on both the legislative and regulatory framework and governance principles in order to equip them to effectively carry out their functions as board members, and to enable them to minimise their risk of liability as well as to safeguard them against bad decision-making.

31. Board members should be educated on an ongoing basis about new matters relating to funds to ensure that they acquire and maintain an understanding of risk management, investment risks and strategies, benefit structures, legal issues, regulatory and compliance requirements, taxation, actuarial and reform issues. The cost of this information provision and training should be at the expense of the fund.

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32. Training and education requirements for board members should be an ongoing process, with an emphasis placed on continuous and lifelong learning (this can be NQF aligned /SAQA approved).

### Principle 4: Board Assessment and Breach of Code of Conduct

33. The board, the principal officer and the sub-committees of the board should be subject to an appraisal of their performance at least once every year. The sub-committees of the board should also be subject to appraisal. The purpose of the appraisal is to assess the effectiveness of the board, the principal officer and the sub-committees, and to highlight where improvements should be implemented.

34. Where a board member breaches the fund’s code of conduct or acts in contravention of any of the responsibilities imposed upon him or her then the board should take such action as it considers appropriate, after consideration of any argument presented in defence of the board member concerned. This may, should the rules of the fund permit, be in the form of, *inter alia*, declaring that such trustee should vacate office; that such trustee is suspended from office for such period or in respect of such function as the board may decide, and subject to any appropriate terms and conditions imposed by the board. The objective of action by the board against a trustee is to preserve the integrity of the board and its governance role. Action against a board member should not be solely driven by whether or not the breach gave rise to financial or other reputational prejudice being suffered by the fund or any other stakeholder. Each matter should be assessed on the facts and merits of the situation, and an appropriate form of discipline should be imposed.

## GOVERNANCE BY THE BOARD OF THE OPERATIONS OF THE FUND

### Principle 5: Internal Controls/ Governance Mechanisms

35. The primary function of the board in relation to the business of a fund is to ensure that it (the board) exercises a rigorous oversight function. There should be a clear identification and assignment of operational responsibilities, either to persons with appropriate skills employed by the fund (where the fund is privately-administered), or by way of a written agreement to a licensed administrator or long-term insurer (where the fund is underwritten).

36. For the board to exercise its oversight role properly, those to whom functions are delegated should be required to report back regularly on such delegated functions and with sufficient and relevant information to enable board to make an informed performance assessment.

37. The board should ensure that there is adherence to and compliance with all statutory and regulatory requirements. In particular, the board should appreciate the rights and duties of those involved in the operation of the fund, others associated with the fund such as the employer and sponsor, as well as the members and beneficiaries of a fund.

38. In addition, the oversight responsibility of the board requires that there should be –