PF Circular 5: Fidelity Guarantee Insurance Requirements

FINANCIAL INSTITUTIONS OFFICE, ,' PXIVATEBAG 238, PRETORIA4 July, 1962. --A

ZIRCULAR NO. ,?,?I 5. TO ALL PRIVATnLY ADPI~INISTERZD PENSION FUN3S. FIDELITY GUARANTEE INSURAKCE . It seems that a num?je'r ;of pension funds found it di-fficult or were relactant to bbtain fidelity guaran￾tee insurance as required in my circular No. P.F. 3 of December, 1961, for the main reason that such cover proved to be very expensive. Investigations revealed that the real cause of the high, premium rates is the fact that'this Office insisted upon cover inter alia against "negligence". ! After further negotiations with the 1nsui-ance Associations it was agreed, that for the tine being pension funds need not obtain cover against lossesdue -to negli￾gence. It was made clesr, however, thet the position will be watched very closely and may be reviewed at a later stage,in the light of experience gained. The Insurance Associations heve agreed to make availabie to pension funds what is commonly known as "conmerc~al risk" policies-which cover practically every￾thing this Office had in mind except negligence. . Pension funds are therefore advised to obtain this type of policy in future. As this is the type of policy normally taken out by employers there should-not be much difficulty in having the employers' fidelity cover extended to include officers administering pension funds. In regard to the "commercial risk" policies it is pointed cut that they normally do not contair. automatic reinstatemznt provisions. In other words, unless ar￾rangem?nts are made to the contrary the amcunt of cover reduces every tiice a claim is paid. Pension funds are consequently requested to see in their own interests that steps be taken whenever a claim is paid to have the aniount of cover reinstated to t'na original anount. It [cay be menticncd that soine pension funds refer individual policies or extracts from policies to this Of￾fice. with the request that this Office must say whather they comply with tha fidelity guarantee requirement. However much this ijffice would like to assist I rkgret that it may be placed in a most invidious position if it were to give legal advice. Funds are aware of the necessary re￾quirements and if they hav~ any doubt as to whether a policy covers those requirements, they shculd consult theiz legal advislrs.

Although. this Office prefers fidelity guarantee policies to be taken out it is prepared to consider in special instances depending upon the financial standing of the guarantors, guarantees by participating employers to make good any losses suffered by funds due to dis￾honesty of their officers. The acceptance of such @arantees must be re- . garded as a temporary measure untii experience has proved I that such guarantees are effective .or otherwise. -Conse￾i quzntly those funds which obtain permission to accept I guarantees from the participating employers mus,t under￾gtand that if this should become necessapy this Office may insist later upon insurance cover being taken out. I It 'may be m~ntioned here that a provision in the rules I whereby the participatin~ employer guarantees the sol￾vency of a ponsion fund as dlstlnct from a provident ' -fund will not be sufficient eompliance. with the fideli￾I I ty requirement as pension funds ma actuarial surpluses I . , should also be covered against losses due to dishonasty. In its previous circular on this subject, this Office recommended that a 5% cover with a maximum of R100,OOO be taken cut, If this recommendation is re￾garded as too high considering the circumstances of in￾dlvidual funds, the trustees of such funds may determine thsir own bases and maxima, always bearing in mind their dutles and responsibilities as trustees. As this, 0ffice hes agreed, as a temporary measure, not to insist upon cover against inegli.gencet' it is esssntidl that there be established to what extent pension fund moneys are lost due to degligence . It would accordingly be bppreciated if this Office could be furnished before 30th June,. 1963, with a statement, courltersigned by the fund's auditor indicating the loss suff~red by each fund during the last five years on ac￾count of I (a) neeligence; and (b) dishonesty and fraud. 3 ,L' REGISTRAR OF PENSION FUNDS.