Are retirement fund members' investments at risk? December 2017

By LAUREN SALT AND MOTHEO MFIKOE, Published in Pension Law

After recent reports regarding the Public Investment Corporation investing the assets of the Government Employees Pension Fund (GEPF) in ailing and embattled state-owned companies, we examine the duties placed on pension fund trustees and their fund managers.

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The retirement industry is divided into the private and public sectors. The private sector is governed by the Pension Funds Act (24 of 1956)(PFA). The Act's main aims include registering and regulating all entities operating as retirement funds, to protect the rights of pension fund members and to ensure that employers and pension funds do not renege on their commitments to employees and members by leaving them destitute in their old age. Public pension funds are governed by their own legislation, such as the Government Employees Pension Law (21 of 1996), which governs the GEPF. The GEPF is the largest pension fund scheme in South Africa; it has 1.2 million members and more than R1 trillion in assets under management.

The Financial Services Board (FSB) has issued a number of guidelines for the administration of retirement funds which should be read in line with the King IV Report. King IV covers the governance of the retirement funds industry and provides recommended practices. Though compliance with King IV is voluntary, the principles have been adopted and incorporated into legislation. Moreover, investors are increasingly monitoring how retirement funds are administered by the application of King IV. Not only does King IV provide for retirement fund governance, but it also sets out the role of the trustees in fund governance; specifically, that fund trustees and service providers such as fund managers, should aim to achieve favourable and beneficial outcomes for fund members. It does this by aligning its principles to the Code for Responsible Investing in South Africa (CRISA), which empowers the beneficiaries of investments made by institutional investors, like retirement funds, to select responsible custodians for their investments. This is also in line with Regulation 28 of the PFA which requires pension funds to give consideration to any factor which may mate rially affect the sustainable long-term performance of a fund's assets. The fund trustees are, therefore, held up to stringent standards to act on investment mandates in the best interest of its fund members.

The question arises whether the trustees and fund managers are acting in the best interest of members or contrary to legislation, and the guidelines which underpin their investment strategy. The PFA states that fund trustees must take all reasonable steps to ensure that the interests of the members are protected at all times. The trustees have a fiduciary duty to fund members with regard to their assets and benefits, and a fiduciary duty to the fund to ensure it is accurately administered and financially sound. These fiduciary duties are enhanced by the duty to act in good faith, and with care and diligence. Any action on the part of the trustees that is contrary to their duties results in personal liability.

Section 10 of the Financial Institutions (Protection of Funds) Act (28 of 2001), indicates that trustees convicted for being in contravention of their obligations are liable to a fine or to imprisonment for a period up to 15 years. If the fund members have concerns with regard to risky investment mandates by the trustees and fund managers, they may either approach the fund directly and such a grievance can be escalated to the Minister of Finance or make a complaint to the Pension Funds Adjudicator in terms of an abuse of power, maladministration on the part
of the trustees, disputes of fact or law and employer dereliction of duty.

The PFA has no authority over the GEPF. Instead, the GEPF is administered by government, which is responsible for ensuring the GEPF's
obligations to its members, subject to the approval of the Minister of Finance. On the other hand, the GEPF is a separate legal entity from
government and its trustees are bound by the duties stipulated in Rule 4.1.19 of the GEPF Rules. The Rules provide for trustees to act with due care and diligence, in good faith and in the best interest of the GEPF, its members, pensioners and beneficiaries.

Where GEPF members have concerns regarding their own fund assets, Rule 22 of Schedule 1, indicates that any member or pensioner has the right to communicate directly with the GEPF in regard to their pension benefits claim. Unlike the PFA, Rule 4.5 of Schedule 1 of GEPF Rules indicates that the GEPF trustees "are not personally liable for any costs or loss originating from his conduct, except in the case of negligence, dishonesty or fraud." Therefore, any action arising from the breach of a trustee's fiduciary duty and loss obtained by the GEPF member is directed only to the GEPF. In instances where there are no conflicts between the GEPF and the PFA, the GEPF looks at the PFA for guidance on best practice. GEPF fund managers are still subject to the FSB and its good governance rules as indicated in Circular PF No.130. GEPF fund managers are, therefore, held liable for contravening the provisions of the FSB Rules.

The stringent governance laws regulating retirement funds means that members are afforded considerable protection in terms of their investments. In light of the current political climate, members might feel they cannot rely on the fund trustees to invest their assets soundly. In such circumstances, fund members should be aware that not only is the retirement industry highly regulated but increased fiduciary duties are placed on fund trustees to make sound investments in the interests of the members. Individual members also have recourse should there be a suspicion of mal-administration of their investment benefits. Further, members should note that the GEPF's assets are underwritten by government and accordingly, their assets are guaranteed regardless of any shortfall as a result of poor investment mandates.

Salt is a Senior Associate and Mfikoe an Associate, Employment and Compensation Practice, Baker McKenzie (South Africa).

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