Trustees are clearly falling short of what is required in terms of governance and care, says Gavin Stansfield, group head of legal at Sygnia.
Trustees are clearly falling short of what is required in terms of governance and care, says Gavin Stansfield, group head of legal at Sygnia. Referring to statistics from the Office of the Pension Funds Adjudicator, which last year reported a 30% increase in complaints, Stansfield is concerned that negligence, lack of education and conflicts of interest are contributing to the problem.
The most important role of a pension fund trustee is to ensure the fund achieves maximum benefit and return for its members over the long term.
“In doing so, each trustee must act in the best interest of the fund members with the necessary due care, diligence and good faith that the position requires,” Stansfield says.
In other words, trustees need to uphold their fiduciary duty to the beneficiaries of the fund. This is no mean feat.
“The very notion of what constitutes a fiduciary duty, to whom it is owed and how it should be discharged is complex,” Stansfield acknowledges.
For example, trustees need to be conscious of conflicts of interest that they or other board members may encounter and seek to act at all times in the best interests of fund members, placing their own interests aside.
One example of this may be an employee-elected trustee nearing retirement age, who may be tempted to select investment options that will benefit the fund in the short-term rather than pursuing long-term gains.
“Decisions must always be taken in the interests of the fund as a whole, including all of its members and beneficiaries,” Stansfield emphasises.
He notes that it is important to distinguish between the role of the board of a pension fund and the duties incumbent on individual board members.
“In terms of the Pension Funds Act, the board is required to direct, control and oversee the operations of the fund in terms of its rules. Its duty is to not only ensure that the fund is responsibly managed and financially sound, but also to ensure that members accrue maximum benefits against an acceptable degree of risk,” he explains.
If it can be shown that the breach of a specific fiduciary duty, either by the board acting as a collective or in the case of a specific individual trustee, caused financial harm or loss to a fund’s members, the trustee responsible for the loss may be held personally liable.
If trustees themselves offer investment advice to members, the law requires that they be judged according to the standard expected of a trustee who is equipped with that knowledge and skill, i.e. as a reasonable investment expert. Should it subsequently transpire that the trustees never had the requisite knowledge and skill to give investment advice, or if the investment advice turns out to be incorrect, the trustees may be held liable for negligence, Stansfield explains.
“If however the trustees engage the services of an investment professional and implement such advice in good faith, believing it to be the correct advice, it is the investment professional who may be held liable in the case of negligent or reckless advice,” he adds.
This highlights the need for trustees to either have appropriate investment know-how themselves, or to seek it out from qualified, independent professionals. “There is no doubt a broad range of investment knowledge and expertise among trustees, however a hidden problem can emerge where only those trustees on the board who are vested with investment expertise, end up making all the investment decisions on behalf of the others,” he cautions.
He advises getting independent input from investment consultants so that everyone on the board can be educated and understand what the options are.
Since product providers will naturally promote their products over competitors, Stansfield suggests that trustees should not simply follow the advice of a service provider without doing an in-depth analysis of what constitutes the best advice for the fund and its members.
But even where robust discussion is had, Stansfield suggests that the well-known concept of “boardroom pressure” is no doubt alive and well among boards of trustees. This concept recognises the anxiety experienced by a single trustee (or director) in voicing his or her opinion in the face of a majority view expressed by fellow board members, especially when the majority comprises senior members of the board. Notwithstanding a trustee’s duty to remain at all times independent, which includes the duty to exercise one’s discretion freely and independently of others, it is a recognised fact that in many cases, trustees will simply remain silent rather than being construed as obstructive.
Referring to statistics from the Office of the Pension Funds Adjudicator, which last year reported a 30% increase in complaints, Stansfield says that trustees are clearly falling short of what is required in terms of governance and care.
Since fiduciary duties are incurred from the outset of one’s appointment as a trustee, Stansfield emphasises that boards must take seriously the obligation to educate trustees upfront and on an ongoing basis.
He recommends registering for the Financial Services Board’s (FSB’s) trustee toolkit online and accessing other online courses.
“It’s an office that should be taken seriously. Trustees should be educating themselves from the outset and continue to do so as a means of ongoing professional development,” he says.