Africa Pension Funds Summit 2013

Speaker: Paul Williams

Company: Jonathan Mort Incorporated, Cape Town, South Africa

IS THE BOARD OF TRUSTEES UP TO IT?

STRATEGIES FOR STRENGTHENING THE BOARD IN A DYNAMICALLY EVOLVING ENVIRONMENT

Will your members’ benefits end up like this?

Or will they end up like this?

What I will be covering…

• The role of the trustee board at a fundamental level

• Governance: its purpose and consequences of poor governance

• Today’s pension fund environment

• How to ensure that the Board fulfils its purpose optimally

The role of the Trustee Board at a fundamental level

• Pension fund established to provide specified benefits

• Board’s role to seek to achieve that objective

• How does the Board go about its carrying out its role?

• By making the right decisions

• By delegating and making sure that the delegees perform – performance of

oversight function

• The importance of systems, processes and practices (aka governance

mechanisms) in ensuring that the Board fulfils its role

The purposes of governance

• Benefits promised are delivered

• Benefits are optimal and associated risks minimised; balance of these

opposing concepts • The process of benefit provision justifies the costs, and the costs are

transparent

• The benefit provision process is credible

• Ensure that beneficiaries have trust in the fund;

• Credibility in the eyes of other stakeholders;

• Parties involved in benefit delivery must be accountable to members

The consequences of poor governance- it’s like refereeing: you only notice it when it is bad

• Poor decision-making by the Board

• Poor oversight: high costs; service providers not brought to account

• Poor levels of benefit –

• Poor investment returns; inappropriate investment choice (DC)

• Funding problems; low pension increases (DB)

• Non-payment of benefit; incorrect payment; late payment

• High numbers of member complaints

• Regulatory heat

• Loss of employer support

Today’s pension fund environment- a dynamically evolving environment

• Board members’ legal duties have not changed, but expectations have

• Fiduciary duty – put beneficiaries’ interests over their own

• Socio-economic changes

• Growing middle class

• Development of pension fund industry

• Consolidation within the industry – fewer, but larger funds

• More detailed regulatory requirements

• Increased regulatory oversight of those requirements

• Increased professionalism expected of Boards

How to meet those expectations?

• Get the right people

• Training

• Internal governance – chairperson; sub-committees

• Avoidance/management of conflicts of interest

• Risk management

• Appointment and oversight of service providers

• Relations with other stakeholders

• Policies and codes

• Regular reviews – internal controls

How to get the “right people”?

• What do we mean by the “right people”?

• Levels of education, expertise, experience

• Non-conflicted

• Balance between employer appointees/member nominees/independents

• Employer appointees – well-informed, but not top management

• Member-nominated

• “Free” nomination, or criteria?

• “Fully democratic” or additional credits for requisite experience?

• Constituencies, e.g. pensioner/active; by workplace

• Balance between employer appointees/member nominees

• Union-appointed? Experienced in negotiation, but conflict of interest?

• Independent trustees – experience, but cost

• Should trustees be paid?

Education and training

• Necessary due to responsibility of the position and breadth and

complexity of subject matter

• Education of new board members

• Ongoing training

• How?

• Specialist training?

• By service providers in meetings?

• Trustee toolkit?

• Formal training plan

Internal governance (1) – Sub-committees

• More detailed focus on areas of particular risk/significance

• Decide on number and areas covered, e.g.

• Investment; administration and audit; actuarial (DB); death

benefits; communication and education

• Clear terms of reference in written mandate

• Purpose

• Composition

• Process

• Responsibilities and powers

• Regular reporting to board

Internal governance (2) – Chairperson

• Important role in effective decision-making

• Define role, e.g.

• Confirm agenda and manage meetings

• Lead trustee discussions

• Responsibility for trustee performance

• Liaison with principal officer; employer

• How appointed and removed?

Conflicts of interest - identification

• Requirement of trustees’ fiduciary duty

• Examples of conflicts:

• Employer-appointed trustee: duty to members v duty to employer;

• Union rep trustee – fund members v union members;

• Trustees who are members – duty to all members v own financial interest

in fund;

• Conflict with financial interest in/position with service provider

• Identify conflicts of interest – maintain register and review regularly

• Identify potential future conflicts of interest, e.g. in advance of a project

Conflicts of interest - management

• Evaluate the consequences of the conflict

• Is it likely to affect beneficiaries’ interests or be perceived as doing so?

• Professional advice in evaluation?

• Action should depend on nature of conflict and degree of potential

prejudice:

• Withdrawal from discussions on the matter;

• Delegate to sub-committee not including conflicted trustee;

• Appointment of independent trustee;

• Resignation

Management of risks

• Identify risks to the achievement of the objectives of the fund

• Analyse in terms of:

• Likelihood of risk occurring; and

• Consequences of risk

• Record risks in a risk register – colour code (red; amber; green)?

• Put in place and implement processes for managing identified risks

• Review register and revise it and processes if need be

Management of risks - examples

Risk Possible controls

Fraud • Segregation of duties • Frequent reconciliation procedures for cash and

investment balances

Poor performance by administrator

• Periodic meetings between trustees and provider• Service level agreement reviews• Performance appraisal• Audit by independent third party

Computer system and database failures

• System recovery plans• Data back-up procedures• Password controls

Consistently poor investment returns

• Review member investment choice• Review investment strategy and choice of

investment consultant• Change investment manager(s)

Appointment and oversight of service providers

• Importance of expert advice

• Trustees remain liable to members for service provider acts/omissions

• Appointment

• Tender process

• Conflicts of interest?

• Review and, if necessary, negotiate contract terms

• Oversight

• Relationship of openness

• Establish service levels and report against them

• Continuous review of conflicts of interest

• Third party reviews/audit – records; software; fees

• Re-tender

Relations with other stakeholders

• Goes to credibility of benefit delivery

• Members

• Communication policy – how often? how? what?

• Promptly deal with queries and complaints

• Special help on joining, with investment choice, on leaving

• Employers

• Establish mutual trust

• Channels of communication

• Attendance at Board meetings

• Common approach on communication

• Regulator – respect but don’t defer

Policies and codes of conduct- Demonstrate your compliance

• Code of conduct

• Investment policy statement

• Communication policy

• Performance appraisal

• Risk register

• Conflicts of interest policy and register of interests

• Confidentiality policy

• Gifts policy

Review your progress- Are you still on course? Do you need to change course?

• Investment policy

• Performance of service providers – performance

• Costs and expenses

• Conflicts of interests

• Internal governance arrangements, e.g. sub-committees; chairperson

• Policies, codes and processes

Although it can feel like this…

It can, with good planning, feel like this…

Thank you for listening

…any questions?