Illustration: Mangena

The pension fund sector is facing change at a level possibly not seen since the move, begun about 20 years ago, from defined-benefit to defined-contribution funds. However, pension fund trustees and administrators may not have grasped all the implications of this change, which will affect your retirement fund and your rights and options as a member.

This was an underlying theme at the recent annual Pension Fund Lawyers Association Conference in Cape Town, where experts unpacked a range of legal issues facing funds. 

These issues relate to the regulatory reforms in the retirement industry, including a heightened focus on governance, and the migration of stand-alone funds to umbrella funds.

Twin peaks

Fiona Rollason, the head of legal services at Alexander Forbes, described to the conference the changes to regulatory structures as laid out in the newly promulgated Financial Sector Regulation Act. This will see the financial services industry regulated by two authorities, or “twin peaks”: the Prudential Authority, responsible for financial stability, and the Financial Service Conduct Authority (FSCA), responsible for overseeing market conduct.

Pension funds will, at least for the first three years, fall under the FSCA, which will have wider powers than the current Financial Services Board (FSB) in ensuring that funds are governed properly and members’ interests are put first. Conduct standards issued by the FSCA will deal with the fair treatment of customers in line with National Treasury’s Treating Customers Fairly principles.

The FSCA will monitor financial advice given to members, fund governance and the duties of trustees, record-keeping, data management, financial management, the outsourcing of services, and conflicts of interest, among other things. It will also have increased powers of enforcement in acting against rogue funds and irresponsible trustees.

Default pension regulations

The so-called default pension regulations, which pertain to pre-retirement and post-retirement investment strategies offered by pension funds and which Personal Finance has covered recently (“End of the road for company pension funds?”, January 27), offer a range of legal challenges for trustees.

Funds must have default strategies in place by March 1 next year. Seeing that pension funds need to amend their rules in many cases to comply with the new regulations, and these amended rules need to be approved by the regulator, which could take some time, funds may be cutting it fine in meeting the March 1, 2019 deadline. 

Of the default strategies themselves, the most tricky to implement, says Carlyle Field, a partner at law firm Shepstone & Wylie, may be the default preservation strategy. 

In terms of the new regulations, a member who doesn’t make a choice regarding his or her savings in a fund when retiring or changing jobs, becomes, by default, a paid-up member of the fund. The member’s savings are preserved in the fund until he or she decides to do something with them. 

Field says it may prove onerous for trustees to keep tabs on paid-up members, who may wait many years before accessing their savings, or who may die with their savings still in the fund.

The regulations also require that financial advice is provided to retiring members on the best way to invest their savings. This function is likely to be outsourced by funds, but the trustees will be ultimately responsible for the standard of advice – a further burden (and liability) for trustees.

Move to umbrella funds

Olano Makhubela, acting deputy registrar of pensions at the FSB, says the FSB is looking at reducing number of active funds from about 1 600 to about 200, by establishing minimum requirements for funds in terms of size of membership and amount of assets under management, with a view to consolidating more funds into umbrella funds. 

This will hasten the current migration of stand-alone funds to umbrella funds, which are run by the big administrators and house many employers within an over-arching fund, relieving employers of having to run funds themselves.

Jonathan Mort, director of specialist law firm Jonathan Mort Inc, raised concerns about umbrella fund arrangements, arguing that, although responsible umbrella fund operators may maintain high ethical standards, the structure of umbrella funds opens the door for administrators’ and employers’ interests to come before members’ interests. 

“Does not the danger of unfair advantage that materialised in defined-benefit funds through employers determining the benefit regime and being able to manage the funds to their advantage perhaps also apply when a sponsor sets up a fund with a specific way of delivering fund benefits, which it is able to manage in a way that benefits the sponsor? This is the nub of the issue around commercial umbrella funds today,” he says.  

One reason employers are moving their employees into umbrella funds is to reduce their obligations to their employees. But the move doesn’t let employers off the hook in terms of their fiduciary duties to employees, Mort says, including doing a due diligence on the umbrella fund and monitoring its financial management.

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Petri Greeff

For various reasons, many retirement fund members are facing a future of eating cold baked beans. Perhaps their contributions weren’t effectively invested while they were saving. Perhaps, once they retired, they spent their money too quickly.  Will reducing the number of pension funds and increasing regulation and oversight alleviate either of these problems? I think not.  

Many smaller funds are already struggling to deal with the regulatory requirements for stand-alone funds. The initiative by the regulator to reduce the number of funds will simply mean that most smaller funds will be swallowed up by umbrella funds. Instead of members being represented by trustees with whom they work, they will be part of an amorphous pool of members who belong to a fund run by professional trustees. Furthermore, it is likely that the member profiles of stand-alone funds, and the investment strategies that match those profiles, will be lost. Customised investment strategies that serve a small, niche group of members are not only bespoke but aligned to investment goals, whereas a large pot of future pensioners may get exposure to a more generic, off-the-shelf offering. Yes, it may be cheaper in the short term, but at what cost to the member in the long term?

You can compare it to the difference between a “mom-and-pop store” and a supermarket. In the mom-and-pop scenario, the owners know their customers, stock special items for them, and tailor their service offering to their needs. In the supermarket scenario, shoppers have no relationship with the individual store managers and have to accept the items and brands that a supplier has negotiated with the store to stock. They are also often given impersonal service at the check-out counter.

In the retirement space, trustees of stand-alone funds are more likely to know their members and care about what happens to them. With an umbrella fund, members become just a number, service levels slip, and the ultimate outcome – a decent income for the rest of your life – is more at risk. 

Although regulation is necessary to weed out funds that are not fulfilling their responsibilities, it comes at a hidden cost, and the members could end up paying in the future. 

Petri Greeff is an executive at RisCura, a global investment advisory and financial analytics firm.