Trustees often blindly follow consultants
The hedge fund industry must be rubbing its collective hands with glee at the opportunities that have been thrown its way, allowing for greater exploitation of retirement fund members. There is increased access to hedge funds for retirement funds, proposed new regulation that may benefit hedge funds, and a delay in implementing tougher regulations on retirement fund governance.
* Prudential investment amendments. Two years ago, prudential investment regulations (regulation 28 of the Pension Funds Act) were amended to allow retirement funds to invest a greater proportion of their portfolios in alternative investments, such as hedge funds and private equity funds, taking the limit from five to 15 percent in total, with a maximum of 10 percent each in hedge funds and private equity.
* Draft hedge fund regulation. New product regulation is being discussed to bring some sort of order to the burgeoning hedge fund industry in South Africa, which had some R46.4 billion under management by the end of last year. Of this amount, 63 percent was invested through funds of hedge funds, such as Edge Capital – and most of that money came from retirement funds.
New recommendations for the regulation of hedge funds include their categorisation into “qualified investor funds” and “retail investor funds”.
Retail investor hedge funds will be open to individual investors and will be regulated, as are unit trust funds, in terms of the Collective Investment Schemes Control Act.
The problem lies with the qualified investor funds. These will be open to institutional investors (including retirement funds) and individuals who are able to show that they have the knowledge and expertise and have “spare” money to invest. The actual definition is still to be finalised.
Few retirement fund trustees are experts in investment. Your trustees are expected to call in experts to advise them where they do not have the expertise themselves.
In the case of hedge funds, I would suggest that most trustees have even less knowledge – definitely not enough to find their way around the various investment strategies, the valuations and the liquidity of hedge funds, let alone the investment holdings.
So to investment consultants they must. And whether some retirement fund trustees will even understand the consultants’ advice is questionable.
* Retirement fund governance issues. One of the early decisions made by Rosemary Hunter, the new deputy executive in charge of pensions at the Financial; Services Board (FSB), was to place a hold on the decision by both National Treasury and her predecessors at the FSB to make guidance note PF130 obligatory on retirement fund trustees.
PF130 requires trustees to avoid conflicts of interest. Among other things, trustees:
– Should not accept incentives, such as free trips for themselves and their partners, from service providers; and
– Should exercise care in the selection of service providers. The service provider should not be tempted to advise the fund trustees incorrectly because it will benefit in some way apart from what it charges the fund.
Hunter says she is considering prescribing specific requirements for retirement fund trustees to make it more difficult for those responsible for the governance, management and operations of retirement funds, and the providers of products and services to those funds, “to use their powers in a manner designed to advance the interests of persons other than the funds and their members, to the prejudice of the funds and their members”.
The problem is that this is not just theory. There is a very real example of the problems that can arise. The example is Riscura.
The significant conflicts of interest in this case are evident from a large number of financial documents and emails between senior Riscura executives in the possession of Personal Finance. These conflicts continue, despite the fact that the Pension Funds Act, Financial Institutions (Protection of Funds Act), Financial Advisory and Intermediary Services Act, common law and PF130 all state that conflicts should be avoided, and where they cannot be avoided, should be managed properly by both fund trustees and service providers.
Retirement fund trustees and service providers must meet fiduciary duty requirements to act with due care and diligence when looking after your retirement savings. But not much note seems to be taken of this by either Riscura or many of the trustees of the retirement funds the company advises.
Hunter says it does not matter that PF130 is not becoming regulation immediately, because “a person acting in a fiduciary capacity in respect of his or her principal is already required by existing law to act in the interests of the principal and to avoid or, if that is impossible, manage possible conflicts between those interests and the interests of the fiduciary or a third party”.
Well, I would suggest that the Riscura conflicts of interest are most definitely avoidable.
It is great that the FSB is looking at Riscura, but why no similar action against retirement fund boards of trustees where conflicts have not been avoided?