Introduction to Retirement Funds and General Management for Trustees

As a retirement fund trustee, you're vital to securing members' financial futures. This module introduces you to South Africa's retirement fund landscape, covering their purpose, key stakeholders, and your essential governance responsibilities.

1. What is a Retirement Fund?

A retirement fund is a collective investment vehicle established to provide financial benefits to members upon their retirement, disability, or death. In South Africa, these funds operate under the strict regulatory framework of the Pension Funds Act, 1956, and are overseen by the Financial Sector Conduct Authority (FSCA).

Primary Purpose: The core purpose of a retirement fund is to facilitate long-term savings. Members (employees) and often their employers contribute regularly to the fund. These contributions are then invested to grow over time, aiming to provide a sustainable income stream or a lump sum payment when the member exits the workforce.

Types of Retirement Funds in South Africa:

• Pension Funds: Traditionally provide a regular income (pension) upon retirement. Members typically cannot access their full benefit as a lump sum at retirement, usually only up to one-third, with the remainder used to purchase an annuity.
• Provident Funds: Traditionally allowed members to take their full benefit as a lump sum at retirement. However, with the introduction of the "Two-Pot Retirement System" (effective 1 September 2024), the distinction regarding lump sums at retirement has largely fallen away for new contributions.
• Umbrella Funds: These are single retirement funds used by multiple, unrelated employers. They offer smaller employers access to professional administration, governance, and investment management that they might not be able to afford individually. This structure allows for economies of scale.
• Stand-Alone Funds: Funds established by a single employer for their employees. These funds require their own Board of Trustees and often higher administrative resources.

2. Key Legislation and Regulatory Bodies

The South African retirement fund industry is one of the most regulated in the world, designed to protect members' interests. As a trustee, a strong understanding of the legal and regulatory landscape is paramount.

Key Legislation:

• Pension Funds Act, 1956 (Act No. 24 of 1956): This is the cornerstone legislation governing all registered retirement funds in South Africa. It sets out rules for registration, governance, management, financial requirements, member rights, and benefit payments.
• Financial Sector Regulation Act (FSRA), 2017: This Act established the Twin Peaks regulatory model in South Africa, creating the FSCA and the Prudential Authority. It provides the mandate for the FSCA to regulate market conduct in the financial sector, including retirement funds.
• Income Tax Act, 1962: Governs the tax treatment of contributions, investment returns within the fund, and benefits paid out to members.
• Financial Advisory and Intermediary Services Act (FAIS Act), 2002: Regulates financial advisors and intermediaries who provide advice or services related to retirement funds.

Key Regulatory Bodies:

• Financial Sector Conduct Authority (FSCA): The primary regulator for retirement funds. The FSCA's mandate includes:
  • Registering and supervising funds.
  • Ensuring compliance with the Pension Funds Act and other relevant legislation.
  • Protecting members' interests through various conduct standards and communications.
  • Issuing directives and guidance to funds and trustees.
• Office of the Pension Funds Adjudicator (PFA): An independent statutory body established to resolve complaints and disputes by members (or their beneficiaries) against retirement funds, employers, fund administrators, or other parties related to the management of funds. The PFA's determinations are legally binding and provide crucial guidance for trustees.
• South African Revenue Service (SARS): Responsible for the taxation aspects of retirement funds and member benefits.
• Prudential Authority (PA): Part of the South African Reserve Bank (SARB), responsible for the prudential regulation of financial institutions, ensuring their financial soundness.

3. The Board of Trustees

The Board of Trustees (also referred to as the Board) holds the ultimate responsibility for the sound governance and management of the retirement fund. Trustees are not merely figureheads; they are legally accountable fiduciaries.

Composition of a Board:

• Typically, a board comprises both member-elected trustees (elected by the fund members) and employer-appointed trustees (appointed by the employer).
• The Pension Funds Act generally requires that at least 50% of the board members must be elected by the members of the fund.
• Trustees must meet certain fit and proper requirements as set out by the FSCA (e.g., integrity, competence, financial soundness).

Roles and Responsibilities of Individual Trustees and the Board Collectively: Trustees have a fiduciary duty which demands:

• Utmost Good Faith: Always acting honestly and with the highest ethical standards.
• Care, Skill, and Diligence: Exercising the same level of care, skill, and diligence that a reasonably prudent person would exercise in dealing with the affairs of another person. This implies continuous learning and staying informed.
• Impartiality: Acting fairly and without bias towards any group of members, beneficiaries, or employer interests.
• Compliance: Ensuring the fund complies with the Pension Funds Act, the fund rules, and all other relevant legislation and regulatory requirements.
• Strategic Oversight: Setting the fund's strategic direction, including investment policy, risk management framework, and service provider mandates.
• Monitoring Service Providers: Overseeing the performance of the fund administrator, investment managers, actuaries, auditors, and other service providers.
• Financial Oversight: Approving annual financial statements, budgets, and ensuring sound financial management.
• Communication: Ensuring transparent and effective communication with members about their benefits, fund performance, and important changes.

Trustee Personal Liability and Indemnity: Trustees can be held personally liable for breaches of their fiduciary duties, especially in cases of negligence, fraud, or willful misconduct. However, the Pension Funds Act does allow funds to take out indemnity insurance for trustees to cover genuine errors made in good faith. Understanding this balance is crucial.

4. Key Stakeholders

A retirement fund operates within an ecosystem of various stakeholders, each playing a critical role in its effective functioning. Trustees must understand the relationships and responsibilities of these parties.

• Employer:
  • Facilitates member contributions and makes employer contributions to the fund.
  • Provides member data to the administrator.
  • Plays a key role in communicating fund-related information to employees.
  • Appoints employer-elected trustees.
• Members:
  • The ultimate beneficiaries of the fund.
  • Have rights to information, participation (e.g., electing trustees), and fair treatment.
  • Have a responsibility to understand their benefits and provide accurate personal information.
• Service Providers: The fund typically contracts with various experts:
  • Administrator: Handles day-to-day operations, record-keeping, benefit payments, and member communication.
  • Investment Manager(s): Manages the fund's investment portfolio according to the IPS.
  • Actuary: Assesses the fund's financial soundness, performs valuations, and advises on benefit structures and funding levels.
  • Auditor: Provides an independent opinion on the fund's financial statements and compliance.
  • Investment Consultant: Advises the board on investment strategy, manager selection, and performance monitoring.
  • Legal Advisor: Provides legal counsel on fund rules, disputes, and compliance matters.
  • Principal Officer (PO): An executive function often residing within the administrator or employer, responsible for compliance and reporting to the FSCA.
• The FSCA and PFA: As discussed, these bodies regulate and provide recourse for members.

Importance of Service Level Agreements (SLAs): Trustees must ensure that robust SLAs are in place with all service providers, clearly defining their roles, responsibilities, performance standards, and reporting requirements. Regular monitoring of these SLAs is essential.

5. Fund Governance and Administration

Effective fund governance and robust administration are fundamental to ensuring the long-term sustainability and integrity of a retirement fund.

Importance of Good Governance: Good governance in retirement funds aligns with principles like those in the King IV Report on Corporate Governance, adapted for non-profit organisations. It encompasses:

• Ethical Leadership: Trustees acting with integrity and transparency.
• Effective Control: Robust internal controls, risk management, and compliance frameworks.
• Fairness: Ensuring equitable treatment of all members and stakeholders.
• Accountability: Clear lines of responsibility and reporting.
• Transparency: Open communication and disclosure of relevant information.

Fund Rules: The fund's rules are a legally binding document that governs its operation. They outline everything from membership conditions and contribution rates to benefit structures, investment powers, and trustee appointment/removal procedures. Trustees must be intimately familiar with the fund rules and ensure they are consistently applied and regularly updated.

Risk Management Framework: Trustees are responsible for establishing and overseeing a comprehensive risk management framework. This includes:

• Operational Risk: Risks related to administrative processes, IT systems, and human error.
• Financial Risk: Investment risk, liquidity risk, credit risk.
• Compliance Risk: Risk of non-compliance with legislation and regulations.
• Reputational Risk: Damage to the fund's standing due to poor governance or negative publicity.
• Cybersecurity Risk: Protecting member data and fund systems from cyber threats.

Communication with Members: Transparent and effective communication with members is a key governance responsibility. This includes:

• Issuing regular, clear, and concise benefit statements.
• Holding Annual General Meetings (AGMs) to provide updates on fund performance, governance, and key decisions.
• Providing financial literacy and education to empower members to make informed decisions about their retirement savings.

Record Keeping and Financial Statements: Trustees must ensure that accurate and complete records are maintained for all fund operations and member data. They are responsible for the approval of annual financial statements, ensuring they are audited and accurately reflect the fund's financial position.

Next steps

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