The level of detail required by the Financial Services Board (FSB) for reporting is not always readily available from asset managers. This is caused by a myriad of problems ranging from system constraints at asset manager level to asset managers refusing to provide their clients with the underlying detail, as this could result in their competitors potentially being able to source this information.
We have noted that many pension funds believe that their benefit administrator is responsible for monitoring compliance with Regulation 28. A closer look at many service level agreements has indicated that in many cases, the administration agreement does not include a compliance monitoring function.
The board does not necessarily have the required expertise to assess and analyse the reports that they receive from asset managers. The board is thus extremely reliant on what is presented to them. Paragraph 3 of Regulation 28 has various additional requirements that a board needs to consider. These include:
- promoting the education of the board with respect to pension fund investment, governance and other related matters
- considering the need to promote Broad-based Black Economic Empowerment of those providing services
- ensuring that the pension fund’s assets are appropriate for its liabilities
- performing reasonable due diligence prior to making a contractual commitment to invest in a third party managed asset
- understanding the changing risk profile of assets of the pension fund
- contemplating any factors which may materially affect the sustainable long term performance of the asset ahead of making an investment..
This would give the impression that a pension fund should have a rigorous investment committee that is able
to evaluate these requirements.
Investment product offerings are becoming more complex, resulting in structures that are often misunderstood, unclear and potentially high risk. Pension funds run the risk of investing in structures that are not appropriate for the pension fund.
It is always important to bear in mind that trustees are appointed in a fiduciary capacity. They need to ensure that they are empowered and have the requisite knowledge or resources at their disposal to exercise these duties. Trustees need to:
- understand fully the investment products they are investing in or engage trusted independent advisors to assist with this role
- have a robust compliance monitoring structure in place and clearly define what this responsibility entails
- define service level agreements with asset managers to clarify reporting requirements, as agreements need to take into account additional conditions imposed by the Regulation on the trustees
- appoint board members who have the imperative skills.
Finally, it is not what you know but what you do not know that poses the greatest risk. Boards need to make certain they receive the necessary training to fully understand the implications of Regulation 28 and the investment choices they take on behalf of the pension fund.
Accordingly, see to it that you have clear agreements, understand your responsibility and also have sufficient resources/advisors that empower you to clearly understand your pension fund’s ability to comply and identify the gaps that you need to address.