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 RiskPossible controls FraudSegregation 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?