What It Takes To Be Principal Officer Of A Pension Fund

Nkonki 5th Annual Audit Committee Conference, August 2015 - focusing on Retirement Funds and the Fiduciary Responsibilities of Audit Committees

Jack of all trades; honest beyond reproach; no problem turning away hard-sell service providers

The role of principal officer (PO) of a pension fund can be a challenging one. Managing costs, dealing with pushy service providers, or explaining underperforming stock markets to members are just some of the issues facing a PO on a daily basis.

“POs are a strange breed,” says Mark de Klerk, retirement fund consultant and former PO of the Anglo American Platinum pension funds group. “You need to be a jack of all trades.”

De Klerk explains that with such a range of stakeholders in the industry, the PO has to manage all role players and have good working relationships with them. “There are trustees who are aligned to unions; various service providers such as actuaries, asset managers, consultants, and administrators; or members unhappy with negative returns. There are always curve balls, every day is different, and the PO has to flexible and adaptable.”

Omar Gire, Principal Officer of the Metal Industries Benefit Funds Administrators (MIBFA), says that the biggest challenge for him is service providers who are too focussed on selling their offerings to the trustees. “They can sometimes unduly influence trustees to make decisions that are not good for the fund. Service providers must not take advantage of less experienced trustees and should not try to influence them through material enticements.”

Gire says that pension fund service providers should be appointed solely on merit. “Service providers must not have any links to fund trustees and there should be no conflicts in their roles. Tender processes need to be appropriately followed, with proper interviews, so that trustees can then recommend the best service provider to the board.”

De Klerk concurs and says that POs indeed need to be frank with service providers. “Everyone’s purpose at the end of the day is to serve the members.”

Feeling strongly about how hard employees work for their income, and that they are mandated to belong to a pension fund, Gire wants all monies to be spent in the best interests of members. “As pension fund contributions are a large portion of a worker’s salary, trustees need to spend it wisely, not for example wasting it on international conferences that offer no real benefits.”

There is a raft of other challenges for the PO and Gire cites a few from his long list. “Treat the Customer Fairly is a big one; Environmental, Social, and Governance (ESG) factors; The Code for Responsible Investing in South Africa (CRISA); pressure to invest in public infrastructure; economic contraction; market valuations; whether to invest offshore or in rest of Africa; and fund manager fees, especially when they have underperformed.”

Gire personally believes that ESG investing should not come at an extra cost to retirement funds, and similarly using BEE asset managers for fund investments, or BEE investing, should not come at an additional price to workers who are struggling to feed their children. His view on infrastructure investing is that hard-earned pension fund contributions should not be used to do the job of government in reconstructing the country. “The retirement fund’s objective is to make returns for members. So if government wants pension funds to invest in infrastructure projects, it should be assisting with this, for example by structuring guarantee investment bonds, which help secure invested pension monies. Retirement funds will invest in government priorities, but there must also be a return.”

With ESG now a key component of investing, de Klerk says that trustees must engage with asset managers, and if required, issue new mandates that incorporate ESG investing. “Pension funds usually outsource ESG to their asset managers. So if trustees hand over this responsibility, they must ensure they receive ESG performance feedback as part of the broader investment report back, for example that the right stocks are being picked, and what the proxy voting has been.” He observes that smaller funds which are housed in pooled portfolios are not always able to influence ESG policy, but that the larger segregated funds certainly can.

Not keen on being compelled to invest in prescribed assets, de Klerk would like to rather see more municipal bonds being issued to facilitate pension fund investment in local infrastructure projects.

On the sticky subject of internal costs and administration, de Klerk says “We need to maximise savings from the contributions received – but we must also not compromise on service. Fund administration monies should be spent wisely, and funds do need to budget more. Certainly, there can be allocations for conferences, but these must lead to benefits and improvements for those attending. If money is misspent on first class travel and luxury accommodation, ultimately the worker ends up paying.”

De Klerk cautions that whisky, or less savoury hotel channels, can certainly not be classed as miscellaneous expenses. “POs should never be signing off on this type of waste!”

With the PO being the face and spokesperson of the pension fund, constantly in the spotlight, De Klerk says this is a position of trust. “Members must have faith in the person holding this position. You must conduct yourself professionally and courteously, and do not underestimate the soft skills required. You have to talk different languages across the spectrum, from actuaries to fund accountants.”

Being constrained by numerous regulations, rules and policies, de Klerk says the mandate of the PO must be clear and accepted by all stakeholders. “The PO must never be influenced or encouraged to overstep his mandate. Sometimes there is no discretion, as the PO is heavily bound by legislation. This is a privileged position, and PO decisions can have influence and consequence all the way down the value chain, and over a long period of time. Ultimately, it is all about getting good returns at a reasonable cost.”EndFragment    

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