In an industry based on trust
A LOT MORE DIRT will be shaken out of the Fidentia scandal as sordid details emerge over coming weeks and months. There are a few clear-cut bad guys here – so bad they look like a stereotype in a novel – but there are also the unwitting “innocents” whose biggest crime is ignorance and not ensuring they carried out their duties properly – the trustees.
Just as you can be sure a lot of the “missing” money won’t be recovered, so you can be sure that trustees of funds who committed members’ money to Fidentia will be implicated.
And not just the extreme examples like businesswoman Danisa Baloyi. I was amazed to read, after it emerged she’s a shareholder in Fidentia, a trustee on the board of its largest client and has an R8m loan from them, her reported quote that she did not see a conflict of interest of any sort. Please. I look forward to deciphering her response to the curators’ report towards the end of next month.
However, many trustees of funds linked to Fidentia are probably shaking their heads, wondering how this all happened and not quite realising they could be in a lot of dwang. If anything good can come out of this mess – and I know it seems unlikely at this stage – it’s that the broader trustee group in the country learns something.
Kenny Meiring, marketing strategist at Metropolitan Employee Benefits, believes the Fidentia debacle will have a profound effect on the pension fund industry. “The scandal broke at an interesting time when the draft amendment bill to the Pension Funds Act – though not implicitly stated – puts greater obligations on trustees in general.”
Noting these issues are fleshed out in greater detail in National Treasury’s discussion paper on trustees, Meiring says there’s a push towards making the average trustee personally liable for the performance of a fund, “but the Fidentia issue could lead to more onerous obligations on trustees”.
It will also cast more suspicion on what Magda Wierzycka, CE of Sygnia Asset Management, calls “an already battered financial services industry”.
“In reality, the whole industry exists on the basis of trust. If there’s a breach of that trust, the whole sector suffers.” Wierzycka says few boards of trustees have, to date, con-
They had no idea where the “missing millions” they were entrusted to protect had been invested.
cerned themselves about the security of their assets once passed on to asset managers. “Few question how their assets are protected from fraud, or misappropriation. Most would be unable to demonstrate that they have asked even the most rudimentary of questions. And yet, they are personally liable should anything go wrong.”
This is where many Fidentia-related trustees could be facing serious questions, and possible action. It seems they had no idea where the “missing millions” they were entrusted to protect had been invested. Wierzycka offers some basic questions trustees should be asking their asset managers (see separate box).
She also lists the many ways fund assets can be removed, noting there’s little that can be done if there’s collusion between two or more parties. “Situations such as Fidentia scare a lot of trustees, as they should. The concept of governance within retirement funds needs to take a stronger hold in South Africa. However, the truth is that asset management is a trust industry. If that trust is exploited nothing can totally protect the trustees against criminal intent.”
There are also more practical issues to look at, and one – clearly a concern to National Treasury based on its paper – is the composition of a board of trustees. Meiring sums it up by saying “beware” of employer-appointed, service-provider-appointed or union-appointed trustees. “The important consideration is – are they acting in the interests of the fund, or in the interests of their constituency?”
One possible solution, he notes, is the appointment of a strong independent trustee to the board. Ideally, that should be the way trusteeship is moving, but there are problems – some unions object, feeling their influence is being compromised, and some employers don’t like outsiders on the board.
There’s also the additional costs associated with independent trustees, a very real concern of smaller funds. But in the end it comes down to money well spent. Better to spend more than increase the risk of losing everything.
Beware who’s appointing the trustee. Kenny Meiring