Unpacking the new Pension Funds Act
Reading a piece of legislation is no bedtime pastime at all. in fact, for most of us, it feels like a personal test on mental endurance. Yet, for the pension fund industry practitioners, the expectation is one of sound competency in interpreting both the primary and secondary pieces of legislation that govern the industry. Trustees are not spared either. Same applies to both principal officers and other pension fund executives and managers.
On our part, while we always write to express our honest views on matters affecting the industry, we are never oblivious to the duty to do so objectively and constructively. Where we criticise, we seek to simultaneously proffer alternative views informed by latest thinking and insights. With that cleared, let’s now unpack the new act.
But not so quickly
Perhaps a good starting point is to take a step back and start by reminding us all of what constitutes a good piece of legislation. at the risk of going academic and theoretical on a thought-piece that is crafted with a practical intent, simply put, the hallmarks of a good piece of legislation are unambiguity, fairness, enforceability, and stability. altogether grounded on protecting fundamental rights and upholding the common good of society. We would add, it must certainly be forward-looking too. Some would argue further that, it must also be assuring, inspiring, and instil confidence in both those that it governs specifically, and the public in general. Of course, in our case, one would also hope it is crafted such that it is robust enough not to be way too vulnerable to future Statutory instruments that would then have the effect of substituting some of its provisions.
armed with the above, we guess we can now put the new act to the test.
A modern Act
For the avoidance of doubt, the full name of the new act is the Pension and Provident Funds act [24:32]. But just like with its predecessor, it will more likely be known as the Pension Funds act, or simply the Pensions act. We will call it the same here too to limit the jaw-breaking instances in the article to a minimum.
The act starts on a high note. in its preamble it states, among its objectives as, “to provide for the additional functions of the insurance and pensions commission”. For a highly regulated industry such as the pension fund industry one would be excused to read that as, “to provide more powers to the regulator”. This is especially so taking into account part of the background under which it was crafted –
with the findings of the Justice Smith Commission of enquiry still very fresh and instructive to its crafters.
Maybe this is also the place to mention, yes this early on, that the new act is more than twice longer than the one it is repealing. at a staggering 56 pages, this contrasts sharply with the old one that only stood at 26 pages.
While a similar observation can be made on the extent to which the new act goes to define different terms, what is abundantly clear is that the list is heavily inclined towards defined contribution terms, making it amply clear that it is a modern piece of legislation.
it also speaks of minimum individual reserves and pension increases, empowering the regulator to approve how those are determined. This is clearly in the spirit of ensuring that retirement fund members are not disenfranchised under the regulator’s watch. no one wants to see another Justice Smith Commission of enquiry in the future — and the new act has been crafted with that in mind.
Where you cannot undoubtedly fault this act is on the clarity that has been given to the powers with which the regulator exercises its authority. Specifically, while the power to conduct investigations or enquiries has been retained, as well as the power to inspect records, the “search and seizure of documents and records” is a first.
The commission now has power to send representatives at key meetings with members too. This is really one very interesting one. its implementability will certainly demand skillful manoeuvring if it is not to end up with unintended results at those gatherings where crowd psychology can easily dominate proceedings.
Yet another one is the requirement that trustees convene a meeting with fund members prior to, among other things, changing an administrator. The challenge here is, if it currently takes an averagesized board of trustees about nine months or more to fire an administrator — one can only imagine how nearly impossible it is going to be when you bring in the entire membership of the fund to the table. The risk here is that, where trustees have genuine reasons to change underperforming administrators, they may remain stuck with them due to the cumbersome and convoluted process that this new provision will likely breed.
it is quite relieving that the issue of pension-backed housing loans has now received a lot more attention under the new act. One hopes that this will help improve members’ interest in, and engagement with, their retirement savings as they borrow against their accumulated fund credits for housing purposes.
Fortified governance framework
While there has been a review of all the different provisions of the old act, certain sections of the new act have received a lion’s share of expansions. The rules of the fund section, for instance, have been loaded with a battery of prescriptions that are meant to more firmly secure members’ retirement savings.
it is now required that fund rules are specifically clear on the proportion of the total contributions attributable to any purpose, including, but not limited to, the members’ accumulated credit, administration expenses, group life assurance premiums, and funeral assurance premiums. it is also now required that the rules cover the fund’s policy regarding increases for pensioners – no more pension erosion again due to unfair, or absent, pension increase policies. it further makes it a requirement for the fund rules to spell out the procedures for independent performance assessment of members of the board. This, with no doubt, was long overdue. Only with a deeper understanding of how they define their own performance can trustees more effectively assess the performance of their service providers.
another important area that has received special attention under the new act is the constitution of the board of trustees. Considering that some funds have balance sheets that are bigger than those of their employers, in our view, this certainly is one area that deserved special attention in the new act. it is now required that a board should be made up of a minimum of five trustees, and a maximum of nine. not way too small for diversity of views, but also not way too big to a point where it overloads fund discussions with fragmented opinions that rarely converge on anything progressive. a cap on the size also helps keep trustee fees to a minimum.
inclusion of an independent trustee, read “independent expert trustee”, is yet another element of the new board constitution provisions that cannot go unmentioned. This will not only bring in a depth of knowhow that is visibly lacking in some funds today, but it will also drive funds to operate with a much clearer sight of where they are going, and how they intend to get there.
The issue of qualifications of board members has been a cause for concern as well. Thankfully, the new act speaks to that too. While trustees are not expected to be, and need not be pension fund management experts, our view has always been that they need to be competent enough to assess the quality of the advice they receive from the various service providers.
That no trustee term will exceed ten years also means that there will be regular introduction of new blood into the system. Whether this will apply retrospectively remains of course a question for the regulator.
While diversity in terms of gender balance and geographical representation on boards has received appropriate mention, we are of the view that people living with disabilities also deserve a special mention. Civilisation, and the values we stand for as a people, demand that we treat each other equally and that we stand up to correct institutionalised marginalisation.
Big on communication
Outside of the rules, life has been breathed into members’ rights to information. The act is quite unequivocal with respect to the type, and frequency, with which information should reach members.
For us, this has been our wish. in today’s tech-era, no excuse can be given to why members cannot consume fund information when they need it, where they need it, and how they need it.
Speaking of that, nothing probably beats the requirement that audited fund financial statements are now to be published in a national newspaper within three months after year-end.
are private sector pension funds public entities though? While it is in the public interest that there is this much disclosure, the question remains.
What excites us about this though is our projection that one day the space will be opened to allow members to choose a pension fund of their liking without constraining them only to their employer’s. now, with that kind of freedom, the disclosures and comparisons across different funds would start to make a lot more sense.
• Read full article on website.
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