The regulation governing retirement funds is the Pension Funds Act. One of its key objectives is to protect the rights of retirement fund members through the application of standards, limits, and guidelines. Section 7C of the Pension Funds Act states that, “The board of trustees must protect the interests of the fund’s members at all times.”’
Against this backdrop, MANCOs have been described as the “guardians of their members’ interests”. It is therefore important that MANCOs are aware of all applicable regulation and other best practice guidelines for ensuring the effective governance and management of their retirement fund savings. These guidelines include, among others, King IV, Pension Fund Circular 130 (PF 130); the Code for Responsible Investing in South Africa (CRISA); and the more recently issued Financial Sector Conduct Authority (FSCA) Guidance Note 1 of 2019: Sustainability of investments and assets.
The King IV Report on Corporate Governance for South Africa came into effect on 1 April 2017. The report is a set of voluntary principles and guidelines for the governing bodies of all types of organisations, irrespective of the type of organisation: i.e. for-profit companies, NPOs, state-owned entities and even retirement funds should apply the principles.
King IV specifically included a supplement focusing on retirement funds, given that retirement funds play such a significant role in the economic and governance landscape of South Africa. The King IV report provides a list of 17 principles of good governance that should be implemented on an “apply and explain” basis.
The Financial Services Board (FSB), the FSCA’s predecessor, issued PF 130 in June 2007. The main objective of the circular was to introduce good governance for retirement funds.
PF 130 requires that all boards of trustees put in place a documented code of conduct, which outlines their duties and obligations, a fund-specific investment policy statement and a communication strategy to members. In addition, it compels all retirement funds to have a formal performance appraisal system for its trustees. All these need to be reviewed annually, as well as be available for regulatory inspections and communicated to members.
In addition, PF 130 emphasises the roles and responsibilities of a board of trustees, and addresses the issue of how to deal with conflicts of interest. PF 130 places an obligation on new trustees to receive comprehensive training. It also requires that all board members maintain an up-to-date understanding of risk management, investment risks and strategies, benefit structures, legal issues, regulatory and compliance requirements, taxation, and actuarial and reform issues. While a MANCO does not have the same fiduciary responsibility of the umbrella fund board of trustees, it would be prudent for MANCOs to incorporate as many of the PF 130 and other regulatory good practice principles, as is practical for each MANCO.
Responsible investing – CRISA
Responsible investment and its alignment with good governance and stewardship principles has received increased attention in South Africa over the last decade. This is driven by a number of factors, including new regulatory requirements, client demand and environmental, social and governance (ESG) factors having increased financial implications for companies and their investors.
The Code for Responsible Investing in South Africa (CRISA), launched in July 2011, is a voluntary code that has five underlying principles. The code provides guidelines on how institutional investors should execute investment analysis and activities and exercise investor rights to promote sound governance. CRISA is aligned to the United Nation’s Principles for Responsible Investment (UN PRI), which provide a global standard when it comes to responsible investing. These principles relate to the integration of ESG factors within investment decision-making, active ownership (through proxy voting and engagement), management of conflicts of interest, industry collaboration in implementing the principles, and reporting and transparency on the application of the principles within an organisation’s governance and investment processes.
Guidance Note 1 of 2019: Sustainability of investments and assets
From a regulatory perspective, ESG factors are addressed in Regulation 28 of the Pension Funds Act. Regulation 28(2)(b) requires all funds to have an investment policy statement, while Regulation 28(2)(c)(ix) requires boards of funds to consider ESG. The FSCA Guidance Note 1 of 2019 (GN 1 of 2019) expands on Regulation 28 requirements. The guidance note provides further guidance in terms of what the FSCA expects to be disclosed in an investment policy statement in order to comply with Regulation 28.
GN 1 of 2019 highlights the requirement for funds to show – in their investment policy statement – how their investment process ensures the sustainable long-term performance of their assets. Among other things, the investment policy statement should describe “how the fund intends to monitor and evaluate the ongoing sustainability of the asset which it owns and/or which it is intending to acquire, including the extent to which ESG factors have been considered by the fund, and the potential impact thereof on the assets of the fund and its active ownership policy”. The fund should also address how it monitors compliance with these factors.
Importantly, MANCOs should understand the process of asset manager and product selection and monitoring by the umbrella fund, as well as its approach to understanding how underlying fund managers and financial product providers incorporate ESG issues within their investment process.
Increasingly, it is argued that the consideration of ESG issues within the investment process results in improved long-term financial performance and more sustainable risk-adjusted returns for investors over the long term. Given the importance of these domestic and international responsible investment principles – i.e. UN PRI and CRISA – MANCOs should understand how these best practice principles and requirements are applied with respect to their retirement fund savings in the umbrella fund context.
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