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
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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 average-sized 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.
Reinforced protection
Members will certainly be happy to hear of the tone and emphasis on the charges and penalties that would be levied on those that fail to remit their contributions on time. This will apply to both directors and executives of the responsible company. Furthermore, the commission has now been empowered, if contributions are not remitted for a period of three months, to garnish the bank account of such a company.
How this though speaks to, and is sustainable under, an environment that does not make it compulsory for companies to sponsor retirement benefits in the first place remains an open question.
A pension protection fund has now been introduced. Every fund, unless exempted, is expected to contribute to a pension protection scheme established by the commission.
This is good news and should be most welcome. However, critics of the system would argue that it has the potential to encourage moral hazard — a reckless behaviour by funds knowing that, should they lose members’ money they would be an accessible fund from which losses can be indemnified.
Well, the truth is, every type of insurance scheme is exposed to moral hazard by the insured. The UK has had a pension protection fund for quite some time now and it seems to be working.
However, concern should be on the potential for subsidisation of the small funds by the big funds.
We cannot wait to see how the funding model would be structured to minimise such an unintended consequence.
Under the old Act, penalties seemed a lot more applied mostly at fund level. On reading the new Act deeply and attentively, one gets the feeling that the Commission has sought to levy penalties directly on the key decision makers.
Now, the potential for the board, trustees, and principal officers to be liable in their individual capacities has been strengthened.
There are certainly a couple other provisions that deserve special mention here but that would turn this thought-piece into a small booklet, and that’s certainly not the intention.
More work required
For a more modern Act, our anticipation was that ESG issues would have received a lot of prominence in the new Act.
It is no longer a choice to focus on the environmental aspects of the world we live in — it is now simply the right thing to do. As the famous Chinese proverb goes, “We do not own this land, we have borrowed it from our great grandchildren”.
A provision in the Act that speaks to that would have reminded us all how serious, as a jurisdiction, we treat matters of the environment.
Responsible corporate citizenry is also no longer just for the few – a regulatory provision is required for the majority who need the reminder of their duty to do good to the society and communities that have loyally made them who they are. Diversity has become big globally and we cannot afford to be left behind. Non-discriminatory behaviour alone is no longer good enough. The world today demands that corporates are intentional about embracing diversity across gender, race, ethnicity, tribe, religion, and other orientations. As mentioned earlier on, we also need to visibly and spiritedly be creating environments that are welcoming of our dear friends living with disabilities. It is our considered view that the Act falls short in this area.
Missing Provisions
Micro pensions, while probably deserving an Act of their own, we had hoped that they would appear, even if it meant that it would be just by way of a definition and basic fundamental provisions. No mention of micro pensions is made in the entire Act. With our dominant informal sector, a huge chunk of the economically active portion of the society continues to be left out of mainstream financial services.
Similarly missing are clear provisions on umbrella funds. Our industry needs to consolidate if we are to harness the real power of patient capital to drive the economy in an impactful way. Small funds, of only a handful members, lack the scale to invest directly into the real economy.
Minimum contributions – we also had anticipated that there would be set minimum contributions that funds would need to receive – following on the Australian model for instance. This could be introduced over a period of time to give affected employers and members enough time to properly adjust – say the next five years.
Pretty much related to the above is the issue of compulsion. While maybe a bit premature for now considering our recent history with loss of value and lost trust, this is certainly something for an honest conversation. This is especially so if the burden on the government to take care of its own in old age is to be eased. It will also bring back dignity to our elderly as it will help address issues of poverty and destitution in retirement.
Surprise Appearances
The requirement to consolidate rules with every amendment will entail funds having different versions of their fund rules which has the likely effect of downplaying the sacrosanctity of a fund deed. Some amendments are simply administrative in nature and have no financial soundness implications at all. One would expect those not to require immediate consolidation of the rules. If consolidation is going to happen at the same rate as the amendments, then maybe the essence of going the amendment route falls away. Something for the regulator to think about.
Submission of accounts used to be six months following year-end and the financial year-end was as chosen by the fund. Now it is three months, and the financial year-end has been fixed to 31 December. This is likely to have unintended consequences with respect to the pressure that administrators and auditors will need to handle all the audits at the same time.
Not many of us would have seen the issue of Currency Conversion making it to the Act. How this is so remains an unanswered question for most of us. No one expects such interventions to be a regular feature of our economy. One would suspect that maybe the regulator knows something about the future of our currency regimes that we are not aware of. But again, it is about coming up with a robust and water-tight regulatory framework that does not leave anything to chance.
Powerful But Not Uncheckered
With the expanded control and authority that the regulator now has it is quite easy to think the office’s powers are unlimited. This is certainly not the case. One provision immediately attests to an intentional attempt to manage the powers of the office. While previously the office worked, “in consultation with the Commissions Board”, it now works, “under the direction of the Commissions Board”.
Also, in line with what one would expect in a civilised jurisdiction like ours, the Commission is expected to adhere to certain key principles in performing its functions. That includes giving those that it governs the right to make representations on allegations, and the requirement for the Commission to adhere to rules of natural justice. For instance, where the Commission resolves to revoke a fund’s licence, it is required to give the Board the right of response before revocation and to consider responses before revocation.
Furthermore, any disgruntled entity or individual has an open channel to appeal to the Minister on the decisions of the Commission.
Conclusion
Overall, while the Act reads well, it has perhaps, by design, taken a much more administrative and operational approach that has either over-shadowed some of its technical aspects and provisions or have completely elbowed them out in other instances.
With that said, we remain very positive of the hard work that the team at the Commission will continue to invest into this and the rest of the demands of our industry. No Act is a perfect Act.
Mukadira is a consulting actuary at RIMCA — Itaim@rimcasolutions.com); Gandidzanwa is an investment consultant at RIMCA — Gandy@rimcasolutions.com