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Comments Matrix: Section 7B ExemptionSection Comment FSCA ResponseGeneral I suggest that the Pension Funds Act is rather

amended to require that retail (needs to be defined as being set up by a sponsor), preservation and retirement annuity funds require a minimum of 50% independent trustees. The term independent also needs to be defined in the Act.

There should be no need to apply for an exemption as elections of trustees by members in these funds will never work and the notion of an exemption should only be applicable to occupational funds – along the lines of clause 3.2.9.

The proposed circular is thus in my view a cumbersome way around the current legislation which simply requires updating to cover the requirements of retail preservation and retirement annuity funds. With the abuse in the industry the legislation requires urgent updating.

Sponsors who set up these types of funds must understand that governance requires the sponsor to pay in money (there are no shortcuts) if it is not covered by the members’ fees to the funds. This is where the rub often is. Knowledgeable independents who will carry out their trustee role properly will cost money and often much more than a sponsor is prepared to pay when setting up a brand new fund/ funds. I have known sponsors to limit the required spend on doing things such as risk assessments and drafting governance documents such as the Investment Policy

The comments are noted, however, it is not agreed that the only method of dealing with such matters is by means of amendments to the legislation. The current legislation allows the Conduct Authority to make conditions and this is what will be done going forward.

Statement.

In my many years of being an independent trustee and principal officer I have seen many sponsor trustees who go through the motions of being a trustee but who do not really understand their role as a trustee and who of course will seldom question sponsor proposals or indeed vote against them. This difficulty needs to be removed. Sponsor trustees seldom are trained before becoming a trustee, seldom attend relevant retirement fund seminars and conferences and rely on the sponsor’s internal dissemination of information which may be far from adequate. They often go along with the majority and do not question or really apply their minds.

Where there is only 1 independent trustee as is required at present, the weight of questioning and countering sponsor proposals normally falls on that sole independent trustee. This is not right.

I would like to suggest that an FSCA audit be done on current retail funds to establish the level of fees paid to independent trustees, who sets these, how long the persons have been in office, what the maximum number of terms is, who they were appointed by, what CPD is done, what professional bodies the “independent trustees” belong to etc, etc, etc.

Where there are sub committees, it may not be possible to have 50% of the sub committee members independent as this depends on the number of sub committees and the number of independent trustees in office. I suggest rather that the chair of each sub committee should be an

Noted

Your suggestion is noted. Sub-committees need not comprise only of board members. It may therefore be possible to utilize independent persons for this purpose.

Noted. Boards will be expected to properly exercise their minds on the independent candidates.

independent trustee.

A particular aspect that also needs addressing is how the independent trustee is selected by the Board of Trustees – and not the sponsor – there have been too many jobs for friends in this space. I hope this has changed over the years. Some provisions in clause 4.1 will improve this but it should be a requirement that all funds are required to spec the role, advertise and select the best candidate.

General It is welcome that a distinction is starting to be made between the various types of retirement funds as the environment and circumstances between eg an occupational and a retail fund like an RA fund are naturally very different and therefore a regulation that does not take these differences into account can often be a blunt instrument, or miss the mark completely.

It is always easier to extend or improve regulation to those that are partially regulated already, than trying to start regulating an area that has low (independent) oversight. I would contend that there are significant problems with the occupational fund space which would benefit from a tighter independent oversight role. So the rules that are trying to be established here should be considered in some form or another, suitable for occupational funds. Many retail funds (perhaps to a lesser extent the umbrella funds, however) already apply much of what is mooted in this draft guidance note.

Noted

General We support the Registrar's replacement of paragraph 6.4 of Circular PF 96 and the granting of an indefinite duration of the exemption.

Noted

General A number of the conditions set out in the draft GN Disagree. The law permits the Conduct Authority to impose conditions on such exemptions, which is what

go beyond the matter in question, viz. conditions for exemption from s7A(1) – see for example paras 3.2.9, 3.2.10, para 4. As such it comes across as a means of seeking to regulate umbrella funds through the back door. Whilst the need to introduce regulation which is specific to umbrella funds is to be welcomed, it would be better if this were done in a more explicit and comprehensive way.Would these requirements also all apply to beneficiary funds and unclaimed benefit funds?

has been done in the past and which is now merely enumerated for information purposes in this Guidance Note.The law may be amended in the future but that does not preclude the Conduct Authority from making conditions to the exemptions being granted. The option always available to funds is to comply with section 7A(1).

General I commend the proposed note and look forward to it becoming final. This will save considerable time and paper in the future.

One thought that occurred when reading through was in respect of “old Funds” that are in the course of winding down. In many cases member elected trustees move on business wise and replacement on such a fund is often difficult, due to a basic lack of interest. I would like to suggest that such funds might also be eligible for exemption along the same lines as the funds mentioned.

Noted, to be considered on an individual fund basis on application

General It appears from this that the proposed sets of new exemption conditions are, in effect, standard conditions which may be varied by the FSCA in relation to a specific fund if it believes such variations to be justified by the circumstances of that specific fund.

This means that the Draft Guidance Notice is, in fact, a draft conduct standard the purpose of which must be-(i) to ensure that financial institutions and

representatives treat financial customers fairly; and/or

(ii) to reduce the risk that financial institutions, representatives, key persons and contractors

Disagree. The intention is not to issue a Conduct Standard but a Guidance Notice in order to inform the public about the application of financial sector law - more specifically the Conduct Authority’s application of section 7B(1)(b)(i) of the Pension Funds Act, which will be done on a case-by-case basis and on receipt of an application from a fund.

engage in conduct that is or contributes to financial crime; and/or

(iii) to promote financial stability, and which must be consistent with the objectives of the FSCA.

General There are a number of other conditions for exemption in terms of section 7B which we think that it may be appropriate for the FSCA to impose, such as the following:

No ‘lock-in’ provisions should be allowed in the rules or agreements with providers

If providers of products and services have to compete for the business of providing such products and services to funds granted exemption in terms of section 7B(1)(b) on an ‘arm’s length’ basis rather than being able to rely on their ‘captured clients’ to buy them, this should improve the funds’ prospects for providing ‘fit for purpose’ and ‘value for money’ benefits for their members and beneficiaries.

Conditions for section 7B exemption should include requirements that:1. the rules of the fund do not include any

provisions which constitute an impediment to the termination of the appointment of the sponsor or a party related to it as a provider of services to the fund or the termination of any agreement between it and the fund in terms of which products and/or services to the fund;

2. the rules should be capable of being amended without the consent of the sponsor unless the amendment is likely to have the effect of exposing the sponsor to financial risk or burden that would not be imposed on another entity of a similar nature if it was to replace it as sponsor

This will be monitored as part of the Conduct Authority’s risk-based supervisory model.

These matters are being considered, but will require application where necessary and on a case-by-case basis.

on the effective date of the amendment;3. all agreements with providers of products and

services to the fund relating to matters of substance must be reduced to writing and signed by the parties; and

4. the fund may not conclude an agreement with a provider of products or services to the fund which includes provision for any penalty to be imposed on, or bonus to be granted to, the fund or any member of the fund depending on the period in which the agreement, or the provision of any product or service during that agreement, subsists.

Funds should not have the same auditors as their sponsors

To minimise the risk that irregularities in the conduct of fund sponsors in the exercise of their powers are such are overlooked by the funds’ auditors, they should not be from the same firm of auditors as are the auditors of the sponsors themselves

The principal officer of a fund should be chosen by the fund and should not be employed or remunerated by its sponsor

As the principal officer of a fund plays a key role in monitoring compliance by it and parties related to it with their obligations, it should be a condition for section 7B exemption that the appointment and remuneration of the principal officer of the fund are determined by the board of the fund alone and that the principal officer is remunerated only by it.

The power to appoint ‘independent’ board

Auditors are regulated by a professional body. However, this matter will be discussed and considered for the future.

The comment is noted.

Noted

members should be removed from fund sponsors

As it would be very difficult for the FSCA to monitor and enforce compliance by sponsors with the duty to appoint only truly independent members of the boards of funds, the power to make such appointments should cease on the expiry of the terms of office of board members appointed by sponsors before the funds are grantedexemptions subject to new conditions (or, in the case of a fund applying for exemption in terms of section 7B(1)(b) for the first time, on the expiry of the terms of office of the board constituted in terms of its rules before the exemption was granted).Thereafter the outgoing board should have the power to appoint new members of it.

A person’s membership of the board should be terminable only-1. on the expiry of his or her term of office, which

should be for a period of not less than three and not more than six;

2. on his or her resignation before then; or3. by resolution of the board after an enquiry into

the person’s fitness or propriety during which that person has been given the right to be heard.

Board members should be remunerated by their funds alone

It should be a condition that:1. each member of the board, whether

independent or not, must be remunerated for

The comment is noted.

his or her service as such only by the board and in terms of a remuneration policy determined by the board;

2. that policy may not allow board member remuneration to be determined-2.1 by or subject to the consent of the sponsor

anyone with a material financial interest in the conduct of the business of the fund; or

2.2 by reference to the number of the members of the fund, the aggregate value or its assets or any criterion taken into account in the determination of fees or charges payable to a provider of products or services to the fund; and

3. no board member may derive any additional material advantage, whether financial or otherwise, from his or her appointment as a board member.

The chairperson of the board of the fund should be elected by the board members and serve as chairperson for no more than eight years

The chairperson of a governing body often has considerable power, and thus disproportionate influence over the decision-making activities of the body.

For these reasons the members of the board of a fund to which an exemption has been granted in terms of section 7B(1)(b) should have the power to choose its own chairperson from amongst themselves and no board member should be allowed to serve as chairperson for consecutive periods together exceeding eight years.

Noted.

FSRA now requires that all exemptions be published on the FSCA website (register)

The terms on which each exemption is granted to a specific fund should be published on the FSCA website

To minimise suspicions of ‘regulatory capture’, not only all exemptions, but the conditions subject to which each exemption has been granted and the reason for any deviation from any standard or default exemption conditions should be published on the FSCA website.

1 The Guidance Note does not appear to have an effective date as to when it will apply from. Perhaps one should be included.

Noted, this is now included.

2.4 Will it still be an option to apply for a limited period where a fund does not want to apply for an indefinite period and not to comply with the 50% independent board member representation requirement?

Yes, this will still be possible, each application for exemption will be considered individually. In the absence of a s7B exemption funds must comply with s 7A(1).

2.5 Delete the words “if it is granted” at the end of the para.

Agree, see revised wording

2.5 ABSIP discourages the “indefinite duration” of the exemption. ABSIP recommends an application exemption every three years since the last exemption has been given.

ABSIP believes that it is important that the trustees apply their minds to this exemption at least every three years as governance lapses both in respect of retirement funds and corporates have been on the increase.

Disagree, the rules will determine the basis of exemption and if required, the board may apply for a limited time period exemption.

3.1 Further to the previous issue, presumably any application for an exemption in terms of the Guidance Notice to replace an existing exemption must be submitted before the current exemption expires. Is it sufficient for the application to be submitted on this basis, or must it also be approved before the current exemption expires?

A fund may apply for an indefinite exemption at any time prior to the expiration of its current exemption.

3.1 Amend the first line as follows: “Enjoying exemption envisaged in section 7B(1)(b) of the PFA for anindefinite period is not automatic”Add the words “before the date of expiry of the existing exemption” at the end of the first sentence soas to make it clear that existing temporary exemptions will continue to apply, but only for the remainder of the exemption period.


3.2 This requirement will in all likelihood increase the management cost of the fund (Independent trustees are generally professionals in the industry whose hourly rates are quite substantive).

This may not be practical in the case of unclaimed benefit preservation funds where there are no ongoing contributions being made to subsidise fund costs. Fund costs are deducted from members’ shares in the fund and having professional, independent trustees whose charge out rate could be substantial will affect these funds costs and possibly result in members’ benefits being depleted earlier. Sponsor trustees on the other hand do not charge for their trustee services, thereby containing the costs in unclaimed benefit funds. It should be imperative though that each unclaimed benefit fund has at least one independent trustee.

Noted, however, it is critical in the governance of commercial funds to retain balance on the board

3.2.1 I support the 50% independent trustee board composition proposed in 3.2.1 strongly. However, many funds are just too small to afford the cost of at least 2 independent trustees and the exemption proposed in the second sentence must be invoked, where the funds can reasonably justify the use of only one, and not more independent trustees. Professional independent oversight can be costly

Noted.

for a tiny fund and therefore the rule must be applied judiciously.

3.2.1 Replace full stop with a semi colon after the words “Authority will consider”.

Not necessary.

3.2.1 We agree with this proposal and recommend that the guideline should also set out the criteria for determining whether a board member is independent.In developing such a guideline it might be useful to give consideration to the indicators outlined in Principle 7, item 28 of the King IV Code on Corporate Governance (“King IV”).Applied to the retirement fund environment it would appear to us that in the case of a multi-employer retirement fund the following persons should possibly not qualify as being independent:(i) A member of the governing body of a

significant provider of funding to the retirement fund, e.g. a participating employer or a person who is an officer, employee or a representative of such participating employer [see sub-paragraph a. of item 28 of Principle 7 of King IV]

(ii) a person in the employment of the retirement fund or its sponsor/administrator as an executive manager during the preceding three financial years, or is a related party to such executive manager [see sub-paragraph d.];

(iii) the designated external auditor responsible for performing the statutory audit for the retirement fund or the sponsor/administrator or a key member of the audit team of the external audit firm, during the preceding three financial years [see sub-paragraph e.]

(iv) a professional adviser to the retirement fund or its sponsor/administrator other than as a member of the management board [see sub-

Noted, to alliged wording where appropriate

paragraph f.];(v) a person who is a member of the governing

body or the executive management of another organisation, which is a related party to the retirement fund or the sponsor/administrator [see sub-paragraph h]; or

(vi) a person who is entitled to remuneration contingent on the performance of the retirement fund or sponsor/administrator [see sub-paragraph i.].

3.2.1 The 50% independent board requirement - This could have significant cost implications for boards. Professional boards members will be members of various boards. Funds may limit number of board members in order not to incur additional costs. This could potentially have an impact on representation of expertise at a board level.Board members are bound by the PFA to act objectively and in good faith; although one may argue that their decision making powers are subjectively influenced by being employed by an administrator or service provider, these members will be in breach of their fiduciary duties if they do not exercise their judgement in an objective and independent manner.

Noted. However, it is critical in the governance of commercial funds to retain balance on the board

3.2.1 &3.2.3 It is proposed that a preservation fund, retirement annuity fund, beneficiary fund, unclaimed benefit fund or umbrella fund that does not give its members the right of indirect participation in the appointments of board members may be granted an exemption in terms of section 7B(1)(b) of the PFA subject to the conditions that-1. unless otherwise agreed by the FSCA, each of

at least 50% of the members of the board of the fund are independent in that they are ‘free from any relationships that could, in the opinion of a reasonable and informed outside

Noted. Any fund may decide to afford members a right to elect as provided in s7A(1). As an alternative a fund may apply for exemption in terms of s7B, at which stage the Conduct Authority will decide on the conditions to be imposed on such an exemption. The provision for independent trustees on such boards is an attempt to provide for good fund governance and better outcomes for members.A fund may itself decide to have indirect elections, or regional or other forms of subordinate governance structures, but it is not intended to presently explicitly include this as part of the exemption conditions.

party, be considered as something that would affect their objectivity’; and

2 if a person appointed as an independent board member thereafter ceases to comply with this condition, the board ‘must take remedial action’

Clearly it would be difficult for a fund with many thousands of members living in widely varying circumstances in various places across the country to extend to those members a right to elect members of the fund’s board that they can exercise effectively. This is not, however, a good reason to deny altogether to the members of any funds registered as such in terms of the PFA the right to participate in the governance of the funds that Parliament introduced when it enacted section 7A of the PFA.

Neither is the cost that would be entailed in giving members of occupational pension funds, retirement annuity funds and preservation funds the right to elect members ofsubordinate governance structures of a fund established on bases designed to promote communities of interest.

For these reasons we recommend that it be an exemption condition for all funds other than beneficiary funds and unclaimed benefit funds.

In the case of a retirement annuity fund or a preservation fund, these subordinate structures could be based on area of residence and/or nature of occupation and/or economic sector. In the case of an occupational (umbrella) pension fund, they couldbe based on identity of employer, coupled with any

one or more of these factors.3.2.2 a) This clause is somewhat confusing as it refers to

“not impose, or relax this condition”. The clause is itself not a condition, so presumably this reference is to the condition in clause 3.2.1 and should be worded accordingly.b) The clause allows for the condition to have 50% independent trustees to be waived or relaxed without explaining when each case will apply. May funds request either waiver or relaxation or will this be at the discretion of the FSCA – if so, will guidelines be issued as to how the FSCA will apply such discretion?

Noted. Such funds will still be required to apply for exemption, however, depending on how the members will be represented on the member committees and their rights to be represented, the FSCA may relax the 50% independent requirement.

3.2.2 Treating union/municipal/bargaining council funds in the same paragraph as other funds potentially eligible for exemption is confusing, as the issues involved, and therefore the conditions for exemption, are different. Need a separate section for union/municipal/bargaining funds.How would participating employers be accommodated in the governance structure of such funds.We suggest amending the drafting as follows:“bargaining council, sectoral determination, trade union and municipal funds which provide, in their rules, for alternative forms of member election other than direct member elections may apply to the Authority for exemption from the requirement for direct member election of board members, subject to adherence to the member election provisions in the registered rules; and to the requirement that the rules must, if relevant, provide for the manner in which non-unionised members or members of minority unions, for example, will be accommodated.”

Such funds will still be required to apply for exemption, however, depending on how the members will be represented on the member committees and their rights to be represented, the FSCA may relax the 50% independent requirement.

3.2.2 The rules of many trade union funds provide for indirect participation of fund members and their

Noted

employers in the election of members of the main boards of the funds. In particular, they provide for-1 ‘local area committees’, half of the members of

which are elected by the fund’s members employed at a specific workplace or for a specific employer, and the other half of which are appointed by the employer of those members;

2. ‘regional area committees, half of the members of which are elected by the member-elected members of local area committees in the various regions delineated in the rules, and the other half of which are elected by the employer appointed members of those local area committees; and

3. boards of trustees, half of the members of which are elected to those posts by member-elected members of the regional area committees and the other half of which are elected by those elected to those posts by the ‘employer’ members of the regional area committees.

In this way the funds facilitate the indirect participation by their members in the governance of the funds and communication with, and consultation of, those members by the funds’ boards.

The FSCA proposes that, on application, it will grant exemption in terms of section 7B(1)(b) to an umbrella occupational retirement fund that is also a bargaining council fund, sectoral determination fund, trade union fund or municipal fund if the fund gives all of its members the right to participate at least indirectly in the appointment of members of the board of the fund153 and it complies with such other exemption conditions as the FSCA may consider it appropriate to impose.

Provided that the mechanism for indirect participation by members provided for in the rules of the fund is designed to ensure that such participation is meaningful and is not open to abuse by employers, unions or anyone else, this is a good proposal. It is consistent with the purpose for which section 7A(1) was enacted and deviates from it to a degree that is reasonable, taking into account the circumstances of the funds contemplated.

If members are given the right to elect members of subordinate governance structures and the members of those structures are given the right, directly or through superior governance structures that themselves have the right to elect members of the main board of the fund and by various means to hold them to account, this should minimise the risks that members of the board will succumb to undue influence by the fund’s sponsor or others, and thus improve the governance of the fund.

What is not explained, however, is why provision for equivalent mechanisms is not made a standard section 7B(1)(b) exemption condition for all funds other than beneficiary funds (the ‘members’ of which are minors) and unclaimed benefit funds (most, if not all, of the members of which have not been traced by the funds). In my opinion it should be.

By saying nothing about the identities of the balance of the board members, the FSCA is tacitly saying that it is acceptable to have as other members of the board persons who are not independent. As has been demonstrated above, this is wholly inconsistent with the law, the duties

Noted. Applications will be considered individually and this may be imposed as a condition in certain cases.

Disagree. All trustees remain bound by the provisions of the law, including sections 7C and & 7D of the PFA.The conduct of a trustee is not directly correlated with whether or not that person is regarded as ‘independent’.

Agree, this is clear from sections 7C and 7D of the PFA. See revised wording

of the boards of funds and the duties of the FSCA.

Although the FSCA should make it clear in a guidance circular or directive applicable to all pension funds that it is unlawful for anyone who is not able to exercise an independent discretion to be a member of its board, in my opinion it would be wise to make it also a condition for the granting of an exemption in terms of section 7B(1)(b) to any pension fund, including a fund which gives its members the right to participate indirectly in the appointment of at least half of its board members.

It should also be made clear that persons who are not wholly independent may not be treated as eligible for election by the members, whether directly or indirectly, and, if such a person is elected, the board should be required to terminate his or her membership of the board.

The law requires that a trustee be fit and proper. All trustees, including independent trustees, must exhibit this characteristic. Therefore, it may be unlawful to exclude a person merely on the basis that the person is not considered ‘wholly independent’.

3.2.3 I do believe that section 3.2.3 should apply to ALL trustees, whether employee or sponsor elected, as well as independent trustees. As mentioned upfront, it would be a pity to ignore where the real problems in the oversight of pension funds are ie in the quality, knowledge and expertise of the non - independents, whatever category or type of fund they are involved in eg employee or union elected and sponsor type trustees.

Noted. Expertise and knowledge will be dealt with in the Conduct Standard on prescribed minimum skills and training to be determined by the Authority

3.2.3 Will the FSCA issue guidance on what constitutes “relevant experience or expertise”? This would be useful to reduce instances of independent trustees being rejected by the FSCA in terms of clause 4.2.

Boards of funds should be in a position to exercise their minds on this. In addition, expertise and knowledge will be dealt with in the Conduct Standard on prescribed minimum skills and training to be determined by the Authority

3.2.3 An independent board member is neither described nor defined in this document, save for provision 3.2.3, which says that an independent board member should be free of relationships. This description is not sufficient and it is proposed that

Noted

it be described fully for uniform interpretation purposes, certainty, consistency and continuity.

3.2.3 These paragraphs need to be separated into(1) conditions which must be met for an

exemption to be granted; and(2) circumstances giving rise to the withdrawal of

an exemption.

Delete “appointed to the board” in line 1.

“Which the fund must demonstrate it has considered before making any appointment” - where fund rules determine that the sponsor appoint the independent trustees, the assumption is that this responsibility will be on the sponsor – please advise if our assumption is correct. This applies to all relevant references to the fund / board in the rest of the document.

Noted, not possible to provide for all possible instances

Agree


3.2.3 – first bullet This could be seen to be very subjective. Rather be more specific, and put objective criteria in, for instance he/she may not be employed or directly related to someone who is employed by the Fund or any of its service providers.

Delete the word “and” after the word “objectivity”.

Replace “affect their objectivity” with “ability to perform their functions in accordance with section7C(2) of the PFA”.

To be considered in the insertion of definition/description of independence



3.2.3 – second bullet

It is not fair to discriminate against someone who was expelled, but where the expulsion was found to have been unfair and we therefore suggest the insertion of “lawfully” before “expelled”Delete the word “and” after the words “him or her”.

Agree, although it should be obvious that the reference is to lawful expulsions and not ones that are overturned.


Board of Trustees will have to trust the CV of the potential candidate. Although background checks will be conducted, these are not fool proof.

Noted

3.2.3 – third bullet

Replace “never” with a specified period, e.g. 10 years.Change as follows: “has never been convicted of an offence involving dishonesty, theft, fraud, forgery, uttering a forged document, misrepresentation, breach of fiduciary duty or violence; and


3.2.3 Although the FSCA’s proposed criterion for the determination of independence has the benefit of being broad in its scope, criteria for ‘independence’ should also be expressed in a way that minimise the risk that persons who are not really ‘independent’ of those with an interest in providing goods or services to the fund (other than as board members) are appointed to the board.

For example, the FSCA could say something along the following lines:1 For the purposes of the proposed exemption

conditions described in paragraph 2:1.1 ‘board member’ means a person who is, or

who may become, a member of the board of a fund;

1.2 ‘connected person’ means, in relation to a board member -1.2.1 a person or an entity by whom the

board member is employed or has been employed within the period of five years ending on the date on which he or she became a board member;

1.2.2 a person on whom, or entity on which, the board member is dependent for not less than 20% of the board member’s annual income;

1.2.3 an entity of which the board member is a senior office-bearer or has been a senior office bearer within a period of

To be considered in conjunction with the addition or description of “independence”

five years ending on the date on which he or she became a board member;

1.2.4 a person to whom the board member is related by blood or marriage or with whom the board member is involved in an intimate relationship;

1.3 ‘provider’ means a provider of products and services who or which has provided or will provide such products or services to the fund in the course of any financial year of the fund during which the board member is in office as such and for which the fund has been, is or will be liable to pay to the provider one or more amounts with an aggregate value of R100 000.00 or more; and

1.4 ‘related entity’ means an entity related to another falling within the scope of the term ‘connected person’ as defined, whether by shareholding or otherwise.

2. a person may not be regarded as an ‘independent’ board member for the purposes of these conditions if-2.1 the board member is an employee, valuator

or auditor of or consultant to the fund or has been an employee, valuator or auditor of or consultant to it within the period of five years prior to the date on which he or she became a board member; or

2.2 the board member, a connected person derives, or is likely to derive, directly or indirectly, a material proportion of his or her income during any twelve-month period from a provider or related entity;

2.3 the income or wealth of the board member

or a connected person is dependent in any material way upon the successful conduct of the business of a provider or related entity; or

2.4 or the board member has been in office as such for a period exceeding nine years during the last 12 years; or

2.5 the board member does not have the knowledge, skills, experience and/or self confidence required in order to robustly exercise an independent discretion.

3.2.3 & 3.2.4 The words ‘fund’ and ‘board’ seem to have been used interchangeably unless they have a different context in this case. It is proposed that only these should be used in the appropriate context for consistency purposes and to avoid any confusion that may arise.

Noted

3.2.3 Will the FSCA be publishing the minimum “relevant experience or expertise” requirement to ensure consistency across the industry?

What will determine the “reasonable cost to the fund”? It is a known fact that professional, independent trustees charge out at their normal working hourly rate, which in the case of professionals such as lawyers, actuaries, accounting professionals, this could be a large cost to the fund. Will the FSCA be publishing a maximum payment to the independent trustees to ensure that funds are not financially exploited?

Expertise and knowledge will be dealt with in the Conduct Standard on prescribed minimum skills and training to be determined by the Authority


3.2.3 The FSCA proposes to require that each independent board member has relevant experience or expertise required for the effective fulfilment of his or her duties as a board member.

If the FSCA wants to promote the appointments of highly skilled independent professionals to the

Expertise and knowledge will be dealt with in the Conduct Standard on prescribed minimum skills and training to be determined by the Authority

Noted

boards of large funds, it would be more appropriate for it to make as a condition for section 7B(1)(b) exemption for occupational pension funds, preservation funds and retirement annuity funds that, for example, at least 40% of the members of the board comprise independent professionals appointed to the board by the board members indirectly elected to it by the members. Room should be left for the appointments to the boards of persons who are not professionals but who have other skills, knowledge or experience which could be valuable to boards, such as ex-workers or community workers or activists who can bring to the table knowledge of the circumstances in which lower income members live, the challenges that they face and ways to ensure that the operations of funds are conducted in a suitable manner, taking these into account.


One of the proposed exemption conditions is that an independent board member must not ever have been-1. expelled from any professional body of which

he or she was a member or which was entitled to exercise disciplinary powers over him or her; or

2. convicted of an offence involving dishonesty or violence.

With respect, it is probably inappropriate to disqualify all persons convicted of offences involving ‘violence’, including, for example, those persons who may be people with appropriate knowledge, skills and experience but who have been convicted of-1. offences in terms of the now repealed Terrorism

Act that involved violent crime that did not cause harm to any living person or thing and were committed as part of the struggle against

See revised wording

apartheid; or2. convicted of murdering their abusive intimate

partners and had received short sentences in recognition of the special circumstances in which the murders had taken place.

On the other hand, it would be appropriate to-1. include as a disqualifying condition the removal

of a person from a position of trust as appears to have been contemplated by the information which the Draft Guidance Notice suggests that the registrar will require that a section 7B exempt fund submit in relation to each of its ‘independent’ board members;

2. include as a disqualifying condition the refusal by an insurance company of insurance cover for the person on the grounds of dishonesty;

3. state that the disqualifying criteria will not be applicable if a court or tribunal had found that the convictions or removals from office to have been wrong; and

4. in a directive applicable to all funds, whether section 7B-exempt or not, make the disqualifying criteria applicable to the members of the boards of all funds.

3.2.3 – fourth bullet

The FSCA proposes that it be a condition for section 7B exemption that the fund must demonstrate that each of its independent board members is ‘able to devote sufficient time, expertise and resources to the fund at a reasonable cost to the fund throughout the period of his or her appointment.’

With respect, this should be a condition for the appointment or election and continued membership of each member of each fund. However, it will be difficult for a fund to satisfy itself that it is acting in compliance with the

See revised wording

condition without guidance inregard to, amongst other things, how the reasonableness of trustee fees and expenses is to be assessed.

3.2.4 The FSCA simply recommends that the board of a fund must take ‘remedial action’ if one of the ‘independent’ board members ceases to be independent but does not state what action is contemplated in this recommendation.

As it is clear that a person who is not independent cannot lawfully be a board member, the board membership of a person who has ceased to be independent must be terminated – or, at the very least, suspended for the period in which the board member has become disqualified to act as such - as soon as possible. It is not sufficient to simply require the board member to recuse him or herself from meetings or parts of meetings at which agreements with, or the conduct or performance of, providers may be discussed because these matters are core to the business of a fund. A board member who cannot participate in such discussions is not capable of properly fulfilling his or her duties as a board member.Of course, the question whether a board member has ceased to be independent is a question which must be determined after taking into account all relevant facts and circumstances and, for the purposes of ensuring that-1 the board is first made aware of all such facts

and circumstances; and2. the board member is treated fairly, he or she

must be given a hearing (oral or in writing) before the board decides the matter.

In applying this principle, the other board members will have to apply their minds in effecting this requirement

3.2.5 Section 3.2.5 is probably the area that is of the most concern in this draft – smaller funds will land

Noted.

up moving away from the sub- committee formulae in order to avoid the expense of having to employ even more independents to get the numbers right in the sub- committees. This will mean less efficient running of Boards as often the sub - committees do the technical work, utilising the board members with the appropriate skills, before submitting the proposals or input for approval by the Board ultimately. Remember - the Board of Trustees will consist of a 50% independent board, and therefore will still maintain sufficient independent oversight.

3.2.5 This clause makes sense if the board has 50% independent trustees, but is problematic if relaxation is applied under clause 3.2.2 and the board has only say 1 independent trustee. It would then seem the independent trustee would have to a member of every sub-committee which may be both impractical and expensive.

Noted, proposed that the chairperson of the subcommittee be an independent board member

3.2.5 Our main concern of the draft guidance notice is that of paragraph 3.2.5, particularly reference to the independence requirement for sub-committees.

Our view is that the nature of sub-committees are to attend to the day to day affairs of the fund. The independence criteria would not be practical or even reasonable as this would mean that independent trustees would be heavily involved in the day to day decision making processes, which would render them non-independent. The requirement that all decision are ratified by the full board is sufficient to ensure that independent trustees have oversight on the day to day matters.

We therefore propose that the composition of sub-committees comprises at least one trustee, the principal officer and an administrator representative.


Proposed wording for 3.2.5:"3.2.5 if the board utilises sub-committees, such sub-committee should comprise of at least one one trustee, the principal officer and an administrator representative. All decisions by the sub-committee shall be ratified by the full board at the next board meeting."

3.2.5 We assume that the intention is not to require that each subcommittee must consist of 50% independent trustees or persons. We believe that the requirements regarding sub-committees should, in accordance with the approach of King IV, be principle-based and not rule-based as the circumstance of each fund (even umbrella funds) may be quite different.We therefore suggest that “similar criteria” in 3.2.5 be replaced with “the criteria in 3.2.3”.


3.2.5 Do not agree; this will have a significant impact on costs without out adding significant benefits, e.g. death claims committee one will have to be involved in day to day administration.


3.2.5 The size and composition of a board sub-committee should be determined by reference to the specific functions it is to perform. Imposing this condition on a section 7B exempt fund may mean that it is required to have sub-committees that include people who are not able to make meaningful contributions to its work and this may make these sub-committees less effective and their operations more expensive than necessary.


3.2.7 this should provide for anonymous reporting otherwise this will never work. This requirement should also be included in the Code of Conduct.

Noted, see revised wording

3.2.6 This appears to be a partial repetition of clause 3.2.4 and perhaps the two clauses could be combined.


3.2.6 How is this different from 3.2.4? Is the remedial action referred to in 3.2.4 not termination of office?Suggest deleting 3.2.4 and replacing 3.2.6 with the following:“the rules of the fund must provide that if it comes to the attention of the board that an independent board member may have ceased to comply with any of the conditions specified above, his/her appointment will cease as soon as the board is satisfied that the board member no longer complies with any of the conditions”.Automatic termination is not practicable/desirable as it may apply retrospectively (with obvious serious consequences). Termination should only apply the impediment comes to the attention of the board and the board after investigation is satisfied that the trustee no longer complies with one or more of the criteria of 3.2.3.3.2.4 is any event not practicable as it will not be possible to take “remedial action” where e.g. atrustee has been convicted of fraud. No remedial action can overturn such conviction.


3.2.6 The FSCA proposes that it be a condition for section 7B exemption that ‘if a person appointed to the board of an exempted fund ceases to comply with any of these conditions, his or her appointment as such will terminate immediately and automatically.’

Without a determination of the question whether a board member has ceased to comply with any of the conditions for section 7B exemption, it will be impossible to know when a board member has ceased to occupy his or her post as such. And, if ituncertain whether he or she was a board member when the board made a decision, it may be unclear whether the decision was made at a meeting which


was quorate and was thus validly made.

In the circumstances, this would not be an appropriate condition.

3.2.7 This appears to be a whistleblowing provision which is already covered in section 7A(4)(b) of the Pension Funds Act (PFA) and seems superfluous to be included in this document. This provision in the Guidance Notice mentions ‘concerns’ that an independent board member must report to the Financial Sector Conduct Authority (FSCA). However, it is not clear from the document what constitutes concerns as they have not been described or defined. The provision imposes an obligation on an independent board member and it is not clear if the same applies to other board members who are not independent. The PFA does not make a distinction between the two in terms of their responsibilities and duties.

Agree, provision removed

3.2.7 “an independent board member mustreport any irregularities……”This should be deleted as it is already covered by the Pension Funds Act in section 7A(4)(b),and covers all trustees, irrespective of whether they serve on the board of an umbrella fund or not.Further, it is not an exemption condition. See general comment above.

“………..he or she shall not be held liable or to be victimized as a result of the reporting….”This is already covered by the Pension Funds Act in section 9B

Agree, clause deleted

3.2.7 In our view any duty of this nature should equally apply to both independent and non-independent board members.

All board members should have the same duties; there should be no divide as far as duties are

Noted, clause deleted

concerned. The governance model should avoid a situation of “us” and “them”.

All board members have a similar fiduciary duty. As board members, the non-independent board members are not representatives of the sponsor/administrator; they must in terms of their fiduciary duty always act independently and objectively in the best interests of the retirement fund concerned and avoid conflicts of interest.

It is also important to point out that the non-independent board members (usually senior managers or senior professionals in the employment of the sponsor) similar to executive directors in the case of a company, play a very important role in the good governance of a retirement fund due to their intimate knowledge of the business of the sponsor/administrator and the retirement fund industry.

Ideally such non-independent board members should not themselves be involved on a daily basis in the administration of the retirement fund; they should rather be appointed from the ranks of managers and advisers at the corporate level, who fulfil a corporate oversight role. As such they will rarely find themselves in a conflict of interest situation, including a situation where they would have to defend their own actions at management board meetings.

In the light of the foregoing, we suggest that the FSCA should give consideration to also lay down guidelines in respect of the appointment of non-independent board members.

As we see it, the Guidance Notice is also not the correct instrument to impose duties on board members; such duties should rather be imposed by legislation, as is done in section 7A(4)(b) of the PFA.

It strikes us that a duty to report “irregularities or

concerns” is for various reasons problematical. Not only is it quite vague, but will be very difficult to enforce. It could further lead to the Authority becoming embroiled in matters that are not connected or only remotely connected to the good governance of the fund in question. In the light of the above, we recommend that the clause be amended to refer specifically to any breaches of the law or the rules, or any matters which have not been communicated to stakeholders and which could cause financial prejudice to those stakeholders. (We suggest that matters which have been communicated to stakeholders should be excluded, as stakeholders will then have the opportunity to engage with the board and complain to the Authority and/or the Pension Funds Adjudicator.)

3.2.7 Reference to “concern” - These might not be valid. Board member should first raise any concerns at Bot and only if not addressed refer to Authority.


3.2.7 Section 7A(4)(b) of the PFA requires a board member to report to the FSCA ‘any material matter relating to the affairs of the fund which, in the opinion of the board member, may seriously prejudice the financial viability of the fund or its members.Section 9B of the PFA then provides that such a report will be a ‘protected disclosure’ and the board member who makes it may not be subjected to any ‘detriment’ in retaliation for making it.

Clearly there would be very few matters falling within the scope of the subject matter contemplated in section 7A(4)(b) and it would be appropriate for the subsection to be amended to provide that a board member must timeously and in writing report to the


registrar any act or omission by the fund or a person or entity related to it which, in the opinion of the board member, amounts to a breach of a legal duty or obligation of that person or entity and is likely to have a material adverse impact on the fund.

The proposed section 7B exemption condition, on the other hand, is phrased too broadly. In particular, it requires an independent board member to report ‘any concerns’ to the FSCA. Such a board member could then feel obliged to report to the FSCA his or her ‘concerns’ about matters which should not require the attention of the FSCA such as the standard of catering at board meetings.

3.2.8 The words “was supported by no fewer than” should be inserted at the beginning of 3.2.8.1 as the said introduction does not apply to 3.2.8.2.

Agree

3.2.8 The FSCA proposes that it be a condition for section 7B exemption that the rules of the fund provide that-1. a quorum for meetings of the board must

comprise no fewer than four board members and must include all of the independent board members; and

2. a decision of the board will not be binding on the fund unless-2.1the decision was supported by no fewer

than 50% of the members of the board no fewer than 70% of those who supported the decision were independent board members; and

2.2if the decision was taken by round robin resolution, it is ratified at the next meeting of the board.

Noted

This is a good proposal, particularly as it should remove the stranglehold some sponsors have over the funds established by them.

3.2.8 / 3.2.8.1 Funds will need a transitional period in which to register any rule amendment required to comply withthis section

This provision compromises the democracy and voting power of the board by inserting the 70% threshhold. It also creates difficulties for trustees if they can all be held liable for a decision. We suggest deleting 3.2.8.1 and replacing it with the condition that for a decision of the board to be binding, at least 50% of the board members attending the meeting must be independent. This is all that is necessary to preserve the 50% independence criterion. If a board for example has 6 trustees (of which 3 are independent) and the quorum in terms of the rules are 4, then if only 4 trustees should attend then this would not constitute a quorum unless at least 2 of those attending are independent trusteesDelete the words “that decision was supported by no fewer than” after the words “binding on it unless”.

Agree, see transitional paragraph (5)

3.2.8.1 Insert the words “that decision was supported by no fewer than” before the words “50 (fifty) percent of the members of the board”.

Agree

3.2.8.1 the numbers have caused some confusion in the industry, but I support the principle behind it

Noted

3.2.8.1 a) This clause is mathematically impossible under certain circumstances. For example, if the board has, say, four members of whom two are independent trustees, then if there is consensus on a decision it still fails clause 3.2.8.1 – 100% of the trustees support the decision, but only


50% of them (i.e. less than 70%) are independent trustees.

b) Clause 3.2.8.1 also becomes impossible under any circumstances where clause 3.2.2 applies and the conditions are relaxed to only require, say, one independent trustee.

3.2.8.1 The 70 (seventy) per cent requirement could pose a challenge to comply with for pension funds which have only four board members (who will constitute a quorum) of which 50 (fifty) per cent will be independent. The Fund proposes that 50 (fifty) per cent of the quorum must be independent.


3.2.8.1 1. Taking account of our view set out above that a divide between independent and non-independent board members should be avoided, we are not in favour of the 70% independent board member requirement as it puts the two categories of members into separate blocks when it comes to decision making and attaches more weight to the vote of an independent board member. Secondly, it would be impractical to have 50% of the board members being independent and then demand that a resolution is valid only if more than 50% of those voting in favour of the resolution are independent: if, say, 50% of the board members are independent and all the board members vote in favour of the resolution, then the test of 70% would be failed, because the independent board members comprise only 50% of the board; alternatively, we would have the absurd situation that some of the non-independent board members would have to abstain, even though they agree, in order to satisfy the 70% test.

2. We are however in favour of a dispensation which requires –2.1the quorum to consist of a minimum


number of respectively independent and non-independent members; and

2.2a higher than 50% level of consensus for a decision, say 75% of the board members present at the meeting.

Alternatively, we could require that at least 50% of the independent board members support the resolution for it to be valid.

3. Such a dispensation should ensure that each decision is supported by a substantial group of both independent and non-independent board members.

3.2.8.1 This does not make sense at all, it seems as if independent trustees can always dictate outcome even where Board discuss remuneration or whether a board member is not fulfilling his fiduciary duties.

Noted, revised to 50% independent

3.2.8.2 If the implication is that a round-robin resolution can only be acted upon once ratified, this provision will defeat the practical implications of having round robin resolutions. These are generally urgent in nature and need to be acted upon without undue delay. By way of example, most pension funds provide in their rules that a round robin resolution will have the same force and effect as if it has been passed at a meeting of the board and shall be recorded in the fund’s minute book. It is proposed that the current status quo for most funds as provided by the above example be retained.

Don’t agree. Can be implemented before ratification, must however be ratified

3.2.8.2 A round-robin resolution by a quorum of board members is legally binding on the fund and does notneed ratifying. Any such decision must, by virtue of section 7D(1), be minuted. We therefore request that 3.2.8.2 be deleted.


3.2.8.2 1. In our view a round-robin resolution should not Agree, see revised wording

be subject to ratification as it defeats the object of a round-robin resolution, namely to obtain a decision that can immediately be implemented.

2. The concept of ratification is generally used in our law in the case where an agent acted without the authority of its principal. In such a case the act only becomes binding on the principal upon ratification of the action by the principal. This concept is not suitable in the case where a round-robin resolution procedure is duly authorised by the rules. In such a case the resolution should immediately become binding if made in accordance with the rules. The decision can of course always later be reviewed by the board.

3. However we agree that any round-robin resolution should at the next board meeting be tabled for notification and for the resolution to be incorporated into the minutes.

4. A concern that a round-robin resolution was not preceded by debate prior to the decision can be addressed by giving a board member the right in the rules to call a meeting or conference prior to the resolution becoming effective.

3.2.9 a) The wording “will consider it necessary” is confusing. Should this refer to “may”?b) For very large bargaining council funds with thousands of participating employers, such a requirement will add very material costs without necessarily adding any obvious benefits. We would suggest that this clause allow discretion to the FSCA, who could then meet with the relevant funds to determine if there are cost-effective and efficient ways of achieving the desired results.


3.2.9 The issue of management committees is Noted, this will impact on the exemption granted

discretionary in nature and it is proposed that it be left to the employers to decide. In the Fund’s experience none of its participating employers have established management committees even though they are provided for in the Rules of the Fund.

3.2.9 This clause should be deleted – it seems to go beyond the exemption from the 50% independent trustee requirement. See general comment above.

Further how can entities with no legal standing and not being bound by fiduciary duties play a role in the decision making of the fund? How will their decision making align with trustee decision making?

If the FSCA should decide to retain this clause then it should be amended as follows (the footnote at the bottom of page 5 should be deleted and its contents, amended as indicated, be included as a last sentence of 3.2.9:“depending on the size of an umbrella fund, the Authority may consider it necessary that the boarduses its best efforts to ensure that management committees at employer, sector or regional level be established. Management committees may take the form of committees of an umbrella fund, and which are intended to assist the board of management to liaise better with members and employers, thus ensuring adequate and timeous communication, interaction and understanding of matters which impact these stakeholders.

See revised wording

3.2.9 Clarity would be required to ascertain whether the establishment of Manco’s would be at employer, sector and regional level. This would add to the management cost of the fund (who will pay for it?). If the employer is required to pay the cost of the

Noted

Manco, this will detract from the easy and cost effective argument of participating in an umbrella fund. Will it be necessary to elect member representatives? Employers do not want to spend time on pension / provident funds, hence the attractiveness of participating in umbrella funds. Will this result in employers preferring to rather allow employees to make their own retirement provision (RA’s)?

How will large umbrella funds enforce and “control” the establishment of Manco’s? If an employer does not comply, will participation be terminated? This proposal needs to be workshopped to ensure that the practicality thereof is addressed for the benefit of members.

3.2.9 The FSCA proposes that, depending on the ‘size’ of an umbrella fund (but not a retirement annuity fund or a preservation fund) one of the conditions to which it may grant an exemption in terms of section 7B(1)(b) to a specific fund may be that it establishes ‘management committees’ at ‘employer, sector or regional level’ to-

‘assist the board ... to liaise better with members and employers, thus ensuring adequate and timeous communication, interaction and understanding of matters which impact these stakeholders’

and

‘so that there is sufficient transparency and participation in the decision-making process of funds’.

I recommend that one of the exemption conditions

Noted, will be considered in the drafting of Standards on rules of funds

for every fund other than a beneficiary fund or an unclaimed benefits fund be that it is required to establish subordinate governance structures. To this I add the recommendation that, to promote Treating Customers Fairly outcomes it be required that such governance sub-structures be given specific powers and duties.

For example, the conditions could include provisions along the following lines:1. The fund must provide in its rules for-

1.1 the identification of categories of members determined by reference to1.1.1 the economic sectors in which they are

employed; and/or1.1.2 the identities of their employers;

and/or1.1.3 the locations of their workplaces;

and/or1.1.4 the nature of their occupations, if

applicable, whichever the board of the fund considers most likely to best fulfil the objects of the fund and the purposes for which each governance sub-committee is to be established;

1.2 the establishment of a governance sub-committee for each such category of members; and

1.3 mechanisms for the democratic participation by members of the fund in the election of no fewer than 50% of the members of a governance sub-committee, and thereby their indirect participation in the election of no fewer than 50% of the members of the board of the fund.

2. The objects of each governance sub-structure will be-

2.1 to facilitate the democratic participation by members of the fund in the applicable category in the selection of persons who will have the power to appoint the members of its board;

2.2 to identify the needs and wishes of the members in the applicable category in regard to, amongst other things-2.2.1 the benefits to be provided to them

and/or applicable, beneficiaries related to them;

2.2.2 the investment of amounts held by the fund to provide for those benefits

and to make recommendations in regard to these matters to the board;

2.3 to facilitate communication between the board and the applicable members;

2.4 to assist the board in the fulfilment of its duties by, amongst other things-

2.4.1 advising the board on appropriate means of communication with members and assisting in such communication;

2.4.2 engaging in consultations with the applicable members;

2.4.3 conducting investigations with a view to making recommendations to the board on the allocation and treatment of shares of lump sum benefits payable on the deaths of members before retirement, if applicable; and

2.5 to promote transparency and accountability in the conduct of the business of the fund.

3. To ensure that intermediaries and others cannot wholly prevent the communication with members necessary to make this possible, the rules of the fund should require the funds’ members (and, in the case of umbrella funds, their employers) to regularly provide the funds with up to date member contact information including their cell phone numbers.

3.2.10 This is something that funds should do in any event and should not be restricted to section 7B exemptions. It should be deleted and incorporated in the revised PF130 as part of good governance.It is also not relevant to the exemption from the 50% independent trustee requirement. See general comment above.

Please note that ‘stakeholder’ is defined in the Pension Funds Act

Noted, but it is important to ensure that this is complied with especially in commercial funds where the stakeholders are removed from the governance structures

3.2.10 Paragraph 3.2.10 (p5) requires the board to adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the fund over time, which must be combined with a timeous, regular and relevant communication strategy for the fund and its members.

Is it required that each fund should have a communication strategy (separate to its communication policy) dealing specifically with the Section 7B exemption? (In other words a communication strategy keeping in mind dealing with members of the fund because they don’t Annual General Meetings or vote in any board member).

Noted, see comment above

3.2.10 The FSCA proposes that one of the exemption conditions be that the board must ‘adopt a stakeholder-inclusive approach that balances the

Noted, see comment above

needs, interests and expectations of material stakeholders in the best interests of the fund over time, which must be combined with a timeous, regular and relevant communication strategy for the fund and its members.’

The language used in this proposal appears to have been drawn from King IV.

King IV correctly confirms that the principal to which the governing body of a legal entity such as a pension fund owes its duties is the legal entity itself. Then, referring to its duty to act in the entity’s ‘best interests’, it suggests that those interests ‘cannot nowadays mean anything other than a blend of the interests [of all of its stakeholders]’, no category of which ranks above another, and which interests areinterdependent. While, on the one hand saying that what is required of a governing body of a legal entity is that it simply takes proper account of the legitimate and reasonable needs, interests and expectations of material stakeholders when making decisions, King IV on the other hand suggests that there must be a ‘balancing’ of the competing interests of various stakeholders in the ‘best interests’ of the legal entity, giving priority to some stakeholder interest at one time and others at another. This, then, is what is entailed in a ‘stakeholder-inclusive’ approach to governance.

With respect, it is all a bit ‘fuzzy’. The common law already requires a legal entity through its ‘directing mind and will’ to act in good faith in the exercise of the entity’s powers. This means that, when making a decision, it must take into account all relevant facts and circumstances, disregard those that are irrelevant, and free itself from bias. Relevant facts

and circumstances to be taken into account by the board of a fund will include the rights and interests of material stakeholders. Depending on the circumstances, it may be necessary for the board to consult some or all of those stakeholders in order to ensure that it has knowledge of those interests before it makes a decision in which they are required to be taken into account.

3.3 Where the Authority wishes to add, delete, vary or in any other manner change or amend the conditions attached to exemptions and it may also withdraw an exemption, this should done in consultation with the fund or industry, as the case may be. With regard to withdrawing an exemption the provisions of PAJA should be taken into account.

Noted, However, see section 7B(2), which provides for the withdrawal of exemptions. This condition is not intended to deal with the withdrawal of an exemption.see revised wording

3.3 Notice period should be introduced in order to enable board of trustees to comply.


3.3 In the draft circular the FSCA proposes that exemptions in terms of section 7B be granted for periods of ‘indefinite duration’ although subject to the right of the FSCA to ‘add, delete, vary or in any other manner change or amend or withdraw any [exemption] conditions’.

The reason for this proposal is that many funds to which section 7B exemptions had been granted for periods of three years have failed to apply for new exemptions before those periods expired. This meant that, if the period of 90 days for the filling of vacancies on the board they ceased to have boards properly constituted as such in terms of the PFA and the registrar could not accept exemption applications from such funds. In the circumstances, the registrar was required to exercise his power in terms of section 26(2) of the PFA to appoint interim board members to apply for such exemption and

Noted, however where a board no longer complies with the conditions as set out in their rules and contained in the exemption granted, the Authority will reconsider or withdraw such exemption.

thereafter procure the establishment of a properly constituted board.

While –1. by the simple exercise of care, the funds could

have avoided the risk that an exemption would expire before another was obtained; and

2. as a matter of practice, the registrar usually appointed as interim trustees those who had been the members of the funds’ board before it ceased to be properly constituted,

it appears from the draft circular some of the funds have complained that this process

is ‘a cumbersome way of resolving these cases’ and the registrar is sympathetic to that view.

Given the importance of good governance, particularly in the context of the consolidation of the pension fund ‘market’ it is important that the composition of the boards of section 7B exempt funds be subject to regular scrutiny by the regulator. One way to ensure that this is done is by ensuring that fresh exemption applications are required to be made from time to time. The burden that this would impose on the funds and the FSCA is surely outweighed by the benefit of such regular scrutiny.

3.4 This provision can be deleted because if the fund does not do what is required in 3.4, the Authority will in any way not grant the exemption.

Noted, should guide funds on whether they are eligible before applying for such exemption

4. to confirm, presumably independent board members on RA funds, beneficiary and preservations funds are not affected by this section?

Not agree, applicable to all funds applying for exemption, see revised wording

4. The FSCA should require audited financial statements thatis not more than six months older than its financial year end should form part of the

Section 15(1) of the PFA already requires funds to submit annual financial statements.

application.

In addition to the above requirements any exemption must be subject to the Fund providing and regularly discloses its Financial Sector Charter BBBEE Scorecard in terms of the Financial Sector Codes. Attached is the relevant FSC Code BBBEE Scorecard for Retirement Funds

Well worth considering

4. This would not be practical for employment that an individual left many years ago. People change jobs and those individuals that a person reported to or worked with many years ago, would possibly have moved on to another company or companies may have merged and there are no longer individuals at these previous places of employment that could attest to the above. It is not clear whether this is a requirement for each place of employment. The practicality of this proposal needs to be addressed to avoid potential independent trustees not being able to fulfil these overly stringent requirements. The same goes for paragraph 4.15.

4.1 should be clear that an appointment is subject to the FSCA’s approval

Only noting, not approval

4.1 It is not clear if the conditions of this provision will also apply to other non-independent board members. As it was indicated above, the PFA does not make any distinction between the two. The only difference is the proximity of the sponsor trustees to the sponsor and in dealing with conflicts of interest, which even the non-independent board member should also deal with in any case.All that an independent board member does is to add an objective judgement in dealing with conflicts of interest that may affect those board members who are sponsor or member trustees and/or not independent for any other reason.

Agree, this will be considered in a separate Standard applicable to all trustees, cannot be included in the exemption guidance notice.

4.1 Presumably this requirement only applies to the appointment of any new independent trustee after the fund receives its exemption.It is not clear why this is needed to satisfy the exemption and we suggest it be deleted. If the FSCAdecides to retain this condition, it needs to make it clear whether it must be complied with as a condition of granting the exemption (in respect of the independent trustees in office at the time) or whether it must be complied with on an ongoing basis (or both).What happens if independent board member’s terms are extended or renewed for another term, must this process be done again for the second term of office?Does this apply to Type A and Type B umbrella funds, but not preservation (including unclaimed benefit funds), RA and beneficiary funds?


Note that this is an information request in terms of financial sector law rather than an exemption condition.

4.1 In the draft circular the FSCA proposes to prescribe special disclosure requirements to be applicable to funds to which exemptions have been granted in terms of section 7B from compliance with the requirement in section 7A(1) that members be given the right to elect at least 50% of the members of the funds’ boards.

In particular, the FSCA proposes that each such fund be required to disclose to the FSCA within 30 days of the date on which an independent board information relating to the board member including contact details, employment history, other positions of trust currently and previously occupied by him or her and the reasons for any terminations of appointment to any such positions.

It then proposes that, if, after considering this

Noted

information, the FSCA informs the fund that it is not satisfied that the board member is a fit and proper person to occupy a position of trust in relation to the fund, the fund’s sponsor must procure the immediate termination of the board member’s appointment as such.

Finally, it proposes that the board of the fund ‘declare at each financial year end its adherence to the principles of Good Governance, Code of Conduct and Code of Ethics’ issued as a guide to the boards of fund by the FSCA from time.

4.1.4 over what period is this required – I suggest the 10 year period prior to appointment, as in 4.1.5


4.1.4 & 4.1.5(fifth bullet points)

The fund and/or the independent trustee can provide the name and contact details of the required persons, but they cannot force or require the persons to attest to anything under oath.

If the person does not provide the required information that person would be ineligible.See revised wording

4.1.4 It is not clear why this information is necessary. It seems excessive and risks creating unnecessary work for the FSCA, detracting from its risk-based approach to supervision.Some funds have board members with more than 40 years of work experience, including at companies that no longer exist. Surely a lifetime of detail about previous employment is not practical or relevant. This should be limited to, say, the last 10 years of employment.

Insert the word “and” after the words “the reason(s) for the termination of that employment;”.

“the name and contact details of an employee, official or other a representative of that employer who would be willing to confirm in writing and, on request, under oath, the information given by the fund in relation to the board member.”


Delete the words “an employee, official or other” after the words “the name and contact details of”.Replace the word “by” with the word “to” after the words “information given”.This is going to be a challenge to obtain for all previous employment. It makes sense to instead provide this info for employment immediately before being appointed as a board member of the fund.Alternatively, this should only be required if the board member left the previous employer during the previous 10 years.How will the board know if the relevant employee of the employer (presumably the independenttrustee provided his/her details to the board) will be “willing to confirm in writing and, on request, under oath”?What kind of information will this be? Is that the information referred to in para 4.1.4? This is not clear.

4.1.4 1. The requirement in the fifth bullet point that the name and contact details must be provided of an employee, official or other representative of the employers of a board member, who would be willing to confirm in writing the information given by the fund in relation to the board member, might in practice be very difficult, if not impossible, to give effect to for various reasons, including –1.1 the employer might no longer exist;1.2 no employee, official or representative

might be available that can testify to the information; and

1.3 the relevant employment records might no longer be available.

2. Accordingly the requirement should at least be made subject to the availability of such a


person.4.1.5 “the name and contact details of an employee,

official or other representative of the organisation who would be willing to confirm in writing and, on request, under oath, the information given by the fund in relation to the board member”

Delete the words “an employee, official or other” after the words “the name and contact details of”.Replace the word “by” with the word “to” after the words “information given”.The purpose of the information requested here is clear, but the FSCA should consider whether it needs to request this information as a matter of course (as opposed to in the course of an inspection) in view of whether the additional workload is consistent with the FSCA’s risk-based approach when the fund will likely have carried out due diligence into its independent board members.

See revised wording

4.1.5 The requirement in the fifth bullet point that the name and contact details of an employee, official or other representative of the organisation must be provided, who is willing to confirm the information given by the fund in relation to the board member might be difficult, if not impossible to give effect to for the reason that no such person is available.Accordingly the requirement should at least be made subject to the availability of such a person.

See revised wording

4.2 the fund should replace the word sponsor as the funds should be making the appointment

Agree

4.2 The reference to “the sponsor” may be appropriate for a commercial umbrella fund, but has no meaning for, say, a bargaining council fund. The clause could possibly refer to “the sponsor or board, as appropriate”.


4.2 This provision mentions the word ‘sponsor’ and contradicts provisions 3.2.3 and 3.2.4 where the


onus is imposed on the fund or the board.4.2 “the Authority informs the fund that it is not

satisfied that the independent board member is a fit and proper person to occupy a position of trust in relation to the fund,”This is problematic for a fund / sponsor. It is not an easy task finding an independent trustee. If the fund/sponsor does find one, and appoints him/her, how should they then “unappoint” him/her if the Authority does not consider him/her to be a fit & proper person? Will the fund/sponsor have to specifyin the appointment letter that it is subject to the Authority’s approval? This will not go down well with apotential appointee. Furthermore, if the Authority does not approve the independent trustee, the fund/sponsor will have to find a new candidate, and that may take months, with a resultant vacancy not being filled within the period prescribed under the Pension Funds Act.

Disagree. This is a legal requirement, see section 26(4) and (5) of the PFA.

4.2 “the sponsor must procure the immediate termination of the board member’s appointment.”Where the board appoints the independent trustee, this should be the board’s responsibility. This does not seem to be a condition for exemption and in our view needs to be dealt with elsewhere.

Disagree. See section 26(5) of the PFA. When such independent is not fit and proper, it may affect the exemption and the Authority may vary or revoke the exemption

4.3 this should be included in Schedule E of the Annual Financial Statements.

Noted, will be considered when the prescribed annual financial statements are revised

4.3 This is something that any fund should do in any event and should not be restricted to section 7B exemptions. It should rather be incorporated in the revised PF130 as part of good governance. This section should be deleted as it is not a condition for exemption and needs to be dealt with elsewhere.

Noted, it will also be considered when issuing the Standard on Good Governance

4.3 It is not clear in what form this needs to be declared and to whom.

See revised wording

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