by Chantal Gil, Theko Moteane, Kuda Mukova
SUSTAINABILITY REPORTING FOR PENSION FUNDS
THE PURPOSE OF A PENSION FUND
There are two types of pension funds – a defined benefit fund and a defined contribution fund.
Most pension funds, other than some government-related pension funds, are defined contribution funds, which means the pension fund collects contributions from its members and invests these contributions into investments that provide the members with a retirement income. With this type of pension fund, the retirement income is directly related to how well the investments perform.
The world of investing has been evolving. For example, we have seen the emergence of impact investing – cryptocurrencies and robo-advisers. Correspondingly, investment risks have also evolved given the emergence of climate change, the rising socio-political unrests and the decline in ethics and governance levels.
For example, investing in an insurance company now carries significant climate change risk – a drier and hotter climate has a significantly higher fire risk and drought effect. Therefore, one has to consider this ‘new’ risk when considering an insurance company in an investment portfolio. It is then possible that if your pension fund invests in an insurance company, the investment may yield lower returns due to the consequences of climate change.
Investing in a predetermined pension fund is often part of an employment contract, and members have little control over the investment strategy. One of the ways a member has influence is by participating in the appointment of diligent trustees.
FIDUCIARY DUTIES OF TRUSTEES
The trustees occupy a position of trust, and thus, have a fiduciary duty to the pension fund. A fiduciary duty is the duty of a person in a position of power to act in good faith, with due care and diligence in the exercise of their duties. Trustees need to act with fair consideration to all the facts and conditions that are relevant to any decision made by the board, including investment decisions.
The trustees are bound to act within the policies and rules of the funds and within the Pension Funds Act.
With fiduciary duty comes personal liability.
Each trustee must apply their mind to the issues before the board and cannot blindly accept information and advice from third parties. They should take steps to obtain the necessary information and competence to understand the risks involved in making an investment decision.
Even if a competent third party is appointed to assist the board in its duties, it is still the board’s responsibility to monitor compliance of the functions performed by the third party with the relevant rules governing the fund.
CHANGES IN THE LEGISLATIVE LANDSCAPE
The Code of Responsible Investing South Africa (CRISA) principles were introduced in 2011, which compels investors to incorporate sustainability aspects – environmental, social and governance (ESG) into investment analysis and activities, to deliver superior risk-adjusted returns.
The King codes of good governance require the board of trustees to ensure the pension fund is and is seen to be, a responsible corporate citizen.
The legislation then supported the sustainability factor through Regulation 28, which came into effect in 2012, requiring the board to consider the long-term performance of the investment, including ESG factors.
Most recently, in March 2018, the draft sustainability reporting directive was issued by the Financial Services Conduct Authority (FSCA) and proposed a requirement for pension funds to report on their adherence to the ESG principles. Pension funds will soon be required to explain how they have adopted ESG principles in investment decision making.
A failure to take in the risks associated with ESG, which could materially impact the long-term performance of an investment, is likely to be a breach of the duty of care and diligence by a trustee, for which a trustee can be held personally liable.
The three main changes are centred around a pension fund’s investment policy, on-going monitoring of ESG risks and opportunities and annual reporting to their members
WHAT DO TRUSTEES NEED TO DO?
IQbusiness has teamed up with KudosAfrica to assist pension fund trustees with:
- Awareness of ESG principles by offering a training capability, enabling trustees to have a better understanding of Responsible Investing, as well as on how to assess the risk and opportunities that ESG presents
- Assistance with formulating an investment strategy and internal policy, which incorporates ESG principles
- Providing an ESG monitoring tool, which allows trustees to monitor any ESG risks within their fund’s portfolio
- Reporting to their pension fund members on how the fund has complied with the ESG legislative requirements and any changes adopted during the year