Jonathan Mort Rowan Burger Governance design debate – if we started the law and practice afresh: what should this look like for umbrella funds Jonathan Mort Jonathan Mort Inc Rowan Burger Momentum Investments

AGENDA Our journey to here The problem The issues covered Fund governance Proposals

Poor retirement outcomes with low trust Understand our path to here Proliferation of retirement funds Poorly governed Poor economies of scale Complexity Poor retirement outcomes with low trust

Intention to reduce funds and costs Why is this not going further? Providers don’t like commoditisation Groups still want to make decisions Tax structures an inhibitor Intention to reduce funds and costs

Ideal End State Few funds Efficiently governed Low distribution costs Portable Allow innovation Build more inclusive financial services sector

Governance Non Negotiables Trust Structure Independent financial oversight Alignment of incentives Effective regulation Strong risk management

The Problem with Commercial Umbrella Funds In DB funds employers were able to benefit at expense of members through control of benefit design and the fund. In the commercial umbrella fund sponsor able to benefit at expense of member by controlling benefit provision process and through control of the fund. Challenge is to provide optimal benefit for members at low cost in a way that can be trusted.

The Problem (Cont) Sponsor benefits specifically by: Locking in sponsor service providers, fees not negotiated at arms length Determines the investment arrangements- Investment platform Default Retail, not institutional, products with higher pricing Relationship with employer between sponsor, not the fund Employer is passive Sponsor trustees are sponsor employees Difficult for independent trustee to be truly independent Trustee board is generally constrained in relation to standalone funds

Issues Covered Who owes the fiduciary duty: trustees/sponsor/ employer? Mancos/member representation Employer obligations Powers and responsibility of trustees Accountability to members and employer Rights of sponsor

Fiduciary Duty/ Governance Arrangements Governance structure informed by extent of fiduciary duty Based on Fieldstone test extensive fiduciary duty in occupational funds (umbrella and standalone): Scope for exercise of discretion or power Can be used unilaterally to affect the financial interests of a beneficiary Beneficiary is vulnerable to how that discretion or power is exercised Extensive fiduciary duty because membership compulsory, member cannot exit or transfer out

Governance Arrangements in Occupational Funds Governance purposes- Benefits promised are delivered Benefits are optimal with acceptable level of risk Costs are transparent and defensible Process of delivering benefits is able to be trusted by stakeholders Accountability is a problem! Sponsor cannot be responsible for benefit promise Must give employer certain obligations

Proposal 0 – Members pick funds Generally practice around the world Creates better ownership of retirement savings Changing way of work High job turnover means less continuity

Response – Proposal 0 Employment contract Information asymmetry Benefit of insurance pooling Lower distribution costs

Proposal 1. The Fund Governing Body Trustees have the fiduciary duty, which is not constrained. No member representation on trustee board, which comprised only of independent trustees plus a sponsor representative. Create Oversight Board (OB) comprised of directors appointed by members and employer rep (in minority), separate from trustee board. Trustee cannot be OB director.

Proposal 1. The Fund Governing Body (cont) Role of OB- Require reporting of trustees to it on Change to board or PO Investment/benefit arrangements and costs, changes to these Engagement of service providers Complaints to PFA and FSCA General or master rule amendments

Proposal 1. The Fund Governing Body (cont) Powers of OB- Fire and hire trustees Conduct board appraisal Agree trustee remuneration Convene member AGM Require reporting by trustees or PO on specific issues Review and approve governance budget Obtain expert advice Lodge complaint with PFA or FSCA

Proposal 1. The Fund Governing Body (cont) OB- To have PI cover Able to remunerated within limits prescribed by FSCA S 26 applies to it similarly, but trustees can operate without OB in existence May not communicate with service providers or sponsor: managing business of the fund in the hands of trustees only Must report annually to membership, employers and FSCA on how it carried out its responsibilities Note: Introduction of OB will change the current nature of the relationship between the sponsor and the Fund!

Efficiency Choice Customisation Individualism Response – Proposal 1 Additional layer of governance complexity and cost Why for Type A umbrellas only? Surely oversight is role of Regulator? Efficiency Choice Customisation Individualism

Proposal 2. Mancos Mancos? Yes, if employer wants, as currently arranged subject to OB arrangements. No need for OB to account to it. Don’t think OB per employer can work: Who carries out board appraisal Can’t fire or hire trustees Can’t agree trustee remuneration

Response – Proposal 2 Do away with Mancos Clients vote with their feet Additional cost Governance problems Different asset charges Benefit structures Insurance conditions Clients vote with their feet Sufficient other safeguards in system

Proposal 3. Employer Responsibility Before transfer to umbrella fund employer to confirm in writing to employees that: It has done a due diligence on systems of administrator Reviewed costs and is happy with the reasonableness of those Happy with trustee board and OB Employer to confirm annually in writing to members that it is happy with governance, costs and investment arrangements. FSCA to give guidance note on initial and ongoing due diligence of umbrella fund, for benefit of employer.

Response – Proposal 3 Many employers will outsource due diligence EB consultant? Auditor? Valuator? Need to drive standardisation Make participation less onerous for employers Rethink 13A, 37C Ensure portability Seamless movement between funds No penalties / lock ins

Proposal 4. Sponsor Rights Sponsor should have the right: To require that its services and products be considered for inclusion. In other words, trustees have to have a reason not to use sponsor’s products or services. To attend trustee meetings, except when issues around the sponsor are being discussed. To see the Fund policy documents, and to comment on those, eg governance documents, communication policy, IPS, annuity strategy, etc, on the understanding that only the trustees decide those documents. To be notified of actions by OB against trustees, and decisions of OB in respect of OB. To be participate in fund annual budget process. To market the fund at sponsor’s expense.

Response – Proposal 4 Many sponsors have significant commercial interest in arrangement Use of life licence creates governance conflict

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