1. 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

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

3. 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

4. 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

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

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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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.

15. 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

16. 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

17. 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!

18. 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

19. 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

20. 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

21. 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.

22. 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

23. 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.

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

25. THANK YOU