Carina Wessels, Executive: Governance, Legal, Compliance and Sustainability, Alexforbes

In last quarter’s edition we considered what could be learned in how to proactively future-proof our retirement funds against potential failure, by considering the lessons from corporate failures. In this next article in the series, developments and governance trends in independent non-executive director remuneration practices are considered in identifying transferrable learnings for retirement funds.

Director remuneration regulation and trends

Director remuneration has been a topic of heightened scrutiny, discussion and regulation globally, including in South Africa over the last several years. The first significant regulatory shift occurred through the Companies Act 71 of 2008 (Companies Act), requiring, since 2011, the disclosure of individual director and prescribed officer remuneration in the annual financial statements (AFS) of companies that are required to have their AFS audited in accordance with the Companies Act. It also introduced the requirement for the fees paid to non-executive directors to be approved by a special resolution (valid for a maximum of two years): an approval threshold set for only the most significant of corporate decisions.

The King Report and Code of Governance Principles for South Africa 2009 (King III), roughly aligned with the timing of the Companies Act, also introduced the requirement for individual director remuneration disclosure, as well as a non-binding advisory vote on a company’s annual remuneration policy.

Despite the above regulatory and corporate governance best practice interventions, stakeholders were not sufficiently satisfied with the remediation of their growing concern on the topic of director remuneration.

Institutional shareholders and advocacy groups became increasingly vocal at company annual general meetings (AGMs). They raised concerns about:

• excessive director fees
• lack of transparency
• alignment of director remuneration and company performance.

Several remuneration policy and implementation advisory votes (an additional practice introduced by the King IV Report on Corporate Governance for South Africa, 2016) resultantly failed or received very low votes in support. This continued and increasing negative sentiment in several instances notably led to amendments to the JSE Listings Requirements (LRs), entrenching in the LRs the recommended heightened engagement with shareholders and engagement information disclosure where the advisory votes received a 25 per cent or more vote against.

Additionally, proposed amendments to the Companies Act articulated in the Companies Amendment Bill 2021 go further in entrenching some of the corporate governance best practices (like the advisory votes on the remuneration policy and implementation reports). The amendments require:

• these reports to be approved by ordinary resolutions and an inability to proceed with the policy implementation on a failed vote.
• additional disclosure on how concerns have been addressed at a following AGM in the instance of a failed vote against the implementation report.
• remuneration committee members to stand down for re-election each year that the implementation report fails approval.

The motivation for these proposed changes extends beyond good governance, transparency and ensuring remuneration is used as an enabler for economic, social and environmental business sustainability in pursuit of stakeholder value creation, but is also specifically aimed at addressing systemic South African inequality.

 Retirement fund trustee remuneration regulation and trends

Contrary to the significant focus on remuneration practices and its governance in corporates, retirement fund trustee remuneration is not regulated in South Africa. The only requirement is for independent board member fees and disbursements to be communicated to members at least once a year in terms of principle 10 of Circular PF130 on the Good Governance of Retirement Funds. Disclosure on an individual basis is not specifically required.

Section 22 of the Trust Property Control Act 57 of 1988 deals with trustee remuneration broadly, requiring that: “A trustee shall in respect of the execution of his official duties be entitled to such remuneration as provided for in the trust instrument or, where no such provision is made, to a reasonable remuneration, which shall in the event of a dispute be fixed by the Master”.

Considering the extent of fiduciary responsibilities placed on retirement fund trustees, the extent of financial services regulation generally and especially the fact that South African retirement fund boards of trustees oversee close to R5 trillion of assets, the lack of regulation, best practice or guidance is surprising.

When considering larger funds and the significance of the fiduciary duties placed on boards of trustees, there is certainly logic in suggesting increasing alignment between the remuneration considerations, practices and governance for trustee remuneration compared to non-executive directors: although the strategic scope of the trustee may be narrower, the technical expertise is arguably greater.

In the previous article we considered the Private Security Sector Provident Fund (PSSPF), investigated for allegations of corruption and maladministration in their processes, and focused on some of the trustee failures the Financial Sector Conduct Authority (FSCA) had highlighted during this investigation. In addition, in the same investigation, the FSCA had also concluded that:

• the rates paid to board members during the 2017 financial period were higher than and inconsistent with the fund’s trustee remuneration policy
• board members were remunerated for attending a golf day and a conference
• the chairpersons of the fund’s sub-committees were paid a fixed monthly fee in addition to their fee for attending meetings, which had not been regarded as standard practice in the retirement fund industry.

Globally, there have also been several instances of criticism against trustee remuneration (often also including executive remuneration concerns):

• In 2015 the California Public Employees’ Retirement System faced scrutiny over trustee education and travel expenses with critics questioning the transparency and necessity.
• In 2019 the Canada Pension Plan Investment Board faced criticism over its compensation practices for top executives and trustees. Some critics argued that the high compensation was not justified given the fund’s returns and performance.
• In 2020 a Dutch pension fund faced controversy over the remuneration of its trustees. The members questioned the transparency of the trustee pay structure and raised concerns about potential conflicts of interest.

Industry trends also suggest that a heightened focus on retirement fund trustee remuneration may be necessary and opportune. In its seventh research survey report published in April 2023, entitled Sustainability of Retirement Funds, PwC noted an increase to 74% (2020: 47%) in the number of respondents indicating board members are remunerated and noting an increase in the average remuneration paid to board members since 2020.

The research established that:

• the remuneration is either set by the board or a sub-committee (49%) or by the participating employer or sponsor (51%), with fees paid by the fund (75%), the participating employer or sponsor (9%), a combination of the two (16%) and in one instance using an employer surplus account
• 88% of respondents used an annual review or benchmarking of remuneration
• 30% were remunerated through a retainer, whilst the remainder was equally split between a fixed fee per meeting and an hourly rate; interestingly there did not seem to be a combination of retainer and meeting fees.

Some international regulatory requirements

In the United Kingdom, new rules to Part V of the Trustee Act were introduced in 2000 dealing with remuneration, clarifying certain aspects around trustee remuneration, for example what “reasonable remuneration” means.

The Code of the Dutch Pensions Funds, compiled by the Federation of the Dutch Pension Funds and the Labour Foundation, sets standards for good pension fund governance and became effective on 1 January 2014. It deals with trustee remuneration by requiring the fund to operate a restrained and sustainable remuneration policy, suitable for the business sector, undertaking or liberal professionals for which the fund administers the pension scheme.

It further requires the remuneration to be in reasonable proportion to the level of responsibility attached to the function, as well as to the requirements placed on the position and the time commitment necessary, suggesting that the board must responsibly and prudently weigh up what is appropriate given the fund’s nature and objectives and the significance of having high quality fund management.

Although possibly more likely in case of fund staff, it also requires the board of trustees to exercise restraint where performance related remuneration is involved and specifically that this may not exceed 20% of the fixed remuneration and should not be related to the fund’s financial results.

 What can we therefore learn from the journey and lessons in corporates?

• Regulation may move slowly but we know it regularly follows controversy and especially stakeholder concerns. It’s suggested that resilient funds should proactively consider a heightened focus on remuneration governance and disclosure.
• Where funds do not yet have a remuneration policy, implement a best-in class and responsible policy and where there is one, ensure regular review to retain relevance including:
  • purpose, objectives and philosophy (depending on fund complexity and size, specific attraction principles regarding skills and experience)
  • targeted percentiles at which to remunerate, overlain with affordability
  • fee methodology (i.e. retainer, per meeting, hybrid) and events not paid for if per meeting or hour based (i.e. training)
  • benchmarking principles and process
  • payment rules for company employed trustees (generally, if fees are paid, these would be paid to the employer in compensating it for the employee’s time towards the fund, as the employer is already remunerating the employee).
• Where the remuneration is determined by the board of trustees, the establishment of a remuneration committee comprised of a disinterested majority and, if not possible, heightened sensitivity in managing the inherent conflict of interest of someone influencing or determining their own remuneration.
• Individual and detailed disclosure of trustee remuneration in the fund’s AFS or annual report.
• An understanding of trustee remuneration in the context of active and retired member remuneration (akin to pay gaps considered in corporates).

 We know prevention is better than cure … in future-proofing our retirement funds, let’s avoid the reputational pain and damage that have severely affected the trust relationship between many corporates and their stakeholders. Let’s act proactively and responsibly in creating funds that will be resilient and sustainable in all respects before being forced so by regulation.

Your retirement fund’s future is not yet determined – it’s in your hands. Can you handle it?