Trustee duties in relation to member investor choice

March 1st, 2018

By Muhammed Ahmed Mayat

This article aims to address the issue of trustee duties in the case of member investor choice. Focus is placed on the direct impact of member investor choice on trustee duties alone – all other general fiduciary duties remain relevant and applicable. A seminal question in this regard, is whether or not trustees may relinquish their duties of management, and if so, to what extent (see R Hunter ‘Duties of trustees in regard to member investment choice’ (1999) September Pensions World).

Basic overview member investor choice

Investor choice finds the locus of its genesis in the desire of many pension fund members to exercise some degree of autonomy or choice in the investment process. The traditional investor-trustee paradigm places complete investment discretion with the trustee. This approach, while seemingly sound, proves restrictive in that it cannot adequately accommodate the diverse needs of its different members (individuals of diverse age, risk profiles, etcetera). Member investment choice arrangements attempt to remedy this inflexibility – to an extent – by offering members a spread of portfolio options in which funds can be invested. Individual members may opt to allocate a portion of their contributions toward investing in these portfolios (see C Robinson, ‘Implementation of individual investment choice in a public service defined contribution pension fund’ (unpublished thesis, University of the Witwatersrand, 2001) at 40-45).

Trustee duties

Trustee duties, in respect of investment choice, have not been clearly elucidated by statute or a court of law (at this point) and, as such, inference is necessary to arrive at a speculative construction of what precisely they may entail. Prior to delving into a more abstract discussion, it must be noted that individual applicable regulatory provisions (such as the Pension Funds Act 24 of 1956 (the Act) reg 28’s applicability to funds, which incorporate member investor choice) stand independently and are not impacted by the nature of the ‘member-trustee’ relationship.

The nature of the ‘member-trustee’ relationship in the member investment choice paradigm is of fundamental importance in determining trustee duties. Two arguments may be advanced on whether or not the member exercising the choice exercises primary or subordinate power by means of delegation. The former argument would potentially divest the trustees of much responsibility but appears excessively liberal and inconsistent with the purports of much of pension fund regulation. The more prudent argument – and the desired approach where uncertainty exists – finds for the latter delegated authority. To appreciate the ramifications of this we must elaborate further on these two constructions.

Investor as an exerciser of primary power

Proponents of such argument may point to the Act’s lack of express preclusion in this regard. They reason that the absence of provision permits the conference of power under a member investment choice arrangement to be reasonably construed as primary power. This in turn should allow for increased autonomy and a significant reduction in the stringency of applicable trustee duties. Given the restrictive ambit of operation – individual’s exercising control over what is effectively their own assets – such construction could reasonable remain unencumbered by counterarguments of trustee abdication. Regardless, such arguments place significant reliance on distant abstraction and at times appear laboured and artificial.

As noted above, this view appears excessively liberal and at conflict with the basic purpose of trusteeship and the onerous nature of trustee duties. It appears unlikely that this construction is desired and prudence dictates that trustees would do well to avoid placing reliance on it.

The investor as an exerciser of subordinate power

Section 7C of the Act provides:

‘The object of a board shall be to direct, control and oversee the operations of a fund in accordance with the applicable laws and the rules of the fund.’

Proponents of this view argue that – given the board of trustees’ primary duty is to direct, control and oversee investments – all other exercises of control amount effectively to delegation, namely, in this scenario, the trustees delegate investment power to the individual member. Delegation is an established principle and one that the courts have dealt with on numerous occasions in the past.

The adjudicator in Twerefoo v Liberty Life Association of SA Ltd and Others [2000] 12 BPLR 1437 (PFA) at para 53 discussed trustee duties where delegated:

‘[Trustees] retain the residual duties as regards the investment of the fund’s monies as one of the key operations of a fund, which the trustees must direct, control and oversee. Part of their duty of diligence, care and good faith involves a consideration of whether the person to whom the power of investment is delegated is a suitable person. Furthermore it must involve the duty to monitor the performance of the delegee’ (my italics).

Two duties become immediately apparent from the above extract: A duty to ascertain the suitability of the delegee prior to delegation and a duty to monitor performance.

Although it is unclear as to what monitoring entails in the context of member investment choice, this duty to monitor performance should, in practice, not prove as onerous as it seems. It may prove prudent for trustees to limit the available investment choices to a reasonable amount, to allow for the frequent vetting of fund performances. It appears logical to infer that initial and periodic assessments of the offered fund choices must be undertaken by the trustees – as they would, were they in control of the investment – and that such precaution should reasonably satisfy this monitoring duty.

Further, it is evident that only selected ‘suitable’ members may exercise an elective choice, although the evaluation criteria may be less onerous than normal given the circumstance, wherein a controlled investment environment exists with limited investment options available to the delegee. In this regard, trustees must assess a member by a uniform reasonable criteria prior to delegating the power of election. Failure to do so may render a trustee as having fallen short of the requisite standard of care.

It must also be noted that the duty to ensure ‘that adequate and appropriate information is communicated to the members and beneficiaries of the fund informing them of their rights, benefits and duties’ is retained (as provided in s 7D of the Act). Louw advances the argument that trustees are responsible for ensuring that the individual investors exercising investment choice are properly trained (see J Louw ‘Member investment choice not to be taken lightly’ (2006) December Pensions World). It is unclear as to what standard such envisaged training must meet or whether this potential requirement may be precluded by a reasonable member criteria applied before allowing the member to exercise investment choice.

Although incapable of precise articulation, it appears as if the duties that trustees must fulfil are homogenous to those required under ordinary delegation. Only members who fit a specific criteria may exercise delegated power – although the delegee qualification criteria may be slightly less onerous given the controlled choice of investment products – the trustees must exercise a degree of oversight over the investment choices available and individual investors must be reasonably informed.

This approach seems consistent with a number of proposals aimed at regulating aspects of member investor choice, as well as a foreign approaches to the question. Where trustees are uncertain in the exercise of their duties, given the lack of prescribed clarity, it would be most wise to err on the side of caution rather than to be bold and risk liability.

Muhammed Ahmed Mayat LLB (Wits) LLM (UJ) is a legal adviser in Johannesburg.

This article was first published in De Rebus in 2018 (March) DR 24.