CHAPTER 3: FIDUCIARY RESPONSIBILITY – SOUTH AFRICAN LAW AND PRACTITIONER VIEWS
As discussed in Chapter 2, Phases I and II of the research provided extensive descriptions and interpretations of the fiduciary responsibilities of the key role players in the pension fund investment chain. Phase I of the research encompassed an “interview” process with South African legal sources,210 whereby the research considered the law as it applies to the fiduciary responsibility of pension fund trustees, asset managers and asset consultants. Aspects of fiduciary responsibility were interrogated using the following three questions:
1.Are pension fund trustees, asset managers and asset consultants fiduciaries in the pension fund investment chain?
2.If the answer to the first question is yes, to whom do they owe their fiduciary responsibility respectively?
3.What are their fiduciary duties?
In this chapter, I present these descriptions and interpretations. This presentation is structured as follows. In Section 3.2, I describe the range of interpretations emerging from the engagement or “interviews” with the South African legal sources. These interviews were limited to a specific “population”, which comprised statutes relevant to the pension fund industry and case law (primary legal sources), and Financial Services Board (FSB) Circulars, specifically Circulars PF Nos. 3–130, which contain information about pension funds.
The two sections (3.2 and 3.3) that contain the responses obtained in Phases I and II are structured, firstly, according to the key role players and, secondly, according to the three interview questions. The answers obtained to every question in Phase I were categorised according to the source, that is, legislation, case law or the FSB Circulars. Therefore, each subsection of Section 3.2 typically starts with a description of the answers obtained from legislation and case law, and then moves on to the FSB Circulars.
This is then followed in Section 3.3 by descriptions of practitioner views or interpretations. Finally, by way of consolidation and discussion in Section 3.4, the two sets of descriptions are compared and contrasted. This comparing and contrasting is done with a view to achieving data reduction. Thus, the outcome of this chapter is a range of interpretations of fiduciary responsibility, which are subsequently used in Chapter 4 to directly address the overarching research question.
PHASE I: “INTERVIEWS” WITH SOUTH AFRICAN LEGAL SOURCES
PENSION FUND TRUSTEES
Question 1: Are pension fund trustees fiduciaries?
At first glance, South African legislation appears to be silent on the question of whether pension fund trustees are fiduciaries. However, it is only silent in the sense that it does not explicitly state “trustees are fiduciaries” or “trustees have fiduciary duties”.211 Nevertheless, the statutory duties ascribed to pension fund trustees include those that are generally recognised as fiduciary duties.212
The answer from case law is fairly easy to trace: from the list of 32 recent cases (from 2004 onwards) that were specifically interrogated for this phase of the research (Appendix A), the first 13 cases213 unambiguously acknowledged a fiduciary duty for pension fund trustees. In Dollman v The Irvin and Johnson Retirement Fund & Others214 it is stated that:
In light of the fiduciary duties of the board, it does not have an unfettered discretion in dealing with pension fund assets. Instead it is bound to exercise its control over the property in such a way that it is to the general benefit of fund members.
In Milton v Bidcorp Group Pension Fund215 it is stated that:
…the trustees of a fund owe a fiduciary duty to the fund and to its members and other beneficiaries. These duties are clearly established in terms of common law, case law, and statute, the most important legislative sources being the Pension Funds Act and the Financial Institutions (Protection of Funds) Act 28 of 2001.
In Moeng v John Abbot Garage Services & Others216 it is emphasised that:
In terms of fiduciary duties owed by trustees of a fund to its members, trustees are required to direct, control and oversee operations of a fund with applicable laws and rules of the fund; to take all reasonable steps to ensure that interests of members in terms of rules of the fund and provisions of the Pension Funds Act 24 of 1956 are protected at all times; and to act with due care, diligence, in good faith and to avoid conflicts of interest.
The consensus view presented in the 32 cases was unambiguous: trustees are indeed fiduciaries.217 In none of the population explored was dissent detected.
Circular PF 130218 states that:
as fiduciaries, the boards, its alternates and other persons duly appointed by the board to act on its behalf, have to deal with assets or affairs of the fund in terms of pensions law, common law, customary law, regulations, the (registered) rules of the fund, codes of conduct and policies that apply to the fund.
Furthermore, Circular PF 98219 states that “the board acts in a fiduciary capacity …”. Pension fund trustees make up the “boards” referred to in these circulars as well as in the Pension Funds Act. The FSB consequently regards the trustees as fiduciaries.
Thus, the law, as suggested in legislation through the codification of duties that are generally recognised as fiduciary duties, confirmed in case law, and as discussed in FSB Circulars, is strongly suggestive of the fact that pension fund trustees are fiduciaries. The results for pension fund trustees are now summarised in Table 3.1 below.The legal sources are more ambiguous with regard to the question of who are the beneficiaries of the fiduciary responsibility of pension fund trustees. However, because the legislation presents duties that are generally recognised as fiduciary duties, it was interpreted as being evidence for the existence of a fiduciary relationship. The Pension Funds Act does not explicitly mention the beneficiaries of the duties outlined for the boards of trustees; it merely states in section 7C(2)(a) that “the interests of members in terms of the rules of the fund and the provisions of the Act” must be protected at all times. On the other hand, in section 2 of the Financial Institutions Act it is implied that the duties ascribed to “a director, member, partner, official, employee or agent of a financial institution” are owed to the financial institution itself and indirectly to the owners of the assets, meaning the members of the fund. In section 2(a) and (b) of the Financial Institutions Act it is stated that the persons/institutions responsible must act with the utmost good faith with regard to “such funds” and the “trust property”. This would mean that the persons responsible have a fiduciary duty with regard to the assets they manage, which would mean the fiduciary duty is owed to the owner of the assets, namely, the pension fund. Also see section 2(c):
may not alienate, invest, pledge, hypothecate or otherwise encumber or make use of funds or trust property or furnish any guarantee in a manner calculated to gain directly or indirectly any improper advantage for himself or herself or for any other person to the prejudice of the financial institution or principal concerned.
The “principal concerned” in this case is a reference to the person who entrusted the financial institution with funds to keep in trust on his/her behalf. This Act applies to a variety of financial institutions in addition to pension funds. The members of a pension fund would not, however, be regarded as “principals”.
Case law offered a range of opinions on the question of who the beneficiaries are in terms of the fiduciary responsibility placed on pension fund trustees. The list of 32 recent cases220 provided four possible answers to this question. In 14 cases221 it was said that the trustees owe a fiduciary duty to the members of the fund. In Burke v Mitchell Cotts Pension Fund and Another,222 the term the members as a whole is used, as opposed to only members. However, it is not clear from the rest of this case what exactly is meant by this term. In four cases223 it was concluded that the trustees owe a fiduciary responsibility to the fund and to its members and other beneficiaries. In Hossack v Chep South Africa (Pty) Ltd and Another224 it was said that the fiduciary duty is owed to the fund, but the remaining cases225 did not provide an answer to this question.
FSB Circular PF 98226 states that “the board should not only have the interest of active members at heart but also those of pensioners, deferred pensioners and beneficiaries”. Circular PF 130227 states that the board stands “in a position of trust or fiduciary relationship to funds …” and “the board of management therefore holds fund assets in trust for those persons who will ultimately benefit from them” and later on it is mentioned that “the board shall at all times act with the utmost good faith towards the fund and in the best interest of all the members”. Circular PF 130 therefore implies that the trustees owe their fiduciary duties to the fund itself, but also to all the members and the members‟ beneficiaries.
The third question asked about what South African law states with regard to the specific fiduciary duties of pension fund trustees. As already noted, the words “fiduciary duties for pension fund trustees” do not appear explicitly in legislation. In six233 of the 32 recent cases listed234 the sentiment was expressed that section 7C of the Pension Funds Act codifies the common-law fiduciary duties owed by the trustees of a fund to its members.235 In Milton v Bidcorp Group Pension Fund,236 it is simply stated that the most important legislative sources for establishing the fiduciary duties owed to the members by the trustees are the Pension Funds Act and the Financial Institutions Act.
Circular PF 98 clearly states that this circular “should not be regarded as either an exhaustive or a definitive account of the fiduciary duties of boards of management”. It does, however, refer to section 7C of the Pension Funds Act and states that boards are bound by the rules of the fund. Furthermore, that boards … may vary them only in accordance with the amendment provisions set out in the Act [Pension Funds Act] and rules. In making amendments, the board must have regard to the other fiduciary duties governing its conduct.
These so called “other fiduciary duties” are not described in any detail.
Circular PF 130 states that the trustees are in a “fiduciary relationship to funds and therefore must act with integrity”. It then continues, saying that the board “should deal with all matters relating to the fund and its members in accordance with their fiduciary duties, fairly and with respect”, but it also does not describe these fiduciary duties.
South African legal sources thus provide us with two possible answers to the question of what the particular fiduciary duties are (Table 3.3). Accordingly, the fiduciary duties of trustees are the following:
1.Either the statutory formulation of the common law fiduciary duties mentioned in section 7C of the Pension Funds Act or the statutory formulation of the common law fiduciary duties mentioned in section 2 of the Financial Institutions Act or both;
2.“Other fiduciary duties” as mentioned in the Circulars, which presumably also refer to the generally recognised common law fiduciary duties.
As already mentioned in the section above on trustees, at first glance the legislation appears to be silent on this question. A number of legal duties are, however, conferred on asset managers by legislation. Accordingly, when these statutes are reviewed carefully it becomes evident that the legislation can be seen as a statutory formulation of what has been identified in Section 1.2.2 in Chapter 1, as generally recognised common law fiduciary duties.238 Most of these generally recognised common law fiduciary duties are represented in the lists of statutory duties attached to asset managers in section 2 of the Financial Institutions Act239 and section 16(1) of the Financial Advisory and Intermediary Services Act 37 of 2002 (hereafter referred to as the FAIS Act).240 The following generally recognised common law fiduciary duties are mentioned in these sections: a duty to act in good faith (s 2(a) and (b) of the Financial Institutions Act); a duty to avoid conflicts of interests (s 2(c) of the Financial Institutions Act and s 16(a) of FAIS Act); a duty to not make any secret profit (s 2(c) of the Financial Institutions Act) and a duty to act in the interests of clients (s 16(a) of FAIS Act).
CHAPTER 1: INTRODUCTION
1.1 THE PENSION FUND INDUSTRY
1.2 FIDUCIARY RESPONSIBILITY
1.3 RESPONSIBLE INVESTMENT
1.4 FIDUCIARY RESPONSIBILITY AND RESPONSIBLE INVESTMENT
1.5 DISSERTATION STRUCTURE
CHAPTER 2: METHODOLOGY
2.1 RESEARCH DESIGN
2.3 SELECTION DESIGN AND DATA COLLECTION
CHAPTER 3: FIDUCIARY RESPONSIBILITY – SOUTH AFRICAN LAW AND PRACTITIONER VIEWS
3.2 PHASE I: “INTERVIEWS” WITH SOUTH AFRICAN LEGAL SOURCES
3.3 PHASE II: INTERVIEWS WITH THE KEY ROLE PLAYERS IN THE PENSION FUND INVESTMENT CHAIN
3.4 DATA REDUCTION: COMPARING THE SETS
CHAPTER 4: FIDUCIARY RESPONSIBILITY AND RESPONSIBLE INVESTMENT – INTERPRETATION MATRICES
4.2 QUESTION 1: ARE THE KEY ROLE PLAYERS FIDUCIARIES IN THE PENSION FUND INVESTMENT CHAIN?
4.3 QUESTION 2: TO WHOM DO THE KEY ROLE PLAYERS OWE THEIR FIDUCIARY RESPONSIBILITY?
4.4 QUESTION 3: DESCRIBE THE FIDUCIARY DUTIES OF THE KEY ROLE PLAYERS IN THE PENSION FUND INVESTMENT CHAIN
CHAPTER 5: CONCLUSION
CHAPTER 6: EPILOGUE
6.1 FIDUCIARY RESPONSIBILITY: NEW DEVELOPMENTS IN PENSION FUND LEGISLATION
6.3 ASSET MANAGERS AND ASSET CONSULTANTS
GET THE COMPLETE PROJECT
Fiduciary Responsibility and Responsible Investment: Definitions, Interpretations and Implications for the Key Role Players in the Pension Fund Investment Chain