Oran Hall | Know the key managers of your pension fund
There are two basic types of approved pension arrangements: employer-sponsored pension plans, called superannuation funds, which are group plans, and approved retirement schemes for individuals.
Generally, the contributions of the members of the pension arrangements are pooled and invested.
The pooling of the funds of the many makes it possible for your funds to be invested in high-priced investment assets such as real estate in which you, as an individual, may not be able to invest. This also facilitates investing in a wider variety of assets in several markets, thereby reducing risk.
The prudent management of pension funds is enhanced by the serious oversight role of the trustees, who are ultimately responsible in law for the overall administration and management of the superannuation fund or retirement scheme.
Not to be ignored is the Financial Services Commission, FSC, the regulator that is responsible for licensing the administrators and investment managers; registering the trustees and ‘responsible officers’, who must satisfy stringent ‘fit and proper’ requirements; and approving the funds/schemes themselves.
Trustees should seek professional advice when necessary and often appoint a company or a group of persons to manage the fund or scheme but are fully responsible for its operations nonetheless.
Although trustees are given indemnity if their actions are taken in good faith and upon professional advice, they are required to safeguard the financial health of the approved pension arrangements under their watch.
Other professionals who play a role in the management of the pension fund or retirement scheme are investment managers, administrators, actuaries, auditors, and attorneys-at-law. Generally, these tend to be firms rather than individuals.
Although there are several independent providers of administration and investment management services for pension arrangements, some large companies provide these services in-house but independent of their regular operations.
Administrators play a crucial and central role in the overall day-to-day running of the pension arrangement as they link with the other providers of services and the members of the pension arrangements.
Members of the superannuation funds are permanent employees of the company, and the eligibility requirements are set out in the plan rules of the fund. Eligible contributors to the retirement schemes are employed persons who are not members of a superannuation fund or another approved retirement scheme, self-employed persons and contract workers not contributing to another approved retirement scheme, and persons who wish to transfer from an approved superannuation fund or retirement scheme upon termination of employment.
In a defined benefit plan, the employer contributes on behalf of each member in accordance with the amount required to fund retirement benefits for all members. This is usually defined in the rules as a “balance of cost” to fund the promised benefit. Many of these plans are contributory, meaning that the employee also contributes. With defined contribution plans, the employer contribution typically matches the amount the member pays as the compulsory contribution.
Typically, an employee is required to pay into a pension fund an amount referred to as the ‘compulsory contribution’. Most pension funds require that this amount be five per cent of salary, but it can vary from plan to plan and is set out in the plan rules. This amount is deducted from the member’s salary before determining the taxable income. A member can also choose to pay an additional amount referred to as the ‘optional contribution’.
The maximum contribution members of approved retirement schemes may make is 20 per cent of their income. In those cases in which an employer contributes, the employer may contribute up to the equivalent of 10 per cent of the employee’s income, but the combined contributions of the employer and employee may not exceed the 20 per cent limit.
The investment manager plays a very important role in prudently managing the funds to ensure that the member can get a good pension at retirement. This is very important in the case of defined contribution plans, which include approved retirement schemes and the employer-sponsored pension arrangements which use this option instead of the defined benefit plan. In these cases, the member’s pension is determined by the contributions made by and for the member and the returns made on them.
In the case of defined benefit plans, offered by just superannuation funds, the better the investment returns, the happier the employers. This is so because it is their responsibility to fund the gap between what is required to fund the retirement benefits of the members and the actual value of the fund. Actuaries play a key role in this part of the administration and management of these pension funds.
The investment manager has a responsibility, while sticking to the regulations of the Financial Services Commission, the regulator of the pension sector, to invest the funds prudently in a wide range of investment instruments to get the best return, balancing that against the risk involved in generating that return.
The investment income earned – dividends, rent, interest, realised capital gains – is reinvested for the benefit of the members of the retirement scheme or the superannuation fund and is not used to pay directly the expenses of the pension arrangement. They pay investment fees, usually a percentage of the value of the fund, and administration fees, which may be a percentage of the contributions paid into the fund.
n Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and firstname.lastname@example.org.