Beware! The FSB Can Replace the Board of Your Pension Fund!
In certain circumstances, the Registrar of Pension Funds can deconstruct the board of a pension fund and appoint a new interim board. It’s happening with increasing frequency and this more intrusive approach of the regulator is in keeping with Twin Peaks and the intention to advance a safer financial services sector.
The Financial Services Appeal Board recently made a far-reaching ruling on the powers of the Registrar of Pension Funds to appoint ‘interim boards’ in terms of section 26(2) of the Pension Funds Act 24 of 1956 (“PFA”).
In the matter before the Financial Services Appeal Board, a properly constituted board was in place until the member elected trustees were dismissed from employment. The Fund could not conduct member elections within the prescribed 90-day period allowed in the Act. For this reason, the Registrar appointed an entirely new interim board. The Fund argued that, on a proper reading of section 26(2) of the PFA, the Registrar could appoint so many section 26 trustees as may be necessary to fill the vacancies, but could not remove existing trustees who had been lawfully appointed and replace them with a new interim board of the Registrar’s choosing.
The Appeal Board disagreed with the Fund and upheld the views of the Registrar, stating that the Fund had made the mistake of treating the board as if it was divisible; a fund cannot have a board of which half is properly constituted and half is not. The Appeal Board confirmed that once any part of the board is not properly constituted, the Registrar may appoint so many persons as the he/she considers appropriate – either to make up the full complement or only the number of people required to make up the quorum of the board.
The Appeal Board confirmed that the Register has the power to appoint so many persons as the he/she considers appropriate when one of three jurisdictional facts are present:
1. Where a fund does not have a properly constituted board as contemplated in section 7A and has failed to constitute a board after 90 days. Section 7A requires that members of the fund are entitled to elect at least 50% of the board, so the loss of even one member elected trustee can render the entire board invalid, unless there is an alternate trustee to fill the vacancy automatically or the Fund is able to secure a replacement within 90 days. The expiry of an exemption from the 50% member elected requirement, as is held by many umbrella funds, would also be problematic.
2. Where a fund cannot constitute a board properly.
3. Where a board fails to comply with any requirements prescribed by the Registrar in terms of section 7A(3) of the Act (a provision that is not yet in effect).
The Appeal Board confirmed, that in making the appointments, the Registrar acts ‘notwithstanding the rules of the fund’ and therefore, in appointing the interim members, the Registrar does not attempt to create a board that fulfils the requirements of section 7A or a board as set out in the rules of the Fund in question.
Considering this decision, it may be prudent for funds to consider what measures can be put in place to avoid the Registrar deconstructing the board and appointing a new interim board. Possible solutions include rule amendments or the adoption of advance directives / policies / delegations to avoid the extended hand of the Registrar in the appointment of section 26(2) boards.