With greater emphasis being placed on the importance of saving towards a financially secure retirement, members of retirement funds need the reassurance that the people to whom they have entrusted their hard-earned savings, (Boards of Management of retirement funds) display a high moral code, are trustworthy and will manage their funds prudently and lawfully.

King IV report on corporate governance

The King Committee published the King IV Report on Corporate Governance for South Africa 2016 (King IV) on 1 November 2016, and it is effective for financial years commencing from 1 April 2017.

Focus on retirement funds

King IV is the first report which has a sector supplement drafted specifically with the governance of retirement funds in mind. The supplement – and King IV as a whole – applies to all retirement funds, including pension funds, provident funds, preservation funds and retirement annuity funds. It also encourages retirement funds to follow the Code for Responsible Investing in South Africa (CRISA), a voluntary code applicable to institutional investors, including retirement funds. Both CRISA and King IV are viewed as complementary codes that reinforce and complement each another.

King IV objectives

The objectives of King IV, as set out in the report, are to:

• Promote corporate governance as integral to running an organisation and delivering on four main governance outcomes: (i) an ethical culture, (ii) good performance, (iii) effective control and (iv) legitimacy, via effective leadership by the governing body (being the Board of Trustees in the retirement fund context);
• Broaden the acceptance of King IV by making it accessible and fit for implementation across a variety of sectors and organisational types (including retirement funds);
• Reinforce corporate governance as a holistic and inter-related set of arrangements to be understood and implemented in an integrated manner, and
• Present corporate governance as concerned not only with structure and process, but also with an ethical consciousness and conduct.

The Supplement for Retirement Funds (“the Supplement”) is the first retirement fund specific guidance issued by the King Committee.

The Supplement sets out no fewer than 17 (reduced from 75 in King III) basic principles, which, according to the King Committee, should be adhered to in order to meet the four main governance objectives listed above.

Unlike the King III, which called on companies to “apply or explain”, King IV requires entities to explain how the principles are applied, i.e. the “apply and explain” approach, requiring organisations (retirement funds) to be transparent in the application of their corporate governance practices. Importantly, King IV advocates an outcomes-based approach (rather than rules-based) aimed at achieving favourable outcomes for fund members.

PF130

King IV builds on the existing Pension Fund Circular 130 (PF130), released in 2007, as a ‘best practice’ good governance circular for retirement funds.

Key principles for retirement funds

1. CRISA is complementary to King IV
2. Fund leadership and corporate citizenship must ensure an ethical culture in the fund
3. Fund performance and reporting must ensure creation of value for fund members
4. Fund governing structures and delegation must be set up to ensure adequate and effective controls
5. Fund governance and functional areas must be set up to ensure adequate and effective controls
6. Fund management of stakeholder relationships must result in trust, a good reputation and legitimacy of the fund.

Proportionality

A concept emphasised in King IV is proportionality. This is important because practical implementation of the recommended practices may be rather costly for smaller retirement funds; hence, King IV recommends that Sector Supplements should be “proportionally” implemented as is appropriate for the size, resources and complexity of the organisation.

Conclusion

Whilst compliance with King IV is not a legal requirement, boards of retirement funds will do well to apply the recommended principles, as this will lead to improved stakeholder relations, with a governing body that has effective control, legitimacy and is performing well.

We stated at the outset that members of retirement funds are constantly being encouraged to save more to secure a financially sound retirement. This coaxing arises as a result of the poor savings culture prevalent in South Africa. Coupled with financial education, good corporate governance – with specific focus on ‘transparency’, as outlined in the King IV report on corporate governance – will, hopefully, lay the foundation for improving the way in which members view savings.