When I first read the Pension Funds Act 2019 (PFA), my impression was that it is an expensive legislation to administer. But the fact that it is expensive is not a bad thing. In fact, this maybe one of its positive aspects as I will argue in this article. Let me start from the beginning.
The PFA was enacted to achieve two broad policy goals: (1) to protect the interests of contributors to the fund and (2) to grow the domestic capital market by requiring local investment of funds. There is no doubt that the government has a legitimate interest to achieve these goals. There are several provisions in the PFA that are deliberately designed to achieve these goals. I plan to focus on a few of these provisions to support my thesis that the PFA is expensive to administer but for a good reason.
One of the important provisions in the PFA is section (s) 11 which establishes a fund as a corporation that is governed by a board of trustees. This provision, when read with s 16(1), means that the board is ultimately accountable for the governance of the fund. And the board of the trustees assumes fiduciary responsibilities toward the members. Among other things, the board is mandated to collect contributions from contributors (employers or members directly) and use them to pay benefits to members when they retire or to their beneficiaries when they pass away.
To achieve this mandate, the fund is specifically required by s 29 to invest contributions the next business day after being received. These contributions are expected to be invested in accordance with an approved investment policy and at arm's length in terms of s 48. The arm's length principle is often used in contract law, tax law and other commercial settings. It refers to commercial transactions where parties agree to do business acting independently in their self-interests. A transaction at arm's length requires parties involved to be on equal footing leading them to conclude an agreement upon fair market terms. The mechanism around investments of pension funds is further outlined in the investment regulations of 2020.
To promote transparency and the flow of information between the fund and its members, s 27 requires a fund to annually provide members with fund information and benefit statements. The fund is expected to submit annual reports on these expectations. A member also has a right to request information from the fund in terms of s 28 of the PFA. The details of these requirements are outlined in the Pension Funds (Disclosures) Regulations 2020.
The holding of assets of the fund is also regulated by the PFA. A fund is expected to hold its assets separately from any other person. Section 11 also requires that assets must be held in the name of the fund or a nominee.
To perform these functions requires the availability of resources, human and capital resources, governance and administrative systems. Despite being able to directly perform most of these functions associated with operations of a pension fund business, the board is required under s 18 to outsource all the operations of the fund by appointing professional service providers. To achieve the goals of the PFA, s 18 effectively professionalises the pension funds industry. These professionals assume fiduciary duties towards members in terms of s 19. This is not unique to Lesotho.
Some countries in the 21 century impose fiduciary responsibilities to service providers. In terms s 61, the fund administrator is the only exceptional service provider because in addition to members, it also assumes fiduciary responsibilities towards the fund as a corporation. There is a list of professionals in s 18 that are required to be appointed by the board. There are costs associated with these appointments which the fund must pay and depending on how the fund is structured, these costs are likely to be borne by members through the contributions made to the fund. The professionalisation of the industry through s 18 is one of the drivers in the cost of administration of pension fund businesses.
Another aspect of the PFA that is likely to drive the costs of administration is s 19. As alluded to earlier, this imposes fiduciary duties on service providers. Fiduciary duties are the highest set of legal obligations that a person can owe to another person. Section 19 requires the fiduciary (the one who has the duty) to always act in the interest of members (to whom the duty is owed). It also expects the fiduciary to be impartial in their dealings with members and avoid conflict of interests. Compliance with s 19 has both a substantive and structure component. The substantive component revolves around treating member fairly by always acting in their interest. The structural component involves an intrusive element into how the service provider is structured and governed.
The governance of a service provider is expected to be designed to achieve the objectives of s 19. One of the positive aspects of the PFA is that it does not prohibit a service provider to wear different hats as long the fiduciary obligations in s 19 can be fulfilled. This arrangement is not unique to Lesotho. In Canada, the Pension Benefits Act 1990 permits a service provider to wear different hats. For example, an employer is permitted to self-administrator a pension fund, where they have a different relationship. In relation to their role as an administrator, the employer has a fiduciary responsibility towards members, and different responsibilities in their role as an employer.
A breach of the obligations in s 19 may attract huge liability, including personal liability against directors of service providers. Some commentators have even suggested that a service provider may need to consider taking up fiduciary insurance to protect the interest of members. The potential risk of liability arising from s 19 as a cost driver in the operations of pension fund will likely be built into the cost of doing business by service providers to be transferred to members.
Another important costs driver comes from a sister legislation, the Financial Consumer Protection Act 2022 (FCPA), which applies to protect pension members. Section 45 of the FCPA requires a financial service provider to establish an adequately independent internal complaints handling mechanism to consider and resolve complaints raised consumers. These consumers include pension fund members or their beneficiaries. Most of the service provider listed in s 18 of the PFA are financial service providers within the meaning of the FCPA and are required to comply with the requirement in s 45.
The PFA is also costly to employers who participate in the fund. Section 29 imposes a daily administrative fee of M10,000 against an employer who fails to pay pension contributions on time. Also, unlike in the past where, an employer could without much restriction deduct money from an employees' pension benefits, s 33 has imposed strict requirements to protect employees who are members of a fund. Where there is a need for deduction, an employer must request the fund to deduct. The fund is required to weigh the competing interests of the employer versus those of the member before making a decision.
There are justifications for these costs' drivers. The decision to professionalise the industry is progressive and must be balanced against measures in s 19 that protect member interest based on the highest standard of care. Based on a desk top cost benefit analysis of the PFA it is reasonable to conclude that the costs justify the benefits to be derived.
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There is another consideration that justifies these costs. The PFA requires openness over the fees charged by service providers to the fund. For example, s 67 requires that a service provider may not increase the fees unless they have been brought to the attention of members six months before being effective.
The implementation of the PFA is expensive. However, the expenses are justified by the objectives sought to be achieved. In other words, the professionalisation of the industry is a positive development which comes at a cost. The disclosure of fees is another positive development that has potential to manage these costs. This is especially important because most funds in Lesotho are defined contribution funds, whose members bear the cost of administration and investment of funds. To aid in their financial planning, it is significant that the PFA introduced this requirement of disclosures.
The decision to professionalise the pension funds industry; impose the disclosures of fees to members; impose independent dealing between the fund and service providers are important checks in the PFA to ensure the achievement of its two main goals.
In the end, all stakeholders (including the Central Bank of Lesotho) in Lesotho's pension fund sector have a common mission: to achieve the two main goals of the PFA.
Mtendeweka Mhango is the Metropolitan Research Chair, a joint initiative between the National University of Lesotho and University of Limpopo.
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