Personal Pensions Schemes

Section 120 of the National Pensions Act, 2008 mandates that Occupational Pension Schemes, Provident Fund Schemes, Personal Pensions Schemes and other Privately-Managed Pension Schemes are only managed by Trustees licensed by the National Pensions Regulatory Authority (NPRA).

Trustees as fiduciaries owe undivided loyalty to the members of the schemes, the contributors, and must avoid conflicts of interest, unless otherwise authorised by the contributors after full disclosure. All things being equal, it is the duty of the Trustee to seek the interest of Scheme Members with members, ideally hoping that Trustees with the supervision of the Regulator, National Pensions Regulatory Authority (NPRA) – the custodian of the law, will do the right thing.

The fact that now, Government Securities are not as safe as was envisaged, with the related Domestic Debt Exchange Programme (DDEP), every Contributor and Scheme Member to a privately managed scheme should take personal interest as beneficiaries of what the Trustees are doing and should be doing to make sure the funds are secure. The time to just trust in the process is no more, Scheme Members must now still trust but confirm.

I intend in this article to empower the Contributor (Employers & Employees) and Scheme Members with relevant aspects of the pensions law, the National Pensions Act, 2008 (Act 766) and the Occupational and Personal Pension Schemes (General) Regulations, 2011 (L.I 1990) to be able to question their Corporate Trustees, Trustees of Schemes and especially Independent Trustees on their roles and duties in protecting their interest. Trusteeship is a serious business with grave legal responsibilities, and private pension scheme members must be able to – by law – hold Trustees personally liable for any losses or decisions that are not in the interest of the schemes, especially with respect to the DDEP.

Under Section 98 of Act 766, any contribution received in respect of a member of a scheme is immediately vested as accrued benefits as soon as it is paid to the approved Trustees of the scheme; hence, the Trustees cannot do as they wish with the scheme funds. My focus will be to give the Contributor and Scheme Members insight and knowledge into the role and duty of their pension Trustees, the purpose and use of the Investment Guideline as a risk management tool, prohibited investment practices and exceptions as enshrined in law; so Scheme Members can build the relevant legal issues that will make Trustees personally liable for their actions, inactions, omissions and commissions in relation to the DDEP. The buck stops with the Trustees, their sole job is to protect the pension assets and nothing less.

Role and duty of trustees

A Trustee is obligated under Regulations 28 (d) of the Occupational and Personal Pension Schemes (General) Regulations, 2011 (L.I 1990) to act in the interest of the Scheme Members and not in the Trustee’s own interest, and also required under Regulations 28 (a) of (L.I 1990) to exercise a level of care, skill, diligence and prudence that is reasonably expected of a prudent person who is acting in a similar capacity. The prudent person principle requires the use of common sense and reasonable risk from the perspective of a person with average intelligence when making financial decisions.

Section 168 (4) (b) of Act 766 requires trustees to “take reasonable care to ensure that the management or safe keeping of the pension fund is carried out in the best interests of the members”. There is, therefore, no other consideration for the use of pension funds aside the interest of members.

Unfortunately, inasmuch as the economy seems to be in dire straits, and I wish the private pension funds could do something about it – and they should if they legally can – the trustees’ duty and responsibility is to the beneficiary and any decision made by trustees should only be financially beneficial to the schemes to which they remain trustees. Non-financial or nice to do or let us try to help decisions with this DDEP will put any Trustee in an unpleasant legal quagmire should the members take legal action. Trustees should be mindful that the government cannot save any trustee who takes any decision that is prejudicial to the interest of the scheme member and contrary to law. The operative word in this DDEP is ‘voluntary’, and no gun has been put to any trustee’s head by the government to ‘opt-in’.

There are three types of trustees under the private pensions scheme that pension contributors should be monitoring to make them answerable to any decision with respect to especially the DDEP, that will put their funds at risk – contrary to laws relating to pensions, contract or trusteeship.

These are companies formed only for the purpose of acting as trustees of a particular pension scheme. These companies get licensed by the authority (NPRA) and are mandated to register and administer the various types of schemes; that is Occupational, Personal and Provident Fund. They are trust companies, hence, owe a fiduciary duty to members of the schemes they register.

These are the direct trustees of the various registered schemes by the corporate trustees, and have the responsibility of managing the specific schemes. They owe a fiduciary duty to members of the specific schemes they are managing. Pension schemes are akin to companies, where the scheme trustees are directors with the scheme members, the shareholders. Once shareholders can question directors of a company with respect to decision that are prejudicial to their interest, so must scheme members question the scheme trustees.

These are persons who act like independent directors of a Board, and have no direct or indirect involvement with the pension scheme, sponsoring employer or members other than performing the duties of the trustee. Their presence is needed in all meetings of Trustees and Board of Trustees. Under Regulations 43 (3) of L.I. 1990, “where the Independent Trustee does not agree with a decision in respect of matters involving investment of scheme assets or matters that are prejudicial to the interest of scheme members, the Independent Trustee shall report the matter to the Authority”. Independent Trustees are the go to persons for Scheme Members to seek answers to the performance of their schemes and decisions being taken to protect their funds.

The DDEP is such an extraordinary situation, and Scheme Members – as beneficiaries – must not sleep on their rights as they say by not getting interested in the decisions of Trustees that may have dire consequences on their retirement income. Scheme Members should start seeking audience with their Trustees, and especially the Independent Trustees as to what decisions they have taken and intend to take with respect to this DDEP. The Scheme Members, like shareholders, have the right to determine the direction of the decision of the Trustees with respect to this unique investment quandary.

Trusteeship is not a role for the fait-hearted, and this is the time for trustees to stand up to their responsibilities as to whose interest they represent. Scheme trustees, and especially independent trustees, who put trust assets at unnecessary risk with decision that a prudent person knows or ought to have known that were injurious to the beneficiaries should have themselves to blame. Even if they resign, they should not be absolved from possible law suits that will hold them personally liable for their stewardship as fiduciaries.

Investment guidelines as risk management tools

There exist Investment Guidelines for Tiers 2 and 3 Pension Scheme Funds. This is an investment risk management tool that directs the investment assets that the trustees must invest in. It also gives the maximum Assets Under management (AUM) and pension funds that can be allocated per an asset class. It reduces assets risk as well as concentration risk. Currently, the asset classes with their maximum allocations are as follows:

Source: NPRA Investment Guidelines, 2021

Under Regulation 25 of Occupational and Personal Pension Schemes (General) Regulations, 2011 (L.I 1990), the funds shall be invested only in accordance with investments permitted under the Investment Guidelines as published in the Gazette. This means that any violation is putting your funds at risk, and you should not let the trustees get away with violations that have not been covered by express written approvals by the regulator. Scheme members also have the right to question the regulator on such violations without approvals once identified. You also have the right to change your trustees for such frequent violations even if approved, where there is no reasonable cause to.

There are some risk asset classes, Direct Property Investments (DPI) and Private Debt Funds (PDF), which were introduced in 2021 under Alternative Investments that require your attention. With the DDEP that is likely to or almost put your funds at risk, this is not the time to trust the system, hoping that trustees will be doing the right thing. Question investments into these two asset classes for possible conflict of interest transactions and ‘lift the veil’ on these transactions to know the beneficial owners. Though they are approved investment asset classes under the Investment Guidelines, ask why those investments had to be made and under what circumstance they had to be made?

Again, Repurchase Agreements (Repos) were introduced in the 2021 Investment Guidelines under Bank Securities. However, Regulations 35 (a) of L.I. 1990 states: “An approved trustee of a registered scheme shall not enter into a repurchase agreement with the funds of the scheme”. We have a situation where an Investment Guideline – a guideline – is in clear violation of L.I. 1990 – a statute.

Per Article 11 of the 1992 Constitution, with respect to the hierarchy of laws, where there is inconsistency between Rules or Orders and an Act or Statute, the Act or Statute must take precedence. The Investment Guideline is therefore in conflict with the Act 766 and inconsistent with fundamental law of the land, the Constitution.

Scheme members need to question trustees on the legality of investments in Repurchase Agreements (Repos). Ignorance of the law, as they say, is no excuse; and they cannot hide behind the fact that it is allowed by the Investment Guideline. Trustees are supposed to know the laws relating to their business and that is why they are trustees of the funds.

Prohibited practices, restrictions & exceptions

• External investments – Section 177 of Act 766

External investments refer to the investment of pension fund assets outside the country. Aside subjecting the funds to unnecessary foreign exchange risks, the rationale is not only to make sure pension funds are used to develop the local economy, but to also make sure it does not impact negatively on the foreign exchange mechanisms since to invest outside, the pension funds must buy foreign currency – usually US dollars – in large volumes.

Pension funds playing in the foreign exchange market can have dire consequences on rate volatility; hence, technically, external investments include any investment not in Ghana cedis, such as holdings in foreign exchange or Eurobonds which are basically bonds issued off-shore by governments or corporates denominated in a currency other than that of the issuer’s country.

The framers of the pension laws have taken keen interest of the implications of external investments, such that Section 177 of Act 766 which requires that external investments are approved by the President of the Republic of Ghana upon recommendation by the Regulator through the Minister of Finance. This is the extent of prohibition.

This is an area contributors must watch and make sure their funds are not being put at unnecessary risk. Ask to see approvals and justifications for external investments.

• Restriction on investments – Sections 178 and 179 of Act 766

Under Section 178(a) and (b) of Act 766, a trustee shall not invest pension fund assets in shares or any other securities issued by the trustee or shareholder of the pension fund manager or custodian. Any profit made under such transactions, per section 181(2) of Act 766, must be forfeited to the beneficiaries of the scheme; and any loss surcharged to the trustee and pension fund manager.

These are likely suspicious areas for conflict of interest transactions that require the scrutiny of scheme members, and the need to again ‘lift the veil’ for possible related party transactions.

• Holding securities to maturity – Regulations 35 (b) of L.I. 1990

“An approved trustee of a registered scheme shall not end securities held in respect of the scheme.” This means private pension funds are mandated to hold securities they purchase till maturity.

Trustees may be walking on a tight legal rope should they go ahead in accepting the DDEP since it would amount to ending existing securities to purchase new ones. Existing bonds purchased by pension funds as per the law must be held to maturity; therefore, a debt exchange or any other arrangement will be ending a security. What scheme members must ask their trustees should they accept any DDEP is whether or not they acted within the law. The courts will have to decide.

• Conflict of interest & encumbrance of scheme assets – Regulations 35 (a) & (d) of L.I. 1990

“An approved trustee or pension fund manager shall not invest pension fund assets in instruments that are subject to any type of prohibitions or limitations on the sale or purchase of such instruments.” Also, “An approved trustee of a registered scheme shall not subject the scheme assets to any encumbrance”.

This means the trustees should not invest in assets that are restrictive by way of ability to liquidate or sell, or which adversely affects its use. This brings to mind other possible arrangements with the pension funds aside bond exchange such as debt/equity swaps in State Owned Enterprises (SOEs) whose shares that are not tradable, basically restrictive and a burden to the scheme.

Scheme members must question any arrangement by the trustees that burdens the scheme with assets that do not generate regular cash flows. Also, assets that have limitations on the sale and were purchased for other considerations, except financial and not in the prime interest of the scheme, need to be questioned for justification.

Role of labour unions in the DDEP

The role of organised labour – labour unions – is to promote economic and social interest of its members as registered under the Labour Act, 2003 (Act 651). The labour unions seem to be in the forefront in the engagement with government with respect to the DDEP, which is in line with seeking the economic interest of its members. Under Section 98 of Act 766, scheme funds are immediately vested in the name of members of the scheme; and legally, I doubt if the labour unions can decide on what has to be done with someone’s private funds, especially if the decision will be detrimental to them. The engagement with government is, however, okay only to the extent of moral suasion by government to get the labour unions to also engage their members, who are beneficiaries of the schemes to accept the DDEP.

I do not even think the labour unions are clothed with the authority to determine how funds that are already vested in the individual names of members of the scheme, and who just happen to be their members, should to be treated or invested without seeking their express consent.

Assuming, but not admitting, that the labour unions can agree on an arrangement with the government with respect to the DDEP that will bind their members, the schemes do not belong to only the members of labour unions; so I wonder how the labour unions can legally bind funds of non-union members.

I am yet to see a section in the law relating to Tiers 2 and 3 private pensions, where there is a relationship between the labour unions and trustees of the schemes or role of labour unions in the direct investment of funds that have been vested in the names of scheme members. Trustees cannot take decisions based on agreement reached by labour unions without the express consent of their members.

The point is, labour unions do not have the final decision with respect to the DDEP if it is going to be prejudicial to scheme members who are their members. They need to touch base with their members for them to give express consent to their trustees should they want to play that front role.

Role of scheme auditors

Section 168 (4) (c) of Act 776 requires that an auditor of a pension scheme reports to the regulator acts that are likely to adversely affect the rights of the members of the scheme. Scheme members must, therefore, hold scheme auditors responsible for failure to report such acts, especially with respect to decisions relating to the DDEP that will adversely affect their rights.

Seeking redress for disputes with trustees

• Pensions Adjudicating Committee

Under Section 202(1) of Act 776, an employee or beneficiary of a scheme who is dissatisfied with a decision of the trustee must request the regulator in writing to review the decision in accordance with the law. The regulator is, therefore, the first point of call should the scheme members feel their interest have not been professionally protected by the trustees. All things being equal, the regulator should be in a position to resolve the issue.

The regulator, under Section 205 of Act 776, is mandated to set up a Pensions Adjudicating Committee to determine petitions or complaints relating to, among others, the quality or quantity of benefit. Any decision by trustees that will affect the quality of benefit with respect to the DDEP can be petitioned.

• Appropriate dispute resolution

Under Section 203 of Act 776, where the beneficiary of a scheme is not happy or convinced with the decision of the regulator, the issue may be settled through any appropriate dispute resolution (ADR) mechanism.

Appropriate refers to dispute resolution mechanisms such as mediation, arbitration, and possible court action – whichever may be appropriate in the circumstance as the scheme member thinks fit. The regulator cannot also be absolved in the DDEP uncharted waters.

Way forward

• Approval from scheme members on DDEP

The DDEP is such an extraordinary situation which will have grave negative impact on the fortunes of retirement incomes that Corporate Trustees and Scheme Trustees do not have the business as usual authority to take a final decision to opt-in on behalf of the beneficiaries of the schemes. Trustees must find a way to seek express approval from their scheme members to avoid unpleasant legal actions that will be costly to their persons. The lawyers are just waiting for the call.

Labour unions need to touch base with their members since unlike public pensions (tier 1) which may be mandated to take decisions that will collectively bind their members, private pension funds (tiers 2 and 3) are vested in the individual names of their members, and their express consent is needed.

• Right to port accrued benefits

Under Section 100 (3) (a) of Act 766, the accrued benefits of a member of the scheme may be transferred to another registered scheme to which the member is eligible to belong. The Corporate Trustee, under Section 100 (4) of Act 766, is obliged and mandated to comply with any request for the transfer of accrued benefits.

This is the window for scheme members to punish Corporate Trustees who refuse to seek their interest or perceived not to be seeking their interest. Corporate Trustees earn fees from the funds they manage, and moving the funds will hit their business hard. Porting is power in the hands of contributors, use it!

Call for an Extraordinary General Meeting (EGM) of scheme members. This is crucial since the DDEP is not business as usual but an extraordinary situation; and you need to make sure the ramifications of any decision you have taken or about to take is ratified or approved by the members. This is not the time for trustees to absolutely think they have the authority by law or power to take decisions. The DDEP is a very grey area for which all parties from the government side are trying to play safe. The Ministry of Finance says it is ‘voluntary’, and the Attorney-General says it amounts to a breach of contract should it be done without the express consent of bond holders.

Trustees do not play ‘Rambo’, trying to save a failing economy for something that may end up in the law courts for you to defend your decisions. This could make you personally liable for unexplained losses or reckless decisions that puts the assets you are holding in trust for some beneficiaries to avoidable risks. I have conveniently left out fund managers in any liability to scheme members for a good reason – that fund managers are agents of Corporate Trustees, and the buck stops with the trustees.

To the Independent Trustee, this is the time to stand to be counted since you are a key person named by Act 766 and L.I. 1990 as a ‘watchdog’ to protecting the assets of the schemes. By law, decisions are not to be taken by Board of Trustees in your absence; and any such decisions, once taken, need your ratification. You have a big load to carry and likely to be more at risk should scheme members seek redress. You cannot even resign without being questioned for your inactions and omissions that could have saved the situation should a decision be taken by the Board of Trustees that is not in the interest of the scheme and you failed to stop it. Remember it is not for nothing that your physical presence is need in all Board of Trustees meetings.

The government knows and has been cautioned by the Attorney-General that it cannot take a unilateral decision on the DDEP with respect to the Private Pension Funds; hence, having audience with the Corporate Trustees who are holding the funds in trust for their scheme members, the beneficiaries. In the same vein, in such an extraordinary situation, the trustees – to avoid potential legal suit – must also seek audience with the scheme members to get their buy-in and express consent. This is a unique situation and trustees cannot take any decision that will be prejudicial to the schemes without getting approval from the beneficiaries who own the scheme assets.

Conclusion

This whole ‘hair cut’ Domestic Debt Exchange Programme (DDEP) has broken the needed trust needed in investing for our pensions. All things being equal, contributors should be assured and go to sleep that their trustees and the regulator will at all times seek their interest. Unlike public pension (tier 1), which is a contract based on the contributor meeting some conditions, private pensions (tiers 2 and 3) is a ‘regulated promise’ of a safe and fair return into the future. Now that the trust in even the risk-free return has been broken, it is about time scheme contributors and employees kept confirming while trusting that their interest are being protected at all times.

To scheme members, do not wait to close the door after the horse has bolted; put your destiny into your own hands. Question the decisions of Corporate Trustees, Scheme Trustees and especially the Independent Trustees by asking what I will call the 3 whys – why?, why? and why?. Ask why they took a particular decision, and in their response, ask another why. And after their second response, ask the last why to be convinced the decision is in the interest of the scheme. If not, first move the funds by porting to another trustee to let them know you are in control; then seek redress if the decision has been gravely detrimental to the fortunes of the scheme.

To trustees, I advise you call an EGM to seek express consent from scheme members to also save yourself since the government functionaries have a window of legal protection by putting you on actual notice that the DDEP is voluntary and subject to a breach of contract if the consent of beneficiaries is not sought. So for the trustee, the ‘litmus test’ for your decision is: would the average person take the decision you have taken and arrive at the same investment decision? If the answer is yes, you are free to go; but if the answer is no, then you have a question to answer to the scheme members, which can legally subject you to personal liabilities when found to be in breach of your fiduciary duties.

Finally, I would say the good thing about how the pension laws (Act 766 and L.I.1990) have been drafted is to protect scheme members from situations we currently find ourselves such as the DDEP. When the dust settles, hoping the trustees seek protection in the law and stick to their fiduciary duties, private pensions would be seen as a safe industry to invest. It would have stood the test of time and there would be growth in the business. Trustees and scheme members are counting on you as their only hope for the future in these trying times. Should you fail them, you would have a lot to answer, and it would not be pleasant. The buck stops with you.

The author is a Chartered Banker. Holds an LLB and a Post Graduate Diploma in Financial Management (ACCA). He was the former CEO of National Pensions Regulatory Authority (NPRA).

(Contact: [email protected])