When personal liability kicks in, the consequences for trustees of retirement funds can be dire.

 

In a trial that goes before the South Gauteng High Court next week, four erstwhile trustees of the IF pension and provident funds will be hoping for relief from a determination by the Pension Funds Adjudicator that they be held personally liable for some R17m in expenses which the funds had incurred. The Adjudicator is not party to the litigation.

 

Should judgment go against the former trustees, each of them would be exposed to pay over R4m from their own pockets. Plus costs of the litigation. Plus legal expenses in the protracted run-up. Whichever way the court decides, the warnings for existing and aspirant trustees are stark (see box).

 

The two IF funds are umbrella arrangements for a few dozen participating employers and several hundred employees. The former trustees -- Gail le Grellier, Renier Botha, David Lepar and Carel Smith (the ‘IF Four’) – seek an order to set aside the Adjudicator’s 2013 determination.

 

Her declaration was that that the IF Four had managed the funds improperly, causing them financial loss, and directed that they personally pay the funds for the database rebuild they’d commissioned. The IF Four want the complaint to the Adjudicator, by various employers who contend that the rebuild should not have been paid from deductions in the members’ share of funds, to be reheard afresh.

 

The cost of the rebuild was R18,2m. This is what the IF Four would have to pay, jointly and severally, minus R1m that had been paid in settlement (without admission of liability) by Tony Kamionsky of Dynamique (the predecessor to Aon as the funds’ administrator).

 

According to the IF Fours’ heads of argument, they had been advised by Aon (appointed in 2008 to take over from Dynamique) that the funds’ membership data was inaccurate. Having received two quotes, they appointed accountancy firm Deloitte to rebuild the records.

 

The trustees resolved that the costs of the rebuild be paid by a levy of roughly 2,5% against the funds’ assets. Participating employers proceeded to complain to the Adjudicator against the levy’s imposition.

 

The IF Four were not accused of themselves having maladministered the funds. Rather, as trustees, the complaint was that they were responsible for the actions of then administrator Dynamique. To the extent that Dynamique had maladministered the funds, the IF Four were responsible either vicariously or because they had failed to exercise proper oversight.

 

However, it’s argued in their heads, the IF Four were appointed long after the funds’ inception in 2004. It was only during their later tenure that they became aware of the funds’ financials not having been audited. And only once Dynamique had been replaced by Aon did it become clear that the funds’ data “lacked integrity” and were “unreliable”.

 

The IF Four cannot be held accountable for the unreliability as if they were its cause, they say. The unreliability did not arise when they became trustees but had its origins when the funds were incorporated. At the time, none of the IF Four were trustees.

 

The complaint does not suggest how or when the IF Four should have acted: “If the end result is the same, then the complainants cannot be said to complain about having suffered any prejudice as a result of (the IF Four’s) alleged failure properly to oversee Dynamique’s administration of the IF funds.”

 

For example, Le Grellier took office in November 2006. Ought she immediately to have discovered the maladministration by Dynamique? If so, what should she have done?

 

Should she immediately have terminated Dynamique’s administration in 2007 and, if so, what would the new administrator do on its appointment? Would it have immediately drawn her attention to its inability to finalise the financial statements, because of the membership data’s unreliability, or would this have taken some time to discover?

 

Irrespective of whether the discovery was immediate or later, it’s argued that the rebuild exercise was “necessary, prudent and inevitable”.

 

The issues that the IF Four want decided are whether:

  • They ought to be held personally liable for the maladministration by Dynamique and Kamionsky;

  • Their decision to treat the costs of the rebuild as a special expense to the funds was a proper exercise of their powers as trustees;

  • The costs of the rebuild ought to have been recovered from the professional indemnity (PI) insurance cover held in respect of the trustees and the funds.

When the rebuild was done, it’s suggested in the heads, there was no claim and no loss suffered by the funds. Further, the PI policies excluded liability relating to “any claim/loss arising in any way from the issues raised by the auditors following their audit for the year ended 28 February 2006”.

 

These issues concerned the data’s unreliability and the material weaknesses in the funds’ records. They stemmed from a time prior to the appointments of the IF Four and ultimately led to the necessity for rebuild.

 

Moreover, the argument runs, Aon had failed to pay the PI premiums for the year to end-July 2011. But even if the premiums were paid, the insurers had advised that they would have elected to void the policy due to Kamionsky’s misrepresentation and non-disclosure.

 

Clearly, the principles awaiting decision are not confined to a single dispute. They have wide application to the proper exercise of trustees’ fiduciary duties.

 

  • Allan Greenblo is editorial director of Today’s Trustee (www.totrust.co.za), a quarterly magazine mainly for the principal officers and trustees of retirement funds.