RBA Trustee Training Seminar

RBA Trustee Training Seminar The General Role and Responsibilities of Trustees Presentation by Nkirote Mworia Njiru Legal Affairs Department – Retirement Benefits Authority Trustee Training Seminar Intercontinental Hotel, 1st February 2008

CONTENT I The Historical Context and Concept of a Trust II Duties of a Trustee III Specific Duties Under the RB Act IV Conclusion

HISTORICAL CONTEXT AND CONCEPT OF A TRUST

History of Pensions – From Gratuity to Deferred Pay • Before the introduction of occupational pension schemes, pensions were purely ex-gratia in nature. • An employer would make some provision for the retirement of old employees who were too sick to work. • By the end of 19th century ad hoc discretionary arrangements had given way to more formal schemes. • But still largely gratuitous – employer’s contributions were not seen as part of employees pay but (like gratuities) still viewed as a reward for long service.

History of Pensions – Legal Forms • The original legal form of pension schemes was based on private statute or friendly societies. • By beginning of the 20th century they increasingly took the form of a trust. • In 1921 the trust became the universal basis for private occupational pension schemes because of the introduction of tax relief. • The Finance Act of 1921 gave tax relief to pension schemes which took the form of an irrevocable trust.

History of Pensions – Social Issues • The trusts had to take a specific form to qualify for tax relief thus giving employers less discretion in drafting trust terms. • Expansion of occupational pensions after World War II led to greater regulation as what was previously a privilege became a common term of employment. • Greater public focus on macro-economic effects of pensions led to introduction of concepts geared towards preservation of the pension such as vesting, deferment and portability. • Greater union involvement in negotiation of pension rights increased awareness - once pensions could be preserved they were no longer regarded as ex-gratia reward for long service but as deferred pay.

Historical Context of the Trust • Trusts were first used around the 12th - 13th century and basically started out as a tax avoidance mechanism to avoid punitive property inheritance laws. • The trust mechanism is unique in that it separates legal ownership of trust property from beneficial ownership. • An early example of a trust arrangement would be where a wealthy landowner would transfer legal ownership of his property to a group of trusted friends while retaining the use of it for the rest of his life. • The advantages were that if he died there would be no death duties since the property was not in his name or if his children were young the trustees would manage the estate until they reached the age of majority. • The development of trusts was only possible with the development of the “Courts of Equity” (Chancery Courts) which were able to enforce trustees’ obligations and beneficiary rights.

What is a Trust? “The word TRUST refers to the duty or aggregate accumulation of obligations that rest upon a person described as a trustee. The responsibilities are in relation to property held by him or under his control. He will be compelled by a court in its equitable jurisdiction to administer that property in the manner lawfully prescribed by the trust instrument… As a consequence the administration will be in such a manner that the consequential benefits and advantages accrue, not to the trustee, but to the persons called the beneficiaries.”

Classic Definition of a Trust The definition of a trust can be broken down as follows :- • “an equitable obligation, binding a person (called a trustee); • to deal with property over which he has control (called the trust property); • for the benefit of persons (called the beneficiaries) of whom he may himself be one.”

Understanding A Trust • What is the difference between a trust and other legal concepts? • Contract – the general rule is that a contract is not enforceable by a person who is not party to the contract; whereas a trust can be enforced by a beneficiary who is not necessarily a party to the instrument creating a trust. • Estates of deceased persons – a personal representative or an executor of a will or administrator in case of intestacy, is a trustee for creditors and beneficiaries claiming under the estate of the deceased. But the functions of personal representative are to wind up the estate, pay debts and apply the net estate to the beneficiary entitled under will or intestacy. Trustees duty is to administer a trust on behalf of beneficiaries. • Agency - a relationship between agent and that of principal is that of creditor and debtor. In a trust, a trustee has a full title to the trust property, the agent has not. Agent acts on behalf of principal and subject to his control, trustees do not. Agency is based on agreement,

Advantages of the Trust Mechanism • A trust is inexpensive to set up. • Allows flexibility of terms. • Establish a separate fund to meet the costs of pensions thereby increasing the certainty that pensions will in fact be paid. • Allow employees to participate in the administration of the scheme. • Puts the assets of the pension scheme beyond the reach of the employer’s creditors. • Overcomes the problems of privity which can arise when dependants seek to enforce the pension promise.

The Trust Deed and Rules • This is the document that creates the trust and can be considered to be the constitution of the scheme • It is necessary to obtain professional advice on its preparation as it is an extremely important document. • The rules are the operational details of the scheme and contain everything that a member needs to know about the scheme. If possible it should be summarized into a small booklet and distributed to members. • The Retirement Benefits Act requires that schemes be established under an irrevocable trust.

The Trust – Central Concepts and Idea • The central concept of a trust is the idea of a trustee as a fiduciary: one who holds property on behalf of others and acts in their interests rather than the trustee’s own. • When a trust deed is drafted the intention is to make use of the concepts of:- • fiduciary relationship; and • the law of trusts (aggregate of statute and case law that has developed around the long historical use of trusts) • The trust deed therefore does not need to set out everything that trustees can and cannot do; otherwise it would be too long and complicated. • Trusts are highly flexible and adaptable to circumstances.

DUTIES OF A TRUSTEE

Duties of Trustees I – Introduction • When trustees exercise discretionary powers they are required to exercise them on a “fiduciary” basis. • In the context of a pension scheme does this means trustees represent members interests or do they decide between the interests of the employer and members? • The answer is neither: trustees must act in the best interests of beneficiaries, and impartially between all categories of beneficiaries. The employer is not a beneficiary and the trustees obligations to the employer are limited unless specifically stated in the trust deed and rules.

Duties of Trustees II – Fiduciary Duties • A person in a fiduciary position is not, unless expressly provided, entitled to make a profit: s/he is not allowed to put themselves in a position where their personal interest and their duty as a trustee conflict. • There are two main fiduciary duties imposed by equity: • Duty not to profit from the trust • Duty not to delegate the trust

Duties of Trustees III – Acceptance of the Trust “On accepting a trust, new trustees are bound to inquire of what the property consists that is proposed to be handed to them and what are the trusts, and they should examine all the relevant documents in order to ascertain that everything is in order” • This is important because, as we shall see, trustees duties are personal in nature and a trustee cannot plead ignorance of a state of affairs of a scheme. • If a trustee accepts the office of trustee s/he must discharge its duties as long as their trusteeship subsists. The law does not distinguish between active and passive trustees and a trustee is fully liable to the beneficiaries for any loss that occurs even where the management has been delegated to a third party. Trustees are jointly and severally liable and an aggrieved party may elect to sue one, some or all of them for redress.

Duties of Trustees IV 1. Duty of Trustees to act unanimously. • Unless stated otherwise in the trust deed all decisions of the trustees must be made by all of them. If the rules provide for a majority decision, then that decision binds the minority. 2. Duties in Relation to Information, Accounts and Audit • Trustees must not only keep proper accounts and allow the beneficiary to inspect them, but must also on demand, give the beneficiary information and explanations as to the investments and dealings with the trust property. • The beneficiary is entitled to see all trust documents because they are trust documents and s/he is a beneficiary. They are in a sense his own documents. • This duty of course has practical limits and cannot be strictly observed at great financial cost to the trust itself.

Duties of Trustees V 3. Duty to Act in the Beneficiaries Best Interests • It is not enough to act in good faith and with good intentions if the action taken is not in the beneficiaries best interests. 4. Duty to Exercise a Power in accordance with its purpose • E.g. power to invest in real estate is not a power to provide housing for members. 5. Duty to Exercise Power in an Impartial Manner 6. Duty of Good Faith • i.e. duty to avoid dishonesty.

Duties of Trustees - VI 7. Trustees Standard of Care The accepted principle is that trustees should use such due diligence and care in the management of the trust as an ordinary prudent person of business would use in the management of his/her own affairs. 8. Trustees Discretion A discretion must be exercised as a result of an active mental process – deliberations are key – and a situation must not be allowed to arise merely as a result of inaction.

SPECIFIC DUTIES UNDER THE RETIREMENT BENEFITS ACT

Specific Duties of Trustees Under RB Act I • SECTION 40 ensure that the scheme fund is managed at all times in accordance with the RB Act and Regulations, as well as the scheme rules and any directions given by the Authority; and take reasonable care to ensure that the management of the scheme is carried out in the best interests of the members and sponsors of the scheme.

Specific Duties of Trustees Under RB Act II • SECTION 34: keep all proper books and records of account of the income, expenditure and assets of the scheme fund and within a period of six months after the end of each financial year, ensure that accounts are prepared. By implication, this involves: • Developing long-term financial plans for the scheme • Operationalise strategic plans by developing annual budgets and strategies • Record Keeping of all the administrative and financial transactions – requires developing an accounting system with internal control measures • Enlist services of professionals where necessary but must take full responsibility as the appointing principal e.g. administrators • Valuation of assets must be carried out by Independent, Registered and Licensed members of the Institute of Surveyors and Valuers of Kenya in accordance with IAS 16 • Account for their stewardship by reporting back to stakeholders on the financial performance of the fund, giving a true and fair position of the schemes fund. • Appointment of auditors and facilitation of annual audits • Filing of statutory returns with the regulator

Specific Duties of Trustees Under RBA Act IV • SECTION 37: Trustees must ensure that the scheme has a prudent investment policy on the investment of its funds so as to maintain the capital of the scheme and to secure market rates of return on its investments. The investment policy of a scheme must be implemented subject to any regulations made for that purpose by the Minister in consultation with the RBA. • SECTION 38 No scheme funds can be used to make direct or indirect loans to any person; or invested contrary to any guidelines prescribed for that purpose; or invested with any institution with a view to securing loans at a preferential rate of interest to the sponsor, trustees, members or the manager of such scheme – exception is proportion of benefits that may be assigned for the purpose of securing a mortgage facility on such terms as the Minister may prescribe. • SECTION 35: Trustees may be required by the RBA to have a schemes evaluated by an actuary appointed by the trustees with the approval of the RBA.

CONCLUSION

Practical Issues Trustees Encounter • Investment policy: SHOULD BE PREPARED WITH THE HELP OF AN EXPERT and limits should be set out in the trust deed in accordance with the guidelines set in the RB Act. • Appointment of service providers: should be done after careful shopping around in the market • Guidelines on how trustees are appointed and removed from office.

Practical Issues • Withholding of members benefits in order to off-set liabilities the member may have with third parties must be avoided. • Members withdrawing from the scheme must be paid their properly computed withdrawal benefits within ninety (90) days of the effective date of withdrawal or interest is chargeable. • The trustees must convene an annual general meeting of the scheme members. • Payment of death benefits. This is a tricky area as the RBA gives trustees discretion to deviate from a members express wishes for good cause and the benefits do not form part of the estate of a member for the purpose of administration.

Penalties The general penalty for breach of trust is a fine not exceeding one hundred thousand shillings or imprisonment for a term not exceeding one year or both. However some provisions carry higher sentences e.g. Under Section 34 of the Act, a Trustee who fails to submit audited accounts within six months of the financial year shall be liable to a fine not exceeding five hundred thousand shillings or a term of imprisonment not exceeding two years or both.

Conclusion • The officers of the Retirement Benefits Authority are available as a point of reference for you. • The members of the scheme are relying upon you as trusted friends. • The sponsor of the scheme is giving an opportunity for you to receive invaluable experience in decision making.

Thank You Asante www.rba.go.ke

RBA Trustee Training Seminar