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Retirement Fund Trustee Liability - The Long Overdue Correction

By Lucian Carciumaru

Camargue Underwriting Managers (Pty) Ltd

The previous decade produced minimal claims against the Retirement Fund Trustee Policy (the Policy). This of course meant that the scope of cover was widened drastically, whilst premium rates dwindled.

To illustrate the extent of the widened scope of coverage, consider that Policies were now not only covering the Retirement Fund (the Fund) and its trustees, but also any third party service provider of the Fund. In other words, if any person doing work for a Fund causes a loss (under the defined events), the Policy will indemnify the said Fund. Typically, the Insurer would then attempt to subrogate against the third party that caused the loss. From a pricing point of view, the premium rate decreased to below 0.1% of the limit of indemnity on scheme business.

This type of cover has resulted in numerous issues which has ultimately made the risk uninsurable in this manner. It is impossible to accurately underwrite the various third party service providers of the Fund. When trying to subrogate, various third parties service providers who have caused the Fund a loss, would rather commence a legal battle instead of claiming under their own professional indemnity (PI) or fidelity guarantee (FG) policies. It is not uncommon for an investment manager, who is looking after billions of Rands of pensioner’s money, to only take out R 5 million PI and FG cover. One also often finds that some third party service providers will limit their liability to the Fund in service level agreements. This has really rendered the subrogation clause in the Policy ineffective.

Retirement Funds are controlled by a board of trustees that often outsources all responsibilities to service providers. These providers often control the Fund and when a loss occurs, they rely on the Policy for cover. A claim is often first put through under the Policy instead of the provider’s PI and FG policy.

All this has led to astronomical loss ratios and virtually only one Insurer in the market. Attempts are now being made to underwrite and price this product in a sustainable manner. Let us now look at the Policy cover, bearing in mind that Funds are required by law to purchase insurance under the Pension Funds Act, Regulation 30(2)(u).

The typical Policy broadly covers a retirement Fund (the Fund) and its officers (defined as trustees and all third party service providers) for three main events. The first would be for errors and omissions, or as some may call it, negligence. Simply put, this section covers the Fund and the officers in the event that as a result of an error, neglect, and omission (among many other examples), on part of the officers or the Fund, a loss occurs to the said Fund, and therefore the Fund’s members.

The second area of coverage is broadly fidelity guarantee. This would mean that the Policy responds if the Fund suffers a loss as a result of theft, fraud and dishonesty by a person in their fiduciary capacity.

The third aspect of cover is that of third party computer crime. This is generally a loss caused by the fraudulent or dishonest entry of data into the Fund’s computer systems.

The equivalent of this Policy in Europe and the United States only provides cover for the Fund and its trustees at triple the South African premium rate. A process has commenced in order to bring the South African Policy wording in line with international standards. For instance, cover will no longer be provided for losses caused to the Fund by investment managers. This normally leads to catastrophic losses, which cannot be underwritten by a retirement fund insurer. Cover for losses caused by Fund administrators is sub-limited to the least of the amount which the administrator has limited their liability by, the PI/FG cover which is taken out by the administrator, or the limit of indemnity of the Policy.

The various boards of trustees in the retirement fund industry are being urged to take responsibility when entering into agreements with third party service providers. One must ensure that liability is not limited in service level agreements and that the provider is taking out ample PI/FG cover.

Camargue Underwriting Managers is now the leading market player in the retirement fund space. We are applying the same philosophy which was founded 10 years ago, of specialised risk management liability policies. As we provide cover through Lloyd’s and Mutual and Federal, our retirement fund clients receive various other benefits such as mediation and arbitration, trustee education, retirement fund governance reports, and verification of large payments.

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