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DUTY OF PENSION SCHEME MANAGERS TO THE MEMBER BENEFICIARIES -JUDICIAL ENFORCEMENT & INTERPRETATION

By: IT Support October 30, 2020 no comments

DUTY OF PENSION SCHEME MANAGERS TO THE MEMBER BENEFICIARIES -JUDICIAL ENFORCEMENT & INTERPRETATION

DUTY OF PENSION SCHEME MANAGERS TO THE MEMBER BENEFICIARIES -JUDICIAL ENFORCEMENT & INTERPRETATION

IAN O. ODONGOH

ASSOCIATE ADVOCATE

Karanja –Njenga Advocates

ianodongoh@gmail.com

The enactment of the Retirement Benefits Act (Cap 197 of 1997) ushered in a new era with regard to the management, administration, investment and general corporate governance over pension schemes. The statute forms the primary legal basis for the standards that are required of any person charged with the responsibility of overseeing the affairs of a pension scheme. Before it came into effect, disputes regarding the management of pension funds were largely left to the interpretation of the contract or trust deed that created the scheme, but with the entry of the law, the obligations owed by managers were given the force of law and brought with it penalties in the event of breach of the obligations.

As with all laws, the ultimate power of interpretation and enforcement lies with the courts, it is therefore crucial to interrogate the interpretation that courts in Kenya have applied to provisions of the law touching on the role of managers.

For the purpose of this article, the only retirement benefits model considered are occupational schemes mainly composed of formal sector workers of companies with schemes. It is worth noting that the Act also covers the National Social Security Fund (NSSF), as well as retail schemes mainly offered by insurers and targeted and individual workers.

By looking at the mischief which existed in the pensions industry at the time of passing the Act, and a brief analysis on pronouncements by judicial officers when applying the law, this article seeks to offer trustees, managers, custodians and administrators of pension and retirement schemes a blueprint on providing ethical and competent fiduciary services that will pass the test of law.

Statutes are proclamations of parliament, it is crucial that in construing a statute, one considers the intentions of the makers. It is for this reason that I will delve briefly into the misconduct and malfeasance that the Retirement Benefits Act intended to reform.

Prior to 1997 the retirement benefits arena in Kenya was not robustly regulated. As mentioned above, managers were only charged with what was provided in the trust deed appointing them. The country lacked a framework to regulate and monitor managers in their duties, as a result of which the interest of scheme members were largely unprotected. The quality and competency of the persons undertaking investment on behalf of the schemes also came into question. This saw members’ funds being invested in ventures that were not practicable and in the long run diminishing returns accruable to members.

Another common challenge faced by the industry was conflict of interest. This is bound to happen where individual members of schemes perform management roles. By having control over the investment direction of a scheme, some unethical managers would collude with property owners to buy properties at exorbitant costs, eating into the margins accruable to the beneficiaries.

There was also undue emphasis on real estate as an investment area, perhaps due to the limitations of having managers who couldn’t appreciate the viability of other ‘sophisticated’ investment avenues. This in turn, exposed members to undue risk in case of systemic challenges affecting the land market, and at the same time denied members of the benefits of having a diversified investment portfolio. To cure this, regulations under the act have made it compulsory that all administrators possess some form of professional training in insurance or related fields. Further, subsequent regulations passed under the Act have divided the different roles and made it unlawful for any one person to for instance act as trustee, administrator and manager at the same time. There have also been regulations prescribing maximum portions of a scheme that may be invested in different types of investments.

Having a background on challenges plaguing the industry at the time of drafting the legislation, we can now consider the standard that would be expected of managers of such schemes. Usually, courts are called upon to apply themselves to interpret the law in instances where it is felt that a trustee, administrator or manager has not represented the interest of members sufficiently. Due to the nature and value of most contracts with respect to pension schemes, all disputes are usually subject to arbitration. The implication of this is that a lot of the commercial disputes revolving around pensions, will go unreported since arbitration proceedings have confidential protection. Our findings therefore are limited to those that have made it to court. Although they aren’t numerous; they are insightful as to the thinking of arbitrators and judges called upon to enforce the Act.

On the competence required of Administrators and Managers, arbitrators and judges have been steadfast in defending members and their interests from subpar administration and management services. Consider a matter in which a noted insurance service provider was sued by a fund scheme in which the insurer was appointed as an administrator. The administrator had failed to register the scheme under the Income Tax Rules which at the time were governing Retirement Benefits. They then went on to administer the scheme, as though it were registered. Members who retired received dues in excess since the tax obligation which wasn’t paid as per the regulations. The members who remained weren’t as fortunate since when the tax man realised what was happening, placed the total tax burden (since inception) on the remaining members. When the dispute arose, the scheme rightly argued that they had placed reliance on the skill, knowledge and competence of the administrator. The administrator on the other hand tried to argue that under the Trust Deed which appointed them, they had no duty to register the scheme under the income tax rules. In upholding the competence rule, the both the arbitrator and court found that the tax loss which the members suffered, was directly connected to the duties required on the part of the administrator. Therefore, the insurer was liable to compensate this loss.

In various other decided cases, courts have upheld the oversight mandate as exercised by the Retirement Benefits Authority. There have been instances where the authority has carried out its own investigations into the mismanagement of schemes, confirmed wrongdoing and rightfully expelled trustees and other officials. Attempts by affected officials to subvert the mandate of the authority by going to court; have fallen flat. This goes to show that administrative actions taken by the authority to weed out irregular practices will always enjoy protection from courts.

The impact of the Retirement Benefits Act to management of pension schemes cannot be understated. It is apparent that the law, and subsidiary regulations provided under it have been aimed at improving the governance of schemes and improving the protection of the benefits of members. For any qualified professional or institution appointed to provide any services regulated under the act; it is imperative that they have these two guiding principles in mind. They also ought to keep themselves updated with current developments in the industry and foresee any risks that might affect the funds they have been charged with overseeing. Instilling professionalism in managing retirement schemes is one sure way of creating public confidence, and inspiring current working generations to take up different pension offerings in the market. This will usher Kenya’s pension sector into a dynamic and vibrant era whose possibilities are limitless!

“Learn from the past, live in the present and create your future” Joel Brown

 

Bibliography

  1. International Organisation of Pension Supervisors –Case Study Kenya 2012
  2. Retirement Benefits Act –Cap 197 of the laws of Kenya
  3. Civil case number 537 of 2013 In the matter of Kenya Industrial Research and Development Institute
  4. Constitutional Petition no. 353 of 2012 in the matter of the Kenya Railways Staff Retirement Benefits Scheme

 

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