RBA Trustee Training Seminar

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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

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CONTENT

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

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• HISTORICAL CONTEXT AND CONCEPT OF A TRUST

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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 employers
  contributions were not seen as part of employees
  pay but (like gratuities) still viewed as a
  reward for long service.

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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.

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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.

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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.

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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.

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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.

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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,

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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 employers creditors.
• Overcomes the problems of privity which can arise
  when dependants seek to enforce the pension
  promise.

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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.

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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 trustees 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.

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• DUTIES OF A TRUSTEE

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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.

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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

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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.

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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.

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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.

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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.

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• SPECIFIC DUTIES UNDER THE RETIREMENT BENEFITS ACT

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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.

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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

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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.

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• CONCLUSION

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• 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.

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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.

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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.
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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.

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Thank You
Asante www.rba.go.ke