National Provident Fund Final Report [Part 15]
Below is the fifteenth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002.
NPF Final Report
This is the fifteenth extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Some of the commission’s recommendations regarding the NPF cover the same topics dealt with in the Superannuation Act. The commission hopes that its recommendations, which are specific to the NPF and the NPF Act will be considered as part of the general policy development, which is now occurring.
List of the Commission’s recommendations on the structure of NPF between 1995 and 1999
At the paragraphs in Schedule 1 listed below the commission has made the following recommendations:
Selections, qualifications and quality of Trustees
(a) The Minister’s powers of appointment and termination of appointment of trustees should be removed;
(b) There should be no public service representative trustees on the board of NPF;
(c) The ex officio appointment of the Secretary of DoF as chairman of the NPF Board of Trustees should be removed;
(d) The chairman should be appointed by the board;
(e) New employer representative trustees should be selected and appointed by organisations representing employers (They need not themselves be an employer);
(f) New employee representatives should be selected and appointed by organisations representing employees (They need not themselves be an employee);
(g) The organisations entitled to take part in the selection and appointment of Trustees should be specified in or under the legislation;
(h) Prior to appointment, all selected trustee designates should be vetted by the regulator and satisfy the regulator that they are fit and proper persons to be appointed as trustees;
(i) The process of applying the “fit and proper person test” should be an administrative rather than a judicial or quasi-judicial process; it must be fair but not subject to review by the courts;
(ii) The onus of establishing a person as fit and proper should be upon the applicant or organisation that has selected the applicant;
(iii) The decision should be made by a committee which could be comprised of the Chief Ombudsman Commissioner, the chairperson of Amnesty International and the president of the Law Society;
(iv) The committee should be empowered to request a police clearance and be entitled to seek the opinion of the Ombudsman Commission;
(v) There should be a right of review from the committee to the Governor of the BPNG whose decision should be final and not reviewable by the courts;
(i) The concept of fiduciary duty of trustees should be expressly stated in the NPF Act. It should also be stated whether the more stringent duties imposed by the Trustee Act apply to NPF Trustees. The commission recommends that they should
(j) The sanctions against criminal, negligent and improper conduct by trustees should be strengthened; and
(k) The concept of appointing the managing director, as a member of the board should be reconsidered. The board’s role is to appoint, direct and supervise the managing directors. The managing director’s role is to carry out the board’s policies and directions and report to the board. It is inappropriate that he/she be a member of the board and it leads to role confusion.
The appointment and termination of appointment of Trustees
(a) Remove ministers and politicians from the process for selecting and appointing trustees;
(b) There should be an express statement in the legislation that the board has the responsibility to advise the appointing authorities of pending vacancies. It should empower and oblige the board to fill casual vacancies on the board (after vetting by the regulator) until a new trustee is duly appointed by the appointing authority;
(c) Draw up a clear statement of duty for the corporate secretary to monitor the approaching expiry of appointment dates and the constitution of the NPF board generally. It should be the corporate secretary’s duty to advise the board;
(d) Sanctions to be applied at each level (management and board) for failing to maintain the required number of representative trustees on the board.
(a) The managing director/CEO should to be chosen and appointed by the board, after advertising the position on the open market. The terms and conditions of the position are to be determined by the board (including specified grounds for termination);
(b) The appointment should be by contract after the appointee has been vetted by the regulator and passed the “fit and proper person” test;
(c) The board should be obliged by legislation to prepare a detailed duty statement for the managing director to be incorporated into his contract of service;
(d) The board should be obliged to consider whether conditions of service should be left to negotiation or whether an upper limit is to be imposed. Submitting the contract to the regulator for approval should be considered.
(e) The bard should be obliged to prepare a code of conduct covering the managing director and all senior staff;
(f) There should be an annual performance review for the managing director; and
(g) There are arguments for and against the managing director being also a member of the board of trustees. As stated previously, the commission recommends that the managing director not be a member of the board.
(a) The corporate secretary should be chosen and appointed by the board.
(b) The minimum duties of the corporate secretary should be prescribed in legislation to include the duty to record and monitor the dates of appointment and expiry of the terms of trustees and to notify the managing director and chairman of all matters affecting or likely to affect the constitutional validity of the composition of the board; and
(c) The secretary (if also the legal officer) should be proactive in giving legal advice. If secretary is not a lawyer, the legal officer should have that proactive advising role at board meetings. The corporate secretary should be responsible for advising the board of all its obligations, including reporting obligations. The corporate secretary should also advise the board on its compliance.
Management of investments – weaknesses
(a) Require NPF, by legislation, to have an expressed investment policy which has been approved by the regulator;
(b) Provide for investments to be managed by a professional funds manager, which is obliged to follow prudential investment guidelines.
If this is not possible, or alternatively, make provisions for independent professional trustees to join the board, with suitable provisions for their remuneration or to oblige the board to obtain professional advice at the cost of the fund;
(c) The regulator should be given the duty and power to monitor NPF’s compliance with all its reporting obligations and the trustees should be exposed to sanctions for non-compliance;
(d) The regulator should be given the responsibility to review investment performance and the power to give directions in relation to investments and trustees to be subject to sanctions for non-compliance;
(e) The board must be obliged to report to the members (employers and employees) at least annually and members should be given access to a Complaints Tribunal. Members should also be empowered and facilitated to complain to the regulator about the performance of trustees and management and to seek the removal of trustees and officers for misconduct or non-performance;
(f) Methods of reporting to members could include the NPF’s periodical magazine, press advertisements and by communicating to relevant employer and employee organisations and placement on the website (Cost effective methods should be chosen);
(g) BPNG should be appointed the regulator of superannuation funds (including the NPF) (This has been set in place under the Superannuation Act 2000);
(h) For this system to work, BPNG will have to establish a strong regulator section and become very proactive in monitoring NPF’s compliance with investment guidelines, internal management and planning requirements and with its reporting obligations. This is not a traditional banking responsibility but it will need to be embraced wholeheartedly by BPNG so that the existing vacuum in the field of supervision and monitoring is well, truly and effectively filled.
Powers and obligations of the NPF Board of Trustees
Where possible the powers and obligations of the board of trustees should be included in the legislation by way of clear and definite statements — such as no power to borrow or no power to borrow for investments.
Such clear statements in the legislation should be supplemented by commentary in NPF’s manuals for trustees and senior officers.
Investment guidelines and directions
While the Minister retains powers over the NPF this question about the Minister’s power to issue directions to NPF needs to be resolved by appropriate legislation.
The commission, however, recommends removing the Minister’s powers to issue directions to the NPF from the NPF Act.
The Minister’s powers over NPF should not exceed his powers over other private organisations.
Investment Guideline Part (e) approval delegations
This raises the question of whether there should be any external control over NPF’s investment or whether it should be left entirely to the control of the board, in conjunction with its investment manager company.
(a) The commission recommends that there should be some device to ensure that NPF’s investments will be in accordance with prudential principles suitable for a superannuation fund;
(b) The responsibility for monitoring and approving that NPF’s investments are within prudential limits should be given to the BPNG regulator.
(c) While NPF remains subject to ministerial control its prudential limits need to be clearly specified in the legislation.
Minister Haiveta’s K1 million approval to trade in equities
(a) If it is intended to constrain the fund’s ability to acquire equities registered on overseas stock exchanges then this general approval up to K1 million per transaction needs to be reconsidered;
(b) The general approval should be worded to enable the fund to invest up to a given percent of its total assets offshore.
Minister’s approval given without seeking or obtaining DoF advice
It is recommended that a Minister’s duty to act on advice should be treated as one of the duties of leadership. It is recommended that this problem, which extends beyond the situation of the NPF, be referred to the Ombudsman Commission to consider whether to issue appropriate directions on this aspect of the duties of leadership.
Failure by DoF to provide expert advice to the Minister
The commission has recommended that the NPF should be freed from the need to obtain ministerial and DoF approvals. However, the recruitment of highly qualified professional officers into DoF still needs to be addressed to enable it to carry out its other functions. In the meanwhile, DoF should seek the advice of external consultants on significant matters, which are beyond the expertise of its own staff (at the cost of the applicant — DoF pays consultant and applicant reimburses). If the approval function resides in the BPNG regulator, the expertise must be built up within the regulatory body, which could also use expert consultants at applicant’s expense if necessary.
With regard to ministers making decisions without acting upon required departmental or appropriate independent expert advice, the Minister should be advised by the Ombudsman Commission of his duty to make decisions after receiving advice from relevant experts.
Approvals under Section 61 of the PF(M) Act
Such political approval is no longer appropriate but the commission considers that approval from an independent authority for large investments is still desirable.
Approval should be sought from the regulator who can nominate an independent expert to give an opinion. The regulator will then approve or not approve.
Approval should be sought prior to entering into the transaction or it could be contracted subject to regulator’s approval. There should be an express provision about the validity or invalidity of non-approved transactions.
Applying the PF(M) Act
The applicability of Part viii of the PF(M) Act to the NPF, which is a private employees superannuation fund needs to be reconsidered. If there are provisions which could benefit NPF, they should then probably be written into the NPF Act.
Deliberate failure by Board and management to comply with legislation
(a) There should be clear civil sanctions written into the Act making Trustees and officers personally liable for loss caused by such breaches of duty (A re-examination of the”good faith” concept to make the risk of incurring personal liability very clear);
(b) There should be criminal sanctions for deliberately disregarding the provisions of the legislation; and
(c) Such deliberate or seriously negligent failure to obey statutory duties should be specifically referred to in the legislation as breaches of the Leadership Code, subject to the Ombudsman.
Management exceeding delegated powers
(a) Clear delegations to be made by the board to management and recorded on a delegations file for reference by management and the trustees; and
(b) There should be an audit trail for delegated decisions by way of written memorandums showing reasons given and approvals obtained (and where appropriate, competitive quotations).
(a) If it is decided to allow board decision-making by circular resolution then clear provisions regarding the matter need to be specified in the NPF Act, such as:
(i) the circumstances justifying decision-making by circular resolution;
(ii) provisions for administering circular resolutions;
(iii) the subsequent ratification of circular resolutions.
(b) The commission recommends that the provisions in the Companies Act be considered as a model for adaptation.
Unauthorised expenditure of Trust funds outside the investment guidelines
(a) Departure from prescribed investment guidelines should be specified as a breach of fiduciary duty;
(b) Where Section 61 or equivalent approvals are sought, one condition of approval should be that the transaction will not result in a breach of the investment guidelines.
(a) Insert appropriate validating provisions in the Act to validate bona fide decisions despite unintended flaw in the appointment process. The provisions could be similar to those in the Company Act;
(b) Define by legislation the excusatory test. The “good faith” test is less stringent than the Common Law test which requires the conduct to be validated to have been:
* as would be done by a prudent man; and
* in good faith.
(a) The policy regarding exemptions needs to be worked up by means of a process of rational policy development involving all interested parties and then considered by government and Parliament.
It is a very complex matter beyond the scope of this commission;
(b) The commission recommends that sanctions and strong incentives be built into the legislation to encourage employers to comply with their obligation to contribute to the NPF in a timely manner;
(c) This should include automatic penalty interest for significantly overdue contributions; tax concessions on contributions paid to be made dependent on timely payment and an attractive discount for timely payment;
(d) Access to the Internal Revenue Commission database. The NPF has lists of employers and their employees for the purposes of ensuring that all relevant employer bodies contribute to NPF for all their employers and recording those contributions in respect of each employee on their memberships files.
To be continued