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Chapter 9: Administrative Risk
There are two types of administrative risk we need to look at. One is the administrative risk in an organisation such as a fund, that is going to give you a capital amount and /or income on that capital and the other administrative risk, is from you, the investor or retiree.
We will deal with the organisational risk first so that you know what to look for when you go to those Annual General meetings you have been avoiding. I know they are boring, but did you know this avoidance is part of the administrative risk you have?
Any investment organisation such as a pension plan, will have administration risks that will relate to the risks in administering the investment or pension plan. A plan administrator is subject to the common law duty of care and fiduciary duties. All funds should have a structured process aimed at identifying the most critical risks in the following areas:
In the pension fund the management is where the costs of running the fund should be tightly controlled. Principal Officers and trustee costs should be comparable with the fund responsibilities. High salaries are the killer to pension returns in this area. As a trainer to pension funds, I have seen pension funds paying principle officers twice the going salary rates, at a cost to the pensioners. Other than being highly unethical, this is like robbing your parents! When these principal officers and boards were questioned, they displayed the most amazing arrogance and ignorance. It made me realise how the incompetent view themselves as Gods! Fortunately many principal officers are highly ethical and hard working. Many of those funds which I have worked with are gentle and very caring, as well as being completely committed to improving the lives of the many people they will have to take care off. If that was not the case I would never tell people to invest in any retirement fund.
Fund governance is most important and rests with the board. Often board members are called trustees. Some of these trustees are particularly bad, since you do not need any minimum education to sit on a board. In some countries members of the fund can elect trustees to the pension fund boards, and it is a case of the blind leading the blind. If you do vote a trustee in, at least find out if they can do the job- it is your money after all!
The board of directors is supposed to set out its responsibilities in accepting and committing to the specific corporate governance principles, undertaking to run the pension fund correctly.
Pension fund management should understand the risks run. The board must set acceptable levels of risk; measuring, monitoring and controlling these risks; and ensuring that an adequate and effective internal control system is in place. A compliance function should be in place to ensure these objectives are met.
Risk management comprises of the board looking at where the risks to the fund lie. In my experience, most of these risks are due to the staff, who look to their own pocket and how to minimise work. In many pension funds I have been told people are working so “hard”. A simple observation shows the same staff have spent two hours on their cell phones talking to friends, one hour in the bathroom, an hour at lunch and two twenty minute “tea breaks” in an eight hour workday. In addition, PC audits show on-line shopping and Facebook or other social media have been visited. The truth is they were working hard, just not for their employer! Salaries are a major cost in a fund and need to be tightly controlled.
At the heart of any risk-management framework are the control mechanisms – both internal and external. A control system could be simple like having someone sign in at the entrance, or complicated where you have three people signing every check, after a series of questions are asked. Audit systems are a control system and these should be efficient and cost effective. Controls that are put in, should operate at every level and be an integral part of daily activities.
Decision making, execution and checking functions must be assigned to different people and have suitable oversight given to the processes by independent personal. For example getting a husband to check his wife’s work is not an efficient or independent check.
Communications are required so that everyone understands their responsibilities and to make sure that relevant information is reaching the appropriate personnel. The pensioners, members and staff of the fund should have information given them in a transparent easily understood format. If a person has access to a computer this should be on-line, but not everyone has a computer, mobile phone and data. The pension fund must be aware of this.
When putting administrative risk on ourselves we learn the attributes of responsibility and accountability. It is easier to say a company has done us wrong than to say- did we go to the Annual General Meeting, or did we vote correctly? Did we read the documents, did we ask questions?
For example:
It is astounding how many people think they are rich when they are actually cash poor but asset rich and all assets have loans on these assets. All of this knowledge goes under personal administrative risk.
When I used to advise on estates, most people did not have the faintest clue, on how much they were worth. People with children, believed the insurance would be sufficient to educate and clothe their children until they could be independent. People facing retirement had left legacies in their wills to people that would leave their beloved spouses starving. It was a mess and we will take a look at this in our section on estates further on in this series.
Your personal administration is most important, as you cannot control what you do not know. Start today, put all your accounts together and use our budget control template to walk you through taking administrative control of your life. Once organized it will take you an hour per month to manage.
It works like this.
Every month put in your income and your anticipated spend- the amount you think you will spend. At the end of the month put in what you have spent.
Budget control template
JAN |
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INCOME |
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FEB |
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INCOME |
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MARCH |
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PROFIT/LOSS |
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APRIL |
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INCOME |
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EXPENDITURE |
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SALARIES |
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MAY |
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JUNE |
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JULY |
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INCOME |
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AUGUST |
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INCOME |
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EXPENDITURE |
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SEPTEMBER |
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INCOME |
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OCTOBER |
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INCOME |
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EXPENDITURE |
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NOVEMBER |
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INCOME |
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EXPENDITURE |
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DECEMBER |
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INCOME |
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If you continually overspend, you should start a list to detail what you are spending.
Example of budget items:
Item |
Amount budgeted |
Amount spent |
1. Bond Payment / Rent |
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2. Levies and Rates |
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3. Water & Electricity |
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4. School Expenses |
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