Should trustees seek amendments to staindard term investment mandates?

By Francisco Khoza


It is not uncommon for the trustees of a pension fund (“Trustees”) to be met with resistance whenever they want to negotiate amendments to standard term investment mandates with investment managers. The usual response from some investment managers is that, their standard term mandate has been approved by the registrar of financial services (the “Registrar”) and has been accepted by other clients, without any changes. Faced with such a response should the Trustees still insist on negotiating changes to the standard term investment mandate in order to protect the pension fund’s position?

The object of this note is to explore the extent to which Trustees can negotiate changes to the standard term investment mandates. The note will consider the duty of the Trustees, under the Pension Funds Act, 1956 (“PFA) and guidance under Circular PF No.130- Good governance of retirement funds (“Circular PF 130”). The note will also cover the relevant aspects of the Code of Conduct for Administrative and Discretionary Financial Services Providers (the “Code”), issued under the Financial Advisory and Intermediary Services Act 2002 (“FAIS”).


The objects of the board of Trustees are to direct, control and oversee the operations of a pension fund according to the applicable laws and the rules of the fund. Although the PFA does not expressly deal with the investment of pension funds assets, the objects of the board of Trustees encompass the duty to administer and invest the assets of a pension fund. In carrying out the objects, the Trustees are required to :

• take all reasonable steps to ensure that the interests of members in terms of the rules of the fund and the provisions of the PFA are protected at all times.
• act with due care, diligence and good faith; and
• avoid conflicts of interest; and act with impartiality in respect of all members and beneficiaries.

The above are fiduciary duties of Trustees which should inform the approach that Trustees adopt when considering and negotiating mandates with investment managers. Our Courts have outlined the approach to be adopted by Trustees (not only pension fund trustees but trustees in general) when investing trust assets. The Appellate Division (now the Supreme Court of Appeal) stated that one of the circumstances to be considered by a trustee when dealing with trust assets is that he is not dealing with his own money, but with that of the trust. “Greater care and caution are required of him in the latter case than in the former.” In essence, a person in a fiduciary position, such as a Trustee, is required to adopt the standard of a prudent and careful person. It is arguable that, simply accepting a standard term mandate from an investment manager without considering whether it is appropriate for the pension fund may constitute a breach of a Trustee’s fiduciary duties.

Circular PF No. 130

Circular PF No.130 deals with the good governance of retirement funds. According to the circular, “The proper management of the investments of the fund is a critically important part of the governance of a fund.” Although the board of Trustees has a duty to invest the assets of a pension fund in order to ensure that it has the money to pay the benefits promised to members, the board of Trustees may appoint investment managers to administer the fund’s investments on its behalf.

Paragraph 50 of Circular PF 130 deals with how Trustees are to deal with investment mandates. In this regards the paragraph states that: “It is important that the board ensures that the mandates given to service providers clearly define the board’s expectations and reporting requirements relating to the performance of the investments. The board should therefore not endorse mandates or agreements that are vague or ambiguous. Any contractual arrangement between a fund and an investment manager should set out clearly the benchmarks against which performance will be measured. Any contract should be on terms and conditions that are acceptable to the fund, and may require independent legal advice being given to the fund in that regard.”

From the above paragraph it is apparent that Trustees must ensure that any mandates concluded with an investment manager is consistent with the pension fund’s position and requirements. The Trustees should not enter into a mandate that is vague or ambiguous. Although standard term investment mandates will generally meet the minimum requirements of a pension fund, Trustees should note that they are still required to ensure that the terms and conditions are acceptable to the pension fund. This is a broad requirement. This may require the Trustees to consider, among other things, the following: ensuring that the standard term mandate is consistent with the investment policy of the pension fund, that the pension fund is comfortable to make the representations set out in the standard mandate, that the pension fund is comfortable to give the indemnities stated in the mandate, that pension fund comfortable with the extent of the liability exposure that may arise under the mandate; the fees structure etc. In essence, what is required is not just a perusal of the investment mandate but a proper consideration and understanding of the contents of the mandate. If the Trustees are not comfortable with the standard term mandate they should negotiate amendments with the investment manager.

The question is, to what extent can the Trustees negotiate changes to a standard term mandate? This question raises the need to balance the interests of Trustees (and in turn the pension fund) and the obligations of an investment manager as a financial services provider whose conduct is regulated by FAIS.


Investment managers are financial services providers authorised under FAIS. Trustees usually appoint an investment manager with discretion. Under FAIS and the Code an investment manager with discretion is referred to as a discretionary financial services provider.

Before entering into a mandate with a client, an investment manager is required to obtain information about the client’s financial circumstances, needs and objectives and such information that is necessary to enable the investment manager to provide suitable investment management services to the client. The investment manager is also required to identify the financial products that best suit the client’s objectives, risk profile and needs subject to the limitations and retractions imposed on the investment manager by its license. All of these requirements are meant to ensure that the investment services provided to the client are suitable for the client’s needs. Arguably the peculiar position of the client will inform the content of the mandate signed by the Trustees and the investment manager.

The investment manager is required to obtain a signed mandate from a client before rendering any services to that client. The mandate of an investment manager must initially be approved by the Registrar. The Registrar may approve the mandate on certain conditions. The initially approved mandate is referred to as the “specimen mandate”.

Regarding the amendment of a specimen mandate paragraph 5.3 of the Code states that,

“A discretionary FSP may not amend the specimen mandate substantially, without the prior written approval of the registrar.

It is the above paragraph that usually gives rise to resistance from some investment managers to the amendment of their standard term mandates. It seems resistance arises from a number of factors including: a lack of understanding of the above paragraph, not wanting to be delayed by the requirement to obtain the Registrar’s approval and from a view that, if other clients have signed the standard term mandate without any changes, why should it be changed for one particular client.

However, an understanding of the above paragraph would help both Trustees and investment managers. The key to the paragraph is that the investment manager is required to obtain the approval of the Registrar when it substantially changes the specimen mandate. Unfortunately, substantial is not defined under FAIS or in the Code. There is a view that the ordinary meaning of substantially should apply. In this regard, according to the Collins Concise English Dictionary substantial has the following meaning, “of a considerable size or value, worthwhile, important, having importance, an essential or important element”

From the above, it seems, if some aspects of the specimen agreement are amended but for the most part it remains the same, there is no need to obtain the Registrar’s approval. However, if the specimen agreement is amended to a great extent then the approval of the Registrar is required. One thing is clear, FAIS and the Code do not prohibit or prevent the Trustees from negotiating the terms of a standard term mandate or the amendment of such terms to further protect the pension fund’s position. If anything, both FAIS and the Code encourage an engagement between the Trustees and the investment manager before concluding an investment mandate.


Trustees have an obligation to ensure that the investment mandates they enter into with investment managers are suitable for the needs of the pension fund. The Trustees must ensure that they enter into clear mandates. In order to protect the interests of the pension fund, Trustees must not be deterred from negotiating changes to standard term mandates. Simply accepting a standard term mandate, without considering whether it serves the interests of the pension fund and failing to negotiate changes to the standard term mandates, if there is an apparent need to do so may constitute a breach of the Trustees’ fiduciary duties.

Where the negotiations result in small or minor changes to the standard term mandate, the investment manager is not required to obtain the approval of the Registrar. The Registrar’s approval is only required if the negotiations result in considerable amendments to the standard term mandate. Trustees and investment managers must adopt a practical approach to negotiating mandates and ensure that whilst the mandate allows the investment manager to provide the professional service, the interest of the pension fund are accommodated. If the approval of the Registrar will be required, this must be factored into the time table for negotiating and concluding the mandate.