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04/08/26 01 01sv2608BMIE_1


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04/08/26 01 01sv2608BMIE_1

  2. 2. WHAT IT’S ALL ABOUT MODULE 7 S outh Africans face a be- trustees. There will be no place wildering array of pension for a trustee who does not fully Karin Biggs CA (SA) funds and even more com- understand the rules and the plex retirement fund legislation. environment in which they op- While every fund is bound by erate. law to appoint trustees to look The Responsible Trusteeship se- after members’ interests, few ries, brought to you by the trustees elected to represent Financial Mail, Ernst & Young their colleagues’ interests have and eDegree, is designed to fill the skills to fulfil their duties all the gaps. properly. This section of the course In addition, new legislation will help you understand how is making all trustees respon- to read and interpret financial sible for signing statements statements. declaring that they have com- If you are a trustee and want plied with their duties as to get to grips with your duties, sign up for the eight-part online course at or fill in the form on K arin Biggs, the lead partner in Ernst & Young’s retirement funds division, joined Ernst & Young the back page and fax it to (011) in May 2000. She chairs the SA In- 328-2095. I stitute of Chartered Accountants (Saica) Pension & Provident Fund Interest Group and is helping the Financial Services Board and Saica redraft requirements for retirement funds’ financial statements.
  3. 3. Financial statements The quest for more information All retirement funds, inclusive of pension and provident funds, will be required by section 15 of the Pension Funds Act of 1956 to submit financial statements within six months of the expiry of their respective financial year-ends. T hese financial statements have the fund’s assets are to be invested. funds industry. In addition to the pen- largely been ignored or neglected Another major change to the format sion fund circulars there have been by trustees. However, if under- of financial reporting was the advent of changes to the accounting treatment of stood and correctly interpreted, these the trustees’ report. The purpose of the various issues, evident from the pub- statements could give a wealth of in- report was to provide members of lishing of more and more accounting formation about the fund. funds with more clarity about who was statements and procedures affecting So why have these reports received responsible for their affairs, what ben- more than just retirement funds. There so little attention? efits were provided, the financial results have also been vast changes to what is The answer could be twofold, and any other important issues per- perceived to be good management, cor- namely that they are outdated or not porate governance being the term on understood. To place this in perspec- everyone’s agenda. tive, let’s look at the history of re- The involvement of both member tirement fund annual financial state- trustees and employer trustees on ments. retirement funds has made mem- Where did it all start? bers more conscious of how their Upon establishment of the Fi- funds are managed and has pro- nancial Services Board (FSB) in vided transparency into the af- April 1991, an abbreviated form of fairs of their fund. The role of a financial reporting was inherited, board of management has also originating from the previous come under the magnifying Government Office of Financial glass. Institutions. At the time this Arriving at the crossroads format was found to be in- The retirement industry has adequate in certain areas and it arrived at a point where financial was decided to redesign the statements might not be fulfilling format of financial reporting to their role completely. comply with developments in There has been a concerted effort the retirement fund industry. from role players in the retirement One of the most important changes funds industry to address this. Recently that had to be incorporated into the taining to their respective funds. the Pension & Provident Fund Interest new financial statements was the in- All of this resulted in the current Group, under the guidance of the SA troduction of the then new regulation format of financial reporting, which was Institute of Chartered Accountants 28. Regulation 28 superseded section introduced by way of Pension Fund (Saica), proposed a set of financial state- 19(1) of the act, which had prescribed Circular PF.83 in March 1994. The ef- ments to address the shortcomings of investments in certain categories. With fective implementation date of this cir- the present set of financial statements. the scrapping of section 19(1), the re- cular was December 15 1993. However, In addition, the imminent withdrawal quirement to invest 53% of a fund’s the implementation date for the ap- of audit exemption for previously audit- assets in government or quasi-govern- plication of the new financial statements exempt funds will bring more trans- ment institutions fell away, leaving was announced as April 1 1994. parency to members of funds who did funds with more freedom to decide how Winds of change not previously enjoy the benefits of The pension funds industry has audited financial statements. The new evolved in leaps and bounds. Various financial statements will aim to in- circulars were issued by the FSB to take corporate all the latest requirements and note of the changes in the pension expectations and should again be a Responsible Trusteeship 3
  4. 4. there has been a huge move from de- fined benefit to defined contribution WHAT HAS BEEN PROPOSED? funds in SA and the country has new Accrual basis laws relating to the apportionment of Large privately administered funds useful tool in providing information to surpluses that built up in the old style Small privately administered funds all stakeholders. defined benefit funds. Another area not Cash basis The current format of financial state- reflected in the financial statements cur- Large previously audit-exempt funds ments of retirement funds — which is rently is smoothing reserves. The Small previously audit-exempt funds prescribed by the regulations to the trustees of defined contribution funds Pension Funds Act — has not changed often hold back some of the investment in the past 10 years and no longer meets returns in good years to smooth the ments encourage good administration the governance needs of funds. returns to individual member accounts and will demand proper reconciliation SA has gone through an interna- in years when markets perform poorly. of financial data, thus giving the tional harmonisation process with ac- In 1996 the FSB — which regulates trustees proper management tools over counting statements. This means that if the nonbanking financial services sector the financial affairs of their fund. you pick up a set of financial statements — in conjunction with the Saica interest What has been proposed? from any organisation in the UK — or group, embarked on a process of up- Currently there will be four sets of elsewhere in the world — and a set dating the financial accounting and au- financial statements for funds. from SA, the same set of principles diting requirements for retirement The format of financial statements is should be apparent. The accounting funds. The FSB published the proposed prescribed in the regulations to the principles used for listed entities have new standard for public comment to- Pension Funds Act. As mentioned be- thus changed significantly in the past 10 wards the end of last year and the fore, some of the main changes to the years. Sadly, the format and content of comments are being worked into the regulations being proposed will provide the financial statements of retirement new draft regulations. for far greater financial control of funds funds in SA have fallen behind as no It is hoped that the new regulations and it will allow the trustees of funds to changes have been made in 10 years. will be effective from January 2005. have a much better instrument to keep In addition, there have been many What will this mean for trustees? track of what is happening with the developments in the retirement fund The new proposed format will give finances of their funds. industry over the past 10 years and the all boards of trustees the financial in- What are some of the proposed financial statements do not make pro- formation they will require to manage changes? vision for these changes. For instance, their funds better. These financial state- With regard to rule amendments, the 4 Responsible Trusteeship
  5. 5. financial statements will record the rule greater detail on reserve accounts will changes for which the fund has applied have to be shown. The proposed fi- to the FSB and whether they have been nancial statements will accommodate approved. No mention has been made the full disclosure of surplus appor- of rule amendments and this will give tionment. All reserve account move- fund to another. The fund, which is the trustees the status of all rule amend- ments and allocations will be reconciled transferring the pension assets of mem- ments at a glance. and disclosed. Hence the inflow and bers, must apply to the FSB for ap- At present reserve accounts and outflow of the various pockets of the proval to transfer the money. This is a movements in reserve accounts are not fund will be better reflected in the new requirement in terms of Section 14 of disclosed at all in the financial state- regulations. the Pension Funds Act. Currently, such ments. This is ironic if one takes into Section 14 transfers, which normally transfers are reflected only in one line in account what has been happening with account for very large movements in the income statement. The proposed the promulgation of the surplus leg- the financial records, are not disclosed new reporting standards will require islation, not to mention what risk is at all. This happens when members that funds reflect where the transfer will involved in reserve accounts. Now far transfer their membership from one be coming from, to which fund it will be made, the number of fund members involved and other details. Another enhancement will be cash-flow recon- ciliations: the proposed regulations will require the financial statements to reflect the cash flows of the fund in greater detail. Cash-flow items would typically include transfers, benefit payments and em- ployer contributions. The proposed detailed report- ing on cash flow will al- Responsible Trusteeship 5
  6. 6. low the trustees to see what G Ensured that proper in- the fund owes or is owed at ternal control systems were any point. employed by or on behalf of These are some of the the fund; and proposed enhancements. All G Ensured that adequate of these will, of course, be and appropriate information useless unless understood was communicated to the and correctly interpreted by members of the fund, in- the trustees. forming them of their rights, Have you ever consid- benefits and duties in terms ered comparing the mem- of the rules of the fund; and bership statistics to benefit G Took all reasonable steps payments? Have you com- to ensure that contributions pared the reinsurance recov- were paid timeously to the eries to death payment? All fund or reported where nec- these ratios should reveal essary in accordance with what has or should have Section 13A and regulation been recorded in the finan- 33 of the Pension Funds Act, cial statements. 1956; and The proposed format will G Obtained expert advice on require trustees to sign off matters where it lacked suf- compliance with their duties ficient expertise; and and this should not be con- G Ensured that the rules and sidered lightly. The follow- the operation and admin- ing statement will have to istration of the fund com- be signed: plied with the Pension STATEMENT OF RE- Funds Act, 1956, the Finan- SPONSIBILITY BY THE cial Institutions (Protection FUND’S BOARD OF of Funds) Act, 2000, and all TRUSTEES other applicable laws; and Responsibilities G The fund’s board of The fund’s board of trustees confirms that, dur- trustees hereby certifies to ing the period under review, the best of its knowledge fidelity cover of R<insert that, during the period un- amount> was maintained. der review, in the execution This cover was deemed ad- of its duties it: equate and in compliance G Ensured that proper reg- with the rules of the fund. isters, books and records of G Investments of the fund the operations of the fund are in accordance with the were kept, inclusive of investment strategy and in- proper minutes of all res- vestment decisions in re- olutions passed by the spect of individual invest- board; and ment choice. I 6 Responsible Trusteeship