Issue: April/May 2007
AN INDUSTRY UNDER PRESSURE
Better protection but higher costs on the way
Retirement funds are meant to be custodians of people’s retirement savings. To the extent that these savings vehicles are less than effective in their primary objective, the burden of welfare provision will fall back onto the state in the form of state old age pensions – a cost which the state cannot afford, and which government’s proposal for a compulsory earnings-related social security sytem will help to address.
As a nation, we have a disturbingly low savings rate. It’s aggravated by the savings lost by leakage when people change jobs and thus gain access to their retirement fund nest eggs. It is generally agreed that very few people will be able to survive purely on retirement benefits received from their funds.
This scenario is further aggravated by ongoing developments in the industry. Some issues that have attracted considerable media attention include:
Reforms to be expedited
There can be no question that reforms in the retirement fund industry are long overdue. National Treasury (amongst others) recognised this with its first discussion document on reform. After reviewing the submissions received from industry role players, a second discussion paper was issued recently. In addition to the mandatory national social security system, which the second paper discusses in some detail, results of these reform efforts will include:
For sure, in this industry it will not be business as usual. It is an industry which is increasingly under the spotlight of the Regulator. Trustees and service providers have been feeling the heat that flows from poor governance practices. Members of retirement funds are now more aware of their rights and what they can expect from their boards of trustees, and are not averse to using the Pension Fund Adjudicator’s office for complaint resolution.
The end result of these reforms will see the emergence of an industry which is more transparent. There’ll be increased regulatory and compliance requirements, thus offering better protection to members of funds. But this will come at higher cost to the members, ultimately in their accumulated credits at date of retirement in defined contribution funds.
UNDERWRITTEN FUNDS' CLASSIFICATION SHOULD BE REVISED
With the lifting of the audit-exempt status of underwritten funds, the FSB classified these funds as ‘large’, ‘small’ and ‘mini’ (based on the respective sizes of their memberships and the fair value of of their investments). These thresholds are used in deciding whether the fund in question would need a full-scope audit or a limited assurance audit carried from their 2006 financial year. The classification of funds and their related thresholds are:
Once the first-time audits of the funds for 2006 financial year are complete, the FSB will need to review and raise these thresholds as the limits are simply too low and the costs associated with the requirement for a full-scope audit or limited assurance audit are too high – thus significantly eating into the returns earned for such funds and their members. In these instances, the audit costs will seem high as there is a base cost for an audit regardless of the size or the nature of the fund being audited. This is because International Standards of Auditing apply to all assurance engagements. The only way to compensate, clearly, is by raising the classification thresholds.