– By Manja Serfontein

Trustees are ultimately responsible for the compliance of a retirement fund with a multitude of statutory requirements that funds are subjected to.  Anything that may reduce the corresponding administrative burden will probably be welcomed by most Trustees, like the opportunity to apply for exemption from having to submit statutory actuarial valuations. The application is made to the Financial Sector Conduct Authority (FSCA).

However, the unintended consequences of valuation exemption should be carefully considered as it significantly increases the Trustees’ own responsibility towards ensuring the fund’s financial soundness if they no longer use the services of an actuary to support them in this regard.

The actuarial perspective

Some might argue that an actuary’s role in a defined contribution retirement fund is redundant where the assets in such a fund should, per definition, remain equal to its liabilities.  However, for this argument to hold one must assume that the fund’s administration and financial records are 100% accurate at all times.

There are various specialists involved in the prudent management of a retirement fund, each with a different focus towards ensuring the accurate operation of the fund.  A consultant provides advice on benefit design and the rules of the fund in accordance with the applicable regulations; the administrator is responsible for the day to day operation of the fund and to maintain accurate member records; investment consultants manage investment portfolios in line with the fund’s strategies; auditors provide an opinion on the fund’s governance and controls and on the reliance that can be placed on financial statements based on, amongst others, procedures and sample testing of some transactions.

Broadly speaking, an actuarial valuation brings together all of the above separate functions to produce a consolidated view of the fund’s overall financial position:

  • The actuary checks the operation of the fund for consistency with the rules of the fund and any policies of the fund (e.g. investment policy);

  • He or she further confirms whether all contributions received are reflected in the financial statements and that net contributions towards retirement are accurately allocated to members in terms of the rules;

  • Investment returns provided by investment consultants are reconciled to returns as reported in the financial statements and those allocated to member records;

  • Combining the preceding 2 points, the actuary effectively checks that the build-up of each member’s fund credit /member account is correct;

  • Benefits accrued in the audited revenue account are reconciled with individual member movements on the administrator’s records;

  • Investment statements are reconciled to the fund’s cashbook.  This effectively verifies the accuracy of all cash flows as reported in the financial statements; and

  • A detailed analysis of experience is then performed to identify and quantify all data or processing variations that occurred during the period since the previous valuation.

There are bound to be some level of processing variations in a fund that will result in unallocated amounts.  It is important to thoroughly understand the origin of such unallocated amounts in order for Trustees to make informed decisions as to the utilisation of such amounts.  This could include changes in operational processes, corrections to member records where applicable or distribution of any surplus or shortfall amongst members and reserve accounts.

In short, the actuary’s role is to provide an independent professional view on all  facets of the fund, i.e. both assets and liabilities, in order to assess the overall financial soundness of the fund.  The results of such an actuarial review then allows the Trustees to make informed decisions and/or to implement corrective measures, if required.

Regulatory framework

In terms of the Pension Funds Act every retirement fund must appoint a valuator and must submit a statutory actuarial valuation at least once every 3 years. However, a fund may be exempted from these requirements if it meets certain criteria. This is commonly referred to as valuation exemption and needs to be renewed once every 3 years.

To apply for valuation exemption, the valuator of a defined contribution fund must certify that the fund meets the following main criteria:

  • The fund must be fully funded, i.e. assets should exceed all liabilities.   For the purpose of this certification the valuator can rely on the results as set out in audited financial statements without performing a review of this information;

  • The fund may not carry any open-ended pensioner liabilities.  All pension payments must therefore be fully secured by annuity policies or, in the case of in-fund living annuities, must be limited to the amount available in the member’s account;

  • Any death or disability benefits in excess of the value of the member’s individual account must be fully insured; and

  • The rules of the fund must explicitly provide that any contingency reserve account, other than a processing error reserve, could never have a negative balance.  This often requires a rule amendment if the existing rules are not specific enough.

Once valuation exemption is granted the fund no longer has an appointed valuator in its service.  The onus is then placed on the Trustees, or any other whistle blower, to notify the FSCA of any subsequent developments that may cause the fund to no longer meet any of these criteria.

Arguments for and against valuation exemption

Being valuation exempt has a number of attractive advantages.  The most obvious advantage is the corresponding saving in actuarial fees since it is substantially cheaper to obtain a valuation exemption certificate than to have a statutory actuarial valuation performed.

It also removes other statutory requirements which impacts on both cost and the fund’s administrative burden, like:

  • transfers in terms of section 14 is no longer reviewed and certified by a valuator;

  • No valuator’s report is required for inclusion in the financial statements; and

  • The valuator does not need to certify the financial soundness of any rule amendments.

The downside of valuation exemption is the added risk and responsibilities given to the Trustees and the Principal Officer who take over the responsibility to sign these statutory certifications.

The Trustees expose themselves to the risk that if the fund is poorly administered, they can be accused of not having followed a more rigorous risk management process by having the fund regularly investigated by an actuary. By opting for the valuation exemption route, Trustees are placing a larger reliance on themselves, the administrator, the consultant and the auditor to ensure the fund is properly managed.

Finally, in terms of a lesser known technicality in the Act, an employer remains ultimately responsible to fund any shortfall that may exist upon liquidation of a defined contribution fund that is not valuation exempt.  While this does present some protection to members under extreme circumstances, it exposes the employer to a financial risk that they are often not aware of.  While a deficit in a well-run defined contribution fund is unlikely, the risk to the employer can only be removed through valuation exemption.

Best of both worlds

We generally recommend that Trustees apply for valuation exemption in order to benefit from the above advantages.  However, at the same time we recommend that regular non-statutory actuarial reviews continue to be performed to give Trustees and members the peace of mind that the fund remains in a sound financial position.

Actuarial reviews then become an integral part of the Trustees’ internal governance and risk management framework, as opposed to merely meeting a statutory requirement.  This will unfortunately re-introduce some actuarial expenses, albeit at a reduced cost from a statutory valuation, but will provide all the benefits to members and Trustee’s that a statutory valuation would have done without any of the disadvantages.

Valuation exemption is an easy, quick and cost-effective solution to alleviate some of the statutory duties imposed on Trustees of most defined contribution funds.  There is however a lot to be said for the confidence that Trustees can derive from a consolidated view of the overall operation of the fund, which can only be provided through an independent actuarial review.

– Article featured on EBnet on the 15th of July 2020


– By Corné Heymans
Extraordinary times 

South Africa, and indeed the entire world, is finding itself in an unprecedented situation of having to deal with a pandemic that is causing havoc in all spheres of life where the “new normal” changes on a daily basis.  The challenges are not limited to our physical health, but our emotional and financial well-being is also taking severe strain.

With lockdown restrictions being reduced, the economic activity is slowly coming out of hibernation in most industries.  But I suspect that there are still many who will not be able to return to work.  Some of these individuals will not just temporarily loose part of their income, but may eventually be unemployed in cases where employers are unable to survive this crisis.

As if it is not already difficult enough to make ends meet from one day to the next, one should at same time also consider how this will change your longer-term retirement plans.  The question is how can you possibly meet your immediate financial needs while also keeping an eye on retirement planning?

A break in saving towards retirement

The golden rule when it comes to retirement planning to consistently contribute towards your retirement savings throughout your working life and to preserve these savings when changing employment.  This continuous accumulation of savings for retirement is the key to securing an adequate income that will sustain you in retirement.

Both the Pension Funds Act and the Income Tax Act define pension funds, provident funds and retirement annuity funds as structures that are established for the main purpose of providing income in retirement.  Contributions to these retirement savings vehicles, where it is offered by an employer, are compulsory and government’s intention is further to make preservation of these benefits compulsory when you change employment.

However, compulsory contributions and preservation of benefits is not necessarily a viable option right now.  Many companies are experiencing severe cashflow constraints at the moment and a number of them have already reduced their employees’ salaries.  Planning for a comfortable retirement, which can be many years away, is probably the furthest thing from your mind when struggling to pay the bills on a reduced salary.

The retirement industry regulator, the FSCA, acknowledged that compulsory contributions towards retirement benefits cannot be afforded by all right now.  In response to this crisis the FSCA therefore now allows employers to temporarily suspend retirement fund contributions under specific circumstances.

This will mean that employers can now redirect contributions to pay salaries or to meet other essential cash flow needs.  Suspending employees’ own contributions towards a retirement fund will similarly bolster employees’ take-home salaries at a time when it is needed the most.

(The full communication document from the Authority on the suspension of contributions (Communication 10 of 2020) can be found on the FSCA website at www.fsca.co.za/RegulatoryFrameworks/Industry Communication/Retirement Funds.)

When temporary relief is not enough

The temporary relief from retirement fund contributions will unfortunately not be enough to save all companies.  Some employers and staff may need to renegotiate their terms of employment on a more permanent basis.  This could include substantial restructuring which, in turn, may lead to the permanent termination of existing retirement funds.

There are unfortunately many companies that will just not be able to survive this crisis.  The statistics reported in the news of the number of companies that are not expected to be around once all of this is behind us, is downright scary.  Where an employer ceases to carry on business or is liquidated, the company’s retirement fund will in all likelihood also need to be liquidated, depending on the rules of the fund and the nature of the company’s termination.

Upon liquidation of a fund, whether voluntary or compulsory, all contributions and benefits will cease and accumulated savings are distributed to members upon conclusion of the liquidation in about 6 to 12 months’ time.  Members will be given the choice to take their accumulated savings in cash or to transfer the benefits to be preserved for retirement in another fund.

Keeping the long-term goal in mind

While the suspension of contributions will give welcome relief in the short term, the impact of such a “contribution holiday” on one’s long term retirement goals should be considered.  Some additional savings may very well be required when the world returns to better days again.

The option to cash in one’s retirement savings where this will be possible in liquidation may be very tempting during difficult times.  However, it might be near impossible to recover any savings that you dip into right now.  Using retirement savings to maintain your current lifestyle may just be postponing the hard times to retirement when you will have even fewer options for any sort of recovery.

Making the right choices

The impact of current circumstances on your financial situation can differ vastly from one person to the next.  If this lockdown period is a mere social inconvenience to you which is intruding on your holiday plans, then you are one of a small hand full of the very lucky ones.  Chances are that your retirement planning has not changed at all.

On the other extreme, COVID-19 might have drastically changed your financial situation. Survival from day-to-day is priority right now and having access to your retirement savings may be the only solution to keep bread on the table.  Retirement planning is out the door for individuals who find themselves in this position, for the moment at least, and making ends meet in retirement will be a problem for the future.

If you are in a position somewhere between the above extremes, you need to plan with an open mind and be prepared to make some tough lifestyle decisions.  Having access to suspended retirement contributions for immediate financial relief will certainly be a welcome addition to the monthly budget, albeit perhaps a much tighter one.  You should hopefully be in a position to make up these lost savings, or absorb the impact thereof, at a later stage.

There are proposals being considered to allow retirement fund members to withdraw a portion of their accrued retirement savings.  It may be justified where people need this money to survive, but it will be very difficult to recover any retirement savings that you may use up during these times.  It is therefore critical to protect your retirement savings if this is at all possible, even if it does require some drastic cuts to your current household expenses.  The retirement savings that you have so diligently built up may be the only means to sustain yourself in retirement.

We are finding ourselves in uncharted territory and the financial hardship that many people experience right now is unlike anything we could have imagined just a few months ago.  We hope and trust that all of us will find a way through this and will be able to provide for our loved ones, not only during these days but eventually also in retirement.

And if you are in the fortunate position not to be affected by this global crisis and are able to assist those in need, we hope that you will find it in your heart to do so.  Stronger together.  Always.

– Article featured on EBnet on the 2nd of June 2020