The format in which retirement funds present their financial statements has not changed over the past 10 years and no longer meet funds' governance needs, Karin Biggs, a partner at Ernst & Young and the chairperson of the pension and provident fund interest group of the South African Institute of Chartered Accountants Interest Group (SAICA), says.
The format is prescribed by regulations in the Pension Funds Act.
The format and content of South African retirement funds' financial statements have fallen behind international standards, Biggs told the Personal Finance/Old Mutual Actuaries & Consultants seminar on retirement fund governance.
In addition, she says, funds' financial statements do not make provision for the developments that have taken place in the South African retirement fund industry over the past 10 years. These developments include:
- The shift from defined benefit to defined contribution funds. Laws have been enacted concerning the apportionment of surpluses that have built up in the defined benefit funds.
- Smoothing reserves. The trustees of defined contribution funds often hold back some of the returns in good years to smooth the returns to individual member accounts in years when the markets perform poorly.
In 1996, the Financial Services Board (FSB) and the SAICA embark-ed on a process to update the accounting and auditing requirements for retirement funds, Biggs says.
The FSB published the proposed new standards for public comment towards the end of last year, and the comments are being worked into the new draft regulations. Biggs says it is hoped that the new regulations will come into effect in January 2005.
The draft regulations will provide for far greater control over a fund's finances, and give trustees an effective instrument for tracking their fund's financial situation, she says.
Biggs says the draft regulations include the following areas:
- Rule amendments. Financial statements will record any applications a fund has made to the FSB to change its rules, and whether or not the FSB has approved the proposed changes.
- Reserve accounts. Statements will have to record information on reserve accounts in greater detail. A reserve account is an account that a retirement fund establishes for a specific purpose. Typically, an investment reserve account is an account in which the fund receives investment income. The fund then allocates the investment income to the individual member accounts within the fund.
- Section 14 transfers. When a member leaves his or her existing fund and joins another fund, the fund from which the member's savings are to be transferred must, in terms of Section 14 of the Pension Funds Act, apply to the FSB for approval to transfer the member's money.
Currently, such transfers are recorded in a one-line entry in the fund's income statement. The proposed reporting standards will require funds to record these transfers in greater detail.
- Cash flow reconciliations. Financial statements will have to reflect a fund's cash flows in greater detail. The updated regulations will enable the trustees to track how much money the fund owes or is owed.