From next year, all retirement funds with assets in excess of R500 000 will need to be audited. Have you checked that your trustees are aware of the new developments, that they understand the benefits of an audit and will appoint auditors who are right for your fund? It is no good for trustees to leave the important task of selecting and appointing auditors to their fund's service providers.
From next year, about 10 000 of the 13 000 registered retirement funds in South Africa will have to prepare financial statements and submit them to the Registrar of Pension Funds. The funds may be subject to an audit.
At present, funds underwritten by life assurance companies do not have to be audited.
An underwritten fund is one in which all the fund's investments are made via insurance policies.
The Financial Services Board (FSB) scrapped the audit exemption for underwritten funds and has introduced a requirement that all funds must produce financial statements because of the risks facing fund members.
Michael-John Albert, a partner of the financial services team at auditing firm Deloitte, says it made sense in the past for certain funds not to be audited as most of the funds were defined benefit in nature.
If there was a problem in a defined-benefit fund, the member's basic benefits were guaranteed by the employer. The risk to members was far lower than it is now.
In defined contribution funds, it is you, the fund member, who carries the investment risk.
The move from defined benefit funds to defined contribution funds has also led to far greater administrative complexity, he says.
At the same time, there has been a focus on improved fund governance. The essence of good governance is that the trustees can demonstrate that having discharged their fiduciary duties and one of the ways to demonstrate that these onerous duties have been discharged is to subject the fund to independent audit, he says.
Albert says the trustees are responsible for organising the audit of your fund. As part of the signing off of the financial statements, trustees have to sign a declaration that the proper books and registers have been maintained by the fund and that they have proper controls in place to ensure the accuracy of your holdings in the fund.
Another requirement is disclosure that the fund, the investment managers and the administrators of the fund have proper fidelity insurance cover in place.
Albert says when appointing an auditor, it is important that your trustees don't appoint a firm on the basis of the cheapest quote alone.
Audits can vary widely in scope, and the knowledge and experience of auditing firms to deal with the specialised field of auditing retirement funds varies.
Trustees need a framework or score sheet, and the fee charged by the auditors is but one consideration in choosing the right firm to carry out the audit.
Albert suggests that trustees ask auditing firms the following questions before appointing them:
- What is the knowledge and experience of the auditing firm in relation to retirement funds?
- What approach will the firm take in auditing the fund and what factors will the firm consider in order to reach its opinions.
- How cost efficient and effective is the audit? The auditors should be able to demonstrate that the procedures they follow are necessary and relevant for the scope of the fund's audit.
- Will the audit address the risks that the fund faces?
Audits can cover the bare minimum or they can cover other areas of risk to a fund or particular risks that trustees may be concerned about.
- Is the auditor independent?
For purposes of auditing requirements, retirement funds are categorised into mini, small and large funds.
Mini funds are those which receive annual contributions not exceeding R150 000 and the total assets of the fund do not exceed R500 000.
Small funds are those in which the annual contributions do not exceed R350 000 and the total assets do not exceed R6 million.
Large funds are those with assets worth more than R6 million.
Not all funds have to adhere to the same auditing requirements.
The FSB is concerned about the costs of audits. It has indicated that audit fees for small funds should be between R8 000 and R10 000. Time will tell if this initial assessment is right, Albert says.
Because of the size of the funds and the cost of an audit, the regulator does not require mini funds to be audited. But they must still submit annual financial statements which are reviewed by an auditor.
In the past, audit-exempt funds simply had to fill out a form providing information about the fund's finances.
The auditing of small funds is a high-level review rather than the expression of an opinion on material fund balances as is the case with a full audit, Albert explains.
The FSB requires large funds to undertake audits which meet certain requirements. The types of audits undertaken cover three areas:
- The financial position of the fund and the results of its operating activities for the year;
- Various requirements laid down by the Pension Funds Act, such as whether the employer had paid over the contributions of members to the fund within the required seven days and whether information in the fund's financial statements has been reconciled with the fund's member register; and
- Whether the fund complies with Regulation 28 of the Pension Funds Act that lays down guidelines for the asset classes in which a fund may invest.