Retirement funds that have until now enjoyed an audit exemption, should welcome the removal of this exemption, if it is legislated, George Cavaleros, a partner at Deloitte & Touche's Financial Institutions Services Team, says. We report on the recent Personal Finance and Old Mutual Actuaries & Consultants seminar on retirement fund governance.
The Financial Services Board (FSB) is considering removing the exemption granted to certain retirement funds from being audited. This is long overdue, George Cavaleros says.
Generally, retirement funds which have placed all their assets in insurance policies are currently audit-exempt. Cavaleros says there is a misconception among some trustees and fund members that it is unnecessary to audit these funds because the administrator is required by law to be audited and during this audit, the funds' risks are assessed.
But, Cavaleros says, issues raised in audit reports to administrators are seldom brought to the attention of the trustees of the individual funds. Also, audits of the administrator are intended to deliver an opinion of the administrator's financial statements as a whole.
Experience has shown, he says, that audited funds generally have a higher level of governance than audit-exempt funds and that retirement fund administrators pay more attention to audited funds than to exempt funds, probably because they are aware that these funds will receive closer scrutiny.
This increased attention can only have a positive impact on the retirement fund industry, Cavaleros says.
Problems facing funds
The 2001 Deloitte & Touche Retirement Fund Governance survey found that retirement funds faced administrative problems, accounting and internal control weaknesses and errors affecting the valuation of individual member's future benefits. This is probably the most critical risk facing members in defined contribution funds, he says.
As a member or trustee of an "exempt fund", you should be concerned about these problems because they affect not only the accuracy of your benefit valuations, but also the credibility of the financial reporting of your fund's activities and the quality of service you get from your fund's administrator.
Cavaleros says it is easy to prove that an audit is a prerequisite of good fund governance, as evidenced by numerous conflicts of interest among the stakeholders, including the regulator of retirement funds, the trustees, the members, the administrators and to a certain extent, the auditors.
The regulator
The FSB has for many years been recommending the removal of the audit exemption. Cavaleros believes this is because the FSB has recognised that auditing funds promotes good governance of funds and enables the FSB to regulate them more effectively.
For example, auditors can be requested to blow the whistle on undesirable practices within funds, as is the case in certain overseas countries.
Many people believe that the FSB is already swamped with work and that the removal of the audit exemption and the need for more funds to report to the FSB, could place an additional administrative burden on it. Cavaleros says that if the FSB needs to increase its capacity, it should invest in this before legislation on audit-exempt funds is amended.
Trustees
Trustees are ultimately responsible for their funds and it is not enough for them to claim that, in carrying out their duties, they have acted in good faith, Cavaleros says.
Trustees must be able to demonstrate that they have discharged their governance responsibilities if they want to avoid personal liability if things go wrong, for instance, if members suffer a financial loss.
If challenged, trustees should be able to show that they have been kept up to date on key issues relating to their fund; that they have been independently assured that the risks facing their fund have been appropriately managed; and that their fund's accounting records have been independently reviewed.
Auditors are suitably placed to assist trustees in meeting these obligations, Cavaleros says.
Members
As a member of a fund, you are the eventual beneficiary of the fund's assets, and will be the loser financially, if your fund is not managed appropriately. The big shift from defined benefit to defined contribution funds has greatly increased the risk that retirement fund members assume.
Members need independent assurance that their individual retirement interests are being protected and that their fund is managed within an acceptable governance framework.
An audit can provide this assurance, he says.
Retirement fund members are becoming more aware of their rights and are prepared to exercise them through legal action if necessary, Cavaleros adds.
It is expected that members will demand more transparency from their retirement funds about the health of their fund. They will increasingly call on the member-elected trustees to provide more detailed and regular feedback on the fund's activities and evidence that adequate governance structures, such as audit committees, have been implemented.
Cavaleros says audits highlight areas of concern and these concerns should be reported to the audit committees on which member-elected trustees are represented. This will not only ensure that trustees become aware of issues facing the fund as soon as possible, but it will also ensure that they increase their interaction with fund auditors.
Other considerations
Introducing audits for a previously exempt fund may mean that trustees and the principal officer will have to invest more time in the affairs of the fund, which is probably not a bad thing, Cavaleros says.
Unfortunately, the costs of running these funds will increase and these costs will probably be passed on to the members, he says.
The increase in costs will be a result not only of the audit fees, but also the costs that other role players, such as the regulator and the administrators, will incur as a result of the removal of the exemption.
Administrators
Administrators of retirement funds should not view the proposed removal of the audit exemption as having a negative impact on the industry or on their businesses, Cavaleros says.
The planned change in legislation should rather be regarded as a major opportunity to win back any lost client confidence, with increased transparency and to improve their business for the benefit of their clients and shareholders.
Cavaleros says there is no doubt that these "opportunities" will come at a cost, but they could be recovered over a reasonable period directly from clients or through improved efficiencies. It is critical that administrators see these costs for what they are - an investment in the future, he says.
Auditors
Cavaleros says he concedes that the removal of the audit exemption could increase revenues for the audit firms.
There is constant pressure on audit firms to cut reasonable fees in order to keep the audit engagement. But this is not sustainable and increases the audit risk, which is not in the interests of any of the stakeholders.
Cavaleros says it will be interesting to see how the auditing profession addresses this fee-related matter.
Auditors have a valuable role to play in the governance of funds. Cavaleros has the following tips for funds:
- That trustees play a more active role in selecting their fund's auditors and liaising with them, instead of leaving it to the administrators;
- That the fund's auditor be independent of the administrator, to avoid potential conflicts of interest. Trustees should not appoint the administrator's auditors as their fund's auditors, even through many administrators may argue that such appointments are less expensive;
- That where a firm audits both the employer and its fund, different partners be assigned to the audits; and
- That auditors and trustees meet regularly to discuss risks facing the fund.
What's a defined contribution fund?
With a defined contribution fund you and your employer contribute a pre-agreed amount every month. The most important difference between a defined benefit and defined contribution fund is that with a defined contribution fund the risk of having a pension which is sufficient at retirement is yours.
There are two types of defined contribution schemes:
- Defined contribution pension fund (also known as a money purchase fund):If you are in a defined contribution pension fund you can but you are obliged to purchase a pension (annuity) with two thirds of the money at retirement.
- Defined contribution provident fund. With a provident fund you can take all the money at retirement and do with it what you wish. You must decide how to invest the money to give you a monthly pension. You cannot deduct your contributions against tax income while saving for your retirement.
Role of the administrator
The administrator is appointed by the trustees of your retirement fund to handle the day-to-day management of the fund, and is paid by the fund for its services. There are companies that specialise in the administration of retirement funds and life assurers generally also offer this service. To perform this function, the administrator must be registered with the Financial Services Board.