REPORT OF THE CURATOR OF SACCAWU NATIONAL PROVIDENT FUND (UNDER CURATORSHIP) ( the Fund ) NATURE OF THIS REPORT 1. This report is addressed to the Financial Services Board, and is an update of earlier reports and should be read in context of such reports. Having regard to changing regulatory environment in the Pension Fund industry and more specifically, addressing regulatory matters to the Fund, its restructuring given the departure of its former principal officer, and more particularly, the process in ultimately bringing the curatorship to an end, the Curator has during the past year subjected the Fund to a major review, which is still ongoing and which is reported on hereinafter, more fully. THE CHANGING REGULATORY ENVIRONMENT & REVIEW 2. The government s intention to restructure the financial service industry in line with its the Twin Peaks policy, for prudential and market conduct regulation of financial institutions split between SA Reserve Bank and the to be reconstructed Financial Services Board is particularly relevant to the pension fund industry and is impacting on the management of funds, including this fund. 3. The question of umbrella funds (both commercial and industrial/union) as reflected in the draft circular on the Commencement Termination and 1
Recommencement of Participation of Employers has been taken into account in the review of the Fund and its future. 4. The changes to Regulation 28 have presented far wider considerations, identifying the need to allocate percentages of assets to various asset classes, sub-classes or single assets, with the overriding principle of see-through, the appropriateness of asset/liability modeling and offshore exposure. The recent changes in the global economy and more particularly the South African economy with the accompanying volatility of exchange rates have become challenging factors in balancing of portfolios and managing volatility in the fund. 5. The principle of Treating Customers Fairly (TCF) with an overriding consideration of meeting the reasonable expectations of members is a factor requiring the Fund s attention with a view to assessing such expectations within the particular circumstances relating to the nature of the Fund and the composition of its members. 6. The changing circumstances during the passed year have dictated a revision of the Statement of Investments Principles (SIP), taking into account the changing financial environment, regulations and reasonable expectations of members. Among other things the fund needs to take into account, in tailoring the revised principles, what appears to be a more difficult challenge in achieving required 2
Fund returns, a phenomena not only limited to South Africa, but something that is experienced in the pension fund industry world wide. 7. The tax changes presently in the process of implementation have a significant impact on fund administration, taking into account variable contribution rates insofar as participating employers may set minimum contribution rates, but where members are permitted to contribute at a rate up to 27.5% of income. This alone presents challenges for administrators in record keeping and reconciliations. 8. The phasing out of provident funds. If preservation tax changes are introduced and implemented, this could result in an additional record-keeping burden for the Fund. Separate records will have to be kept for savings and returns which a member will be able to take the proceeds in cash; and another set for the purchase of a pension at retirement. 9. The changing investment environment such as relaxation of exchange controls, internationalization of investment markets, the prospect of local and international economic volatility, the lower expectations of returns and the need for lower costs serves to present wider challenges in funds. It means that retirement funds must consider the full spectrum of products ranging from alternative products, such as private equity and synthetic index linked and guaranteed products through to smooth/ stable bonus products with or without capital guarantees. 3
10. The aforesaid considerations in certain respects dictate the update of the Fund rules, the Fund s SIP, off-shore exposure, the Fund s Code of Good Governance, the need to review effectiveness of current communication with members, the need to review Risk Management Policy and re-broke of risk policy, to mention but some of the challenges which require to be addressed. PROGRESSION OF THE REVIEW AND RESTRUCTURING OF THE FUND 11. During the past year, the Curator adopted a step-by-step process in reviewing all the operations and management of the Fund, although some tasks could be carried out in tandem or even completed before others in non-related cases. 12. As already indicated a new draft Code of Conduct was compiled for the Fund that will dictate the behaviour all Fund officials as well as service providers. 13. The Draft Code is at its final approval stage to ensure it meets all legal requirements. It is intended that the Code will also contribute to the proper administration and governance of the Fund when it is taken out of Curatorship to prevent a repeat of the problems that caused the placing of the Fund under curatorhsip. 14. A rebroke of the Fund s group risk assurance has also been undertaken. The proposals are in the hands of the Curator, who is negotiating, for the best 4
cost/benefit structure for members. This process should be completed within the next 30 days. 15. The key issue involved in the review of the Fund was that a proper member profile should be undertaken to help establish the reasonable expectations of members as the foundation for most other decisions, including the review of the Statement of Investment Principles. The required member profile information has been provided by the Fund s administrator, Old Mutual and further calculations were undertaken in preparation of the Member Profile Report. A key factor revealed is that there is an effective total turnover of membership every five years. 16. The phenomena of a high early withdrawal of membership and the demands of the Pension Funds Act present a conundrum in the review of the Fund s Statement of Investment Principles. The results of the Membership Profile data show that Fund members can be divided into two groups, namely: * The early withdrawal group: This group makes up the bulk of members. Their reasonable benefit expectations are not based on any possible pension at retirement age (whether via continued membership or preservation of accumulated savings). Their expectations are based on receiving a reasonable cash amount on early withdrawal. The consequence of this expectation is that the Fund 5
cannot follow any investment policy that results in a high level of volatility; It must be emphasized that extremely few members will be required to preserve accumulated savings in terms of the Taxation Laws Amendment Act 2015 in the Fund because the vast majority withdraw or retire with less than the proposed minimum amount. This is dealt with in some detail in the Membership Profile Report. ** The retirement group: This group, although, exceedingly small must also have its reasonable expectations met. The problem in providing for a reasonable expectation is that contribution levels of members are varied although the bulk of members in both groups make (employer and employee) contributions of about 15 percent of pensionable income. Although not an exact science because the variables for each member are different, the Fund has decided to use a generally targeted replacement rate of a minimum of 60 percent of final pay after 40 years of membership as a basis for meeting the reasonable expectations retiring members as a basic principle in the review of the SIP. 6
17. The SIP currently states that the targeted investment return is 3.5 percent a year to provide a retirement benefit that is a multiple of 8.5 of a member s preretirement annual pensionable income, assuming a contribution rate of 12 percent of annual pensionable income for 40 years and based on salary inflation of one percent a year. A replacement rate is not provided for. The final replacement rate will depend on decisions to be taken in the revision of the Statement of Investment Principles with the expectations of the early withdrawal group balanced with those of the retirement group taking account of the requirements of the Pension Funds Act and TCF. 18. A review of the Statement of Investment Principles (SIP). This is currently underway with input being sought from the Fund s asset management consultant, Willis Towers Watson, as well as various product providers. This work is still in its early stages but is expected to progress quite rapidly from this point with the completion of the Membership Profile report. 19. Although the Fund has received sound average returns over the past number of years, significantly above the targeted real (after inflation) return of 3.5 percent over a rolling three-year period, recent investment market developments could undermine this historic performance. 20. The completion of the Membership Profile has been an important element of reviewing the SIP. Work has already been underway in the following areas: 7
assessing appropriate generic investment vehicles, including multimanagement, smooth/stable bonus products, passive and active management. 21. It is important to note that the Fund currently has a fairly large exposure to an Old Mutual smooth bonus product as part of its current strategy to reduce volatility and gain offshore exposure. Discussions on an appropriate smooth bonus products are well progressed. The Old Mutual Coregrowth smoothed portfolio provided the best return over the five years to September 30 2015 with a total average annual return of 12.9 percent. 22. Assessing an appropriate level of offshore exposure has been undertaken and assessing the ability of the current individual asset managers in addressing under exposure to offshore investment. 23. As soon as these assessments are completed work will start on redrafting the SIP. About 70 percent of the total investment portfolio could be placed in one or more smooth/stable bonus products having regard to diversifying manager risk. It should be noted that life companies are now starting to offer segregated, customized smoothing products, which can be adapted to the needs of particular funds. About 30 percent of the total portfolio might be placed with asset managers to meet requirements such as ensuring the optimum level of offshore exposure; meeting empowerment requirements in asset management, obtaining access to alternative investments (the Fund already holds an interest 8
in a private equity portfolio). An important element of this exercise will be the containment of investment costs of both current and any future asset managers and any possible transition costs as well as determining acceptable levels of risk. FURTHER IMPLEMENTATION OF REVISED INVESTMENT PRINCIPLES 24. There are a number of issues on the overall agenda for a total review of the Fund. It is intended to complete the task of revising investment principles as soon as possible. The Fund is however unable to provide a completion date at this stage particularly because of uncertainty over regulation. As soon as the SIP redraft is completed then consideration will be given to the appointment of new asset managers, the realignment of the Fund s assets to meet the requirements of the new SIP, a review of the Rules of the Fund taking account of the new SIP and new regulatory requirements. 25. A general review of all service providers is being undertaken. 26. A communication policy is being drafted. (It should be noted that the current controversy over aspects of the Taxation Laws Amendment Act 2015 is having a negative effect on Fund members, with greater potential fund withdrawals. Currently steps are being taken to address the concerns of members. Appropriate letters will be sent to members.) 9
27. An assessment of all major risks facing the Fund and the preparation of a Risk Management Strategy Policy is being undertaken. ADMINISTRATION OF THE FUND 28. The Fund continues to be administered under the curatorship, with the assistance of the in house staff of the Fund and service providers. The in house function of the Fund continues with a present staff compliment of 12 members. The further general administration is undertaken by Old Mutual in terms of Section 13B of the Pension Funds Act. OFFICE OF THE PRINCIPAL OFFICER 29. The former Principal Officer of the Fund was found guilty of a number of charges, which resulted in his dismissal during April 2015. The Principal Officer challenged the finding of the Chairman of the disciplinary enquiry and referred the matter to the Commission for Conciliation Mediation and Arbitration (CCMA). A CCMA-convened arbitration hearing commenced in September 2015 and after hearing evidence over some 13 days, the hearing is scheduled to recommence on 9 March 2016. The duties and function of the former Principal Officer continue to be undertaken by the Curator with the assistance of his staff and a newly appointed manager. The new manager has considerable experience in the retirement fund industry and was formerly employed by a major retirement fund administrator and insurer. He has since commencement of his employment on 10
1 January 2016 attended to many of the duties of a principal officer and will continue to do so with a view to the Fund ultimately coming out of curatorship when the role of a principal officer will have been fully identified and an appropriate appointment is made. ASSETS 30. As at 31 December 2015, the value of the assets was R5 895 426 465 compared to R6 050 973 000 at 31 December 2014. The drop in the asset value can be attributed to negative and/or reduced market investment returns. The Fund had nett current liabilities of R616 940 000 on compared to R404 500 000 as at 31 December 2014 and unclaimed benefits of R98,1 million as at 31 December 2015 compared to R78,5 million as at 31 December 2014. 31. Final Fund bonus rates continue to be declared monthly in advance and a final fund bonus rate adjustment is made following on actuarial valuation insofar as may be necessary. This practice results in the liabilities of the Fund corresponding closely to the market value of the assets of the Fund. FINANCIAL SOUNDNESS 32. The Fund continues to be financially sound and annual statutory valuations are undertaken to monitor financial soundness and evaluation of assets, liabilities and benefits. 11
INVESTMENT RETURN 33. The net-of-fees investment performance of the Fund for the year ended 31 December 2015 is of the order of 6.18% to 11.5% for the year-end 2014. The investment strategy remains conservative and targets a net return of 3.5% above inflation. The considerable drop in the investment return can largely be attributed to the political and consequent economic events, particularly during the last quarter of 2015 such as foreign exchange and the decline of equities wherein the fund holds investments. MEMBERSHIP 34. As at 31 December 2015, there were 97361 active members in the Fund. There are no deferred pensioners or current pensioners. In terms of the Rules of the Fund all benefits are paid as a cash lump sum in terms of GN18 or are used to purchase an annuity from an insurer. In terms of the Rules of the Fund, the Fund s obligations cease at retirement when benefits are payable. BENEFITS 35. The Fund provides benefits on a defined contribution basis, where the benefit is equivalent to the member s individual accumulated credit. A member will receive his/her equitable share on exit from the Fund, which is a smoothed net fund return. The Group Life Assurance risk premiums of the Fund have been capped at 6.5% to avoid erosion of retirement savings of members. 12
36. In the event of death before retirement, a lump sum benefit equal to the sum of the member s accumulated credit and proceeds of the Group Life policy is paid. The normal retirement age varies between 60 and 65. A member may commute for cash so much of his retirement benefit as is permitted in terms of the Income Tax Act, 1962 (Act 58 of 1962). The risk premiums that applied during the valuation period were as per the table below: TYPE OF INSURANCE Group Life Assurance 4 times Annual Salary LEVEL OF COVER Every Non-core multiple Disability Benefits Spouses Cover 75% of pensionable salary 1 x annual pensionable salary Funeral Cover Member R22 000 Spouse R16 500 Child (14 yrs +) R14 000 Child (6yrs to 14 yrs) R7 000 CONTRIBUTIONS 37. The employee contribution rate is a minimum of 6.5% up to a maximum of 10% and the employer s contribution is a minimum of 6.5% up to a maximum of 20.8% 13
FINANCIAL STATEMENTS AND ACCOUNTING 38. The Fund continues to maintain proper financial records and accounts. The benefits administrator, Old Mutual, maintains records of contributions received and expenditure, the most significant being the payments of benefits. The Curator and his staff have regular meetings with Old Mutual and the auditors, Deloittes. 39. All financial statements are up to date and the audit for the period ending 31 December 2015 is in the process of being completed. SECTION 37 (C) RESOLUTIONS AND DISTRIBUTION OF FUNDS 40. The SACCAWU National Beneficiary Fund and the SACCAWU National Trust are administered by Fairheads of Cape Town and the Curator serves as Chairman on the boards of these Funds. Resolutions in terms of Section 37 (C) are processed regularly. This function of making decisions for the purpose of Section 37 (C) determinations is in many respects a subjective and challenging task. The Curator is reliant upon information and investigations conducted by the Fund s in-house team. Information is sourced nation-wide and in many respects from rural areas often necessitating travel to such areas to conduct on site investigations and to obtain documentation in support of dependency claims. 14
PENDING LITIGATION Merit Litigation 41. A trial date is still awaited in this matter. 42. SACCAWU Investment Holdings (In Liquidation) (S.I.H) Litigation As previously reported, a final judgment was obtained against the Union in the sum of R25 million and the indebtedness continues to be repaid by monthly installments. 43. Arbitration: Mafa Dlamini The arbitration proceedings are scheduled to continue on 9 March 2016. Outcome of these proceedings is not expected before April/ May 2016. It has been undecided that should Mr Dlamini not prevail in the arbitration proceedings, he would look to appealing to the Labour Court. 44. Irregularities There has been extensive reporting on various irregularities of fraud which continue to be investigated. A number of matters continue to be investigated by the SAPS and in a recent breakthrough by the Fund which identified a syndicate operating for the purpose of processing fraudulent claims utilizing identity theft. Recently a number of suspects were arrested and are presently undergoing prosecution in the criminal system. A number of other irregularities continue to be investigated. 15
General Litigation 45. The Fund is involved in a number of actions whereby recoveries are being made in terms of Section 13 of the Pension Fund Act against participating employers. The Fund is also involved in a number of potential litigious issues arising from complaints and the intervention of the office of the Pension Fund Adjudicator. RECOMMENDATION 46. I refer to the number of recommendations I have previously made with regard to the future of the Fund. The present status of the Fund necessitates me to provide updated recommendations for the future of the Fund, namely: 46.1 The present investigation into recent irregularities and fraud should continue to be investigated by the Curator s office, Old Mutual (its administrator), and independent forensic investigators and the South African Police Services. 46.2 That the Curator continues to take charge of the functions of the office of the former Principal Officer, with a view to normalizing affairs and ultimately appointing a suitable replacement Principal Officer. This process is far advanced and will be reported on separately. 16
46.3 That the Curator should interact with the Registrar of Pension Funds in determining a suitable and appropriate basis for the Fund to continue once out of curatorship, and with this in mind: 46.3.1 that the revision of the Fund structures, its governance and revised financial structures and objectives be completed and that the consequent restructuring and positioning of the Fund be completed; 46.3.2 that in cooperation with the FSB, the question of future composition and selection of a board of trustees be evaluated, taking into account the past history of the Fund and its present challenges; 46.3.3 that in consultation with the FSB, amended rules of the Fund should be considered whereby the Fund is safeguarded against Union control and influence. 46.3.4. That in consultation with the FSB, a timeline be established. A L Mostert CURATOR 17 FEBRUARY 2016 17