All retirement funds will have to appoint an auditor and have their financial statements audited and reported on by an auditor if a draft prudential standard published by the FSCA is implemented in its current form.
In its statement supporting the draft prudential standard, the FSCA acknowledges that the standard will have “an immediate financial impact on all funds that were not previously subject to the audit requirements – for example, funds that are terminating and those that had previously been exempt from the audit requirements, as they had total assets that did not exceed R50 million”.
It said the financial impact on smaller funds “should be manageable for most funds”. The FSCA said these funds should make provision for audit fees timeously to avoid not having sufficient funds for an audit to be performed.
The auditing and reporting requirements for retirement funds are set out in various board notices, which the FSCA wants to replace.
Board Notice 77 of 2014 exempts funds that have assets less than R50m at their financial year-end from the requirement to have their financial statements audited and reported on by an auditor in terms of section 15(1) of the Pension Funds Act (PFA).
However, funds with assets below R50m but above R6m (known as “small funds”) must appoint an auditor in terms of section 9(1) of the PFA to perform agreed-upon procedures in line with international standards, as adopted by the Independent Regulatory Board for Auditors (Irba).
Funds with assets below R6m do not have to appoint an auditor.
But the FSCA said it has “become evident” that the financial statements of all retirement funds must be audited, irrespective of size, to ensure that the Authority can exercise effective oversight.
In addition to the exemptions in Board Notice 77, the proposed prudential standard will repeal:
- Board Notice 14 of 2009 (Regulatory reporting requirements for retirement funds);
- The exemptions in Retirement Fund Notice 5 of 2020 (Exemption of large funds from certain prescribed formats for preparing financial statements under section 15 of the PFA);
- The exemptions in Retirement Fund Notice 5 of 2022 (Exemption of funds from using certain prescribed formats for preparing financial statements under section 15 of the PFA);
- The cash basis of reporting; and
- The look-through reporting exclusions for guaranteed policies, as set out in PF Notice 2 of 2014 (Exemption from regulation 28(8)(b) – requirements for audit certificate of compliance with regulation 28).
The FSCA said the withdrawal of the various exemptions will ensure equal protection before the law for members of all retirement funds, irrespective of fund size.
Reasons for the prudential standard
The amendments to regulation 28 under the PFA take effect on 3 January next year, which will require additional reporting from funds in respect of infrastructure investments and other asset allocation spreads. However, this is only one of the reasons the FSCA gave for introducing the prudential standard.
It said the current regulatory reporting requirements, including the formats for reporting, are to some extent outdated. For example, in March 2018 and 2022, Irba approved two new illustrative auditor’s reports, but Board Notice 77 prescribed the old, outdated formats. The only way in which the FSCA could facilitate the use of the new formats was by issuing an exemption (Retirement Fund Notice 5 of 2020).
A further reason is that consistent and robust reporting across the retirement fund industry facilitates the comparability of financial statements and provides a basis for the reliability of financial statements. This is necessary to ensure that retirement funds are financially sound and conducted in a transparent and responsible manner, thereby contributing to better protection for fund members.
The FSCA said it was accepted internationally that the International Financial Reporting Standards (IFRS) and the International Accounting Standard (IAS) were not wholly appropriate for the retirement fund industry. It is unlikely that global standards for retirement funds will be developed in the near future.
To ensure the consistency, transparency and comparability of South African retirement funds’ financial statements, it is important that the financial reporting requirements are, to the extent practical and possible, aligned to the IFRS and the IAS. Misalignment with the IFRS and the IAS could undermine the credibility of the country’s retirement-funding system, the FSCA said.
Overview of the draft standard
The draft prudential standard proposes to consolidate all audit and regulatory reporting requirements into one instrument by replacing, among others, Board Notice 14 and Board Notice 77.
It incorporates both the regulatory reporting requirements and the format of the financial statements into one document.
The FSCA said much of the content of the draft standard is based on board notices 14 and 77. However, the draft standard provides enhanced detail relating to reporting concepts, additional definitions, and expands certain paragraphs of the regulatory reporting requirements in line with amendments to the relevant sections of the IFRS and the IAS.
Guidance Notice 1 of 2019 encourages funds to report on their policies, programmes and performance in respect of environmental, social and governance factors. The draft prudential standard requires a fund’s trustees to disclose certain information relating to how their investment policy statement is aligned to the guidance notice.
Click here to download a table that summarises the proposed changes to the financial statements.
Deadline to comment
Interested parties have until 18 January 2023 to submit comments on the draft prudential standard. Comments must be submitted on the template (Word document) and emailed to FSCA.RFDStandards@fsca.co.za.
For more information, contact the FSCA’s Regulatory Frameworks Department at Viloshnee.Naidoo@fsca.co.za or Andile.Mjadu@fsca.co.za.
