• Manja Serfontein – Actuary

Valuation Exemption Unpacked

Trustees are ultimately responsible for the compliance of a retirement fund with a multitude of statutory requirements that funds are subjected to. Anything that may reduce the corresponding administrative burden will probably be welcomed by most Trustees, like the opportunity to apply for exemption from having to submit statutory actuarial valuations. The application is made to the Financial Sector Conduct Authority (FSCA).

However, the unintended consequences of valuation exemption should be carefully considered as it significantly increases the Trustees’ own responsibility towards ensuring the fund’s financial soundness if they no longer use the services of an actuary to support them in this regard.

The actuarial perspective

Some might argue that an actuary’s role in a defined contribution retirement fund is redundant where the assets in such a fund should, per definition, remain equal to its liabilities. However, for this argument to hold one must assume that the fund’s administration and financial records are 100% accurate at all times.

There are various specialists involved in the prudent management of a retirement fund, each with a different focus towards ensuring the accurate operation of the fund. A consultant provides advice on benefit design and the rules of the fund in accordance with the applicable regulations; the administrator is responsible for the day to day operation of the fund and to maintain accurate member records; investment consultants manage investment portfolios in line with the fund’s strategies; auditors provide an opinion on the fund’s governance and controls and on the reliance that can be placed on financial statements based on, amongst others, procedures and sample testing of some transactions.

Broadly speaking, an actuarial valuation brings together all of the above separate functions to produce a consolidated view of the fund’s overall financial position:

  • The actuary checks the operation of the fund for consistency with the rules of the fund and any policies of the fund (e.g. investment policy);

  • He or she further confirms whether all contributions received are reflected in the financial statements and that net contributions towards retirement are accurately allocated to members in terms of the rules;

  • Investment returns provided by investment consultants are reconciled to returns as reported in the financial statements and those allocated to member records;

  • Combining the preceding 2 points, the actuary effectively checks that the build-up of each member’s fund credit /member account is correct;

  • Benefits accrued in the audited revenue account are reconciled with individual member movements on the administrator’s records;

  • Investment statements are reconciled to the fund’s cashbook. This effectively verifies the accuracy of all cash flows as reported in the financial statements; and

  • A detailed analysis of experience is then performed to identify and quantify all data or processing variations that occurred during the period since the previous valuation.

There are bound to be some level of processing variations in a fund that will result in unallocated amounts. It is important to thoroughly understand the origin of such unallocated amounts in order for Trustees to make informed decisions as to the utilisation of such amounts. This could include changes in operational processes, corrections to member records where applicable or distribution of any surplus or shortfall amongst members and reserve accounts.

In short, the actuary’s role is to provide an independent professional view on all facets of the fund, i.e. both assets and liabilities, in order to assess the overall financial soundness of the fund. The results of such an actuarial review then allows the Trustees to make informed decisions and/or to implement corrective measures, if required.

Regulatory framework

In terms of the Pension Funds Act every retirement fund must appoint a valuator and must submit a statutory actuarial valuation at least once every 3 years. However, a fund may be exempted from these requirements if it meets certain criteria. This is commonly referred to as valuation exemption and needs to be renewed once every 3 years.

To apply for valuation exemption, the valuator of a defined contribution fund must certify that the fund meets the following main criteria:

  • The fund must be fully funded, i.e. assets should exceed all liabilities. For the purpose of this certification the valuator can rely on the results as set out in audited financial statements without performing a review of this information;

  • The fund may not carry any open-ended pensioner liabilities. All pension payments must therefore be fully secured by annuity policies or, in the case of in-fund living annuities, must be limited to the amount available in the member’s account;