Well-Functioning Audit Committees In The Retirement Fund Industry

What makes for an effective audit committee?

“The retirement fund industry in South African is huge, valued at R3.2 trillion, comprising of 5,100 pension funds[J1] [DC2] ,” says Mahendrin Moodley, Retirement Fund Sector Audit Leader at Nkonki. “Good governance is therefore crucial.”

Moodley explains that the governance of pension funds includes establishing several board committees, one of these being the Audit Committee (the AC).

At Nkonki’s 5th Annual Audit Committee Conference 2015, key players in the retirement fund industry shared their thoughts on what makes for an effective pension fund Audit Committee.

A never-ending list of risks – Prabir Badal, Government Employees’ Pension Fund (GEPF)

 “The Audit Committee is the eyes and ears of the board in general,” says Badal, “and must look at issues that cut across the fund on a micro level. It has to oversee financial management risk, the functions of internal and external audit, compliance, financial management, variance reporting, and forensics to name a few. It has to bring these all together and make a difference in the fund.”

Risk management is top priority for Badal, and understandably so as the GEPF is South Africa’s largest pension fund, comprising one third of the country’s GDP, and is by far the largest single investor in the local economy. He reflects back to the 2008 Financial Crisis. “We had all our relevant assurances in place. However the fund still lost R150 billion is a very short period of time.”

Putting the spotlight on service providers, Badal says the Audit Committee must make sure that these suppliers are held accountable to the fund. “The fund is in charge, not the other way round, and there has been some resistance to who is the boss. Service providers need to start sharing in a united vision for the pension fund.”

Badal also frowns upon any fraud taking place in retirement funds – no matter how small – as this detracts from pensioner payments.

A happy family of subcommittees – Vusi Mashile, Chairman of SAMWU National Funds

Mashile is highly focused on the level of skills of those serving on the Audit Committee, and also looks at the relationship between this committee and the external auditors. “The Audit Committee must be sufficiently skilled so that it only consults the external auditors on exceptional challenges where specialist advice and intervention is required. Members of the AC need to build their own internal capacity so they do not have to repeatedly consult other parties.”

Mashile considers the relationships between the various subcommittees of a retirement fund essential, with the Audit Committee being one of these. “Subcommittees need to understand how they are all related in terms of risk, investment, audit and so on. This means that delegation to these committees must be very clear and understood by all parties. They must know how to communicate with each other in order to supporting the board and the overall fund.”

Avoiding further Fidentias – Maemili Ramataboe, Pension Fund Governance Consultant

Combined assurance means integrating and co-ordinating the activities of all assurance service providers, such as external and internal audit, and Ramataboe would like to see more of this in pension fund corporate governance. She observes there are retirement funds that do not have internal audit functions, as this obviously adds to their expenses. “However, the risks will be much higher for funds that lack internal audit, and this in turn could mean huge costs and losses in the case of governance failures, such as Fidentia.”

Ramataboe stresses the importance of legislation in determining the mandate of the Audit Committee, and in fact would like to see more of this. “There is not enough guidance on governance in pension funds, and funds follow different structures. The bigger funds have their own audit and risk committees that look at controls, risk management, compliance, etc. But in the smaller funds, if they indeed have an audit committee, it tends to only focus on annual financial statements.”    

Above reproach, concentrate on risk – Omar Gire, Principal Officer, MIBFA

“The majority of members of the Audit Committee must be independent,” recommends Gire. In fact, he prefers to have independent trustees sitting on all of the various committees of a pension fund so that conflicts are avoided throughout the organisation. “And all committee members must be trustworthy, and never engage in collusion. Trustees must feel that they can refer any of their concerns to the AC, and that these will be properly dealt with.”

Gire says the AC should promote greater collaboration between internal and external audit, but that internal audit must remain completely independent. He also recommends that fund risks be managed on a more regular basis, not evaluated just once a year.

Internal audit of other role players – Mark de Klerk, Independent Retirement Fund consultant  

De Klerk feels strongly that the Chairperson of an Audit Committee must be an independent, and once this committee is properly established, its functions go well beyond simply looking at the annual financial statements each year. “The AC should also ensure that the internal audit reports of external fund service providers are available. For example, it should be looking at the internal audit of fund member employers to ensure that correct pensionable salaries and rates are being used by payroll. This means developing a relationship with the Internal Audit function of all stakeholders.”

Service providers need greater oversight – Sbu Luthuli, Batseta Council of Retirement Funds

“Service providers such as administrators cannot be wished away and are an integral part of the industry,” says Luthuli. “So the Audit Committee needs to play a crucial oversight role in making sure that Service Level Agreements are in place and that these parties are held accountable. The fund must know exactly what it is paying for with regard to each service provider, so it can then effectively assess performance of these suppliers.”

As a final caution, Luthuli says that those serving on the Audit Committee of a retirement fund should not accept the appointment if they are not prepared to invest in the time and constant self-improvement required for the position.


 [J1]Mahendrin also says over 15 000 members – surely is million?  Or is ‘member’ being used in some other context?

Pls check with him – add in if necessary

 [DC2]Hi – leave out in the interests of time. I suspect million is correct though. 

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