Wilma Mokupo: Head of Department: Pensions Prudential Supervision, FSB

Page 2 GROWING INDUSTRY ► Administrators: 168 ► Number of registered funds: (with under active funds) ► Membership: 15,2 million (2013) (some are members of more than one fund) ► Total assets: R 3.2 Trillion (2013) Great responsibility lies with Boards of retirement funds and their sub- committees to control, manage & oversee retirement fund assets & protect rights of members

Page 3 Role of trustees & subcommittees Section 7A of PFA/ Pension Funds Act No 24 of 1956 (as amended) ► Skills & training: Section 7A(3) A board member (trustee) must attain & retain levels of skills & training as prescribed (see draft IFC) ► Whistle-blowing: Section 7A(4) (b) A board member on becoming aware of any material matter iro the fund which, in his/her opinion, may seriously prejudice the financial viability of the fund or its members, inform the registrar, in writing Note: whistle-blowing provisions for principal officers, valuators, administrators & auditors* (s8 & s9 of PFA, APA iro reportable irregularities)..Combating of financial crime & fraud prevention (PROCTA, COCA, AML-CFT)

Page 4 Role of trustees & subcommittees Section 7C of the PFA: The purpose of the board is to: direct, control & oversee the operations of a fund in accordance with the applicable laws & the rules of the fund take all reasonable steps to ensure that the interests of members in terms of the rules of the fund & the provisions of this Act are protected at all times, especially in the event of: transfer of any business ito section 14, termination or reduction of contributions to a fund by an employer, increase of contributions of members and withdrawal of an employer who participates in a fund; act with due care, diligence and good faith; avoid conflicts of interest; act with impartiality in respect of all members and beneficiaries; act independently; have fiduciary duty to members & beneficiaries iro accrued benefits or any amount accrued to provide a benefit as well as a fiduciary duty to the fund: to ensure that the fund is financially sound & is responsibly managed & governed ito rules & PF Act; comply with any other prescribed requirements. Board may delegate (ito system set out in rules) but is not divested/ relieved of a delegated function (which can be withdrawn at any time)

Page 5 Role of trustees & subcommittees Section 7D of the PFA: Duties of the board: Ensure proper records of the operations of the fund Ensure proper control systems are employed on behalf of fund Ensure adequate & appropriate info is communicated to members regarding their rights, benefits, duties ito the rules Take all reasonable steps to ensure contributions are paid timeously ito the Act Obtain expert advice on matters where the board lacks sufficient expertise; Ensure the rules & operations & administration of the fund comply with the Act, the Financial Institutions (Protection of Funds) Act & all other applicable laws; and Comply with any other prescribed requirements.

Page 6 Role of trustees & subcommittees Section 7F of the PFA: Legal liability of the Board: ► Courts may relieve a board member (trustee), for reasons other than for wilful misconduct or wilful breach of trust, if it appears to the court that: - ► The board member (trustee) has acted independently, honestly & reasonably; or ► Having regard to all the circumstances of the case (incl. those connected with his/her appointment) it would be fair to excuse the board member (trustee)

Page 7 Role of trustees & subcommittees Financial Institutions (Protection of Funds) Act 28 of 2001 (as amended): Duties of persons dealing with funds of, and with trust property controlled by, financial institutions: ► must, with regard to such funds, observe the utmost good faith and exercise proper care and diligence; ► must, with regard to the trust property and the terms of the instrument or agreement by which the trust or agency in question has been created, observe the utmost good faith and exercise the care and diligence required of a trustee in the exercise or discharge of his or her powers and duties; and ► may not alienate, invest, pledge, hypothecate or otherwise encumber or make use of the funds or trust property or furnish any guarantee in a manner calculated to gain directly or indirectly any improper advantage for any person to the prejudice of the financial institution or principal concerned. Where in terms of section 1 of the Financial Services Board Act, 1990, a “financial institution” is defined as- - any pension fund organisation registered in terms of the PFA, or - any person referred to section 13B of that Act ► Also relates to declaration of interest; Investments, etc.

Page 8 ► Audit Committees & PF 130 ► Subcommittees of the Board est. for specific oversight OR board delegated responsibility if the registered rules of the Fund permit it ► Subcommittees should operate within specific parameters (terms of reference, mandates) ► Subcommittees should advise Boards on risks relating to their functions, processes & controls to mitigated such risks ► Subcommittees will vary from fund to fund based on needs analysis (size, complexity, type, member profile, etc) ► Cost -benefit analysis to create value add for members through fund governance structures ► Audit Committees “the guardians of the integrity of the financial statements” UK code, SOX, OECD, etc. ► Fairness, Accountability, Responsibility, Transparency, ESG

Page 9 Regulatory Reporting Requirements & AFS: A Governance & Risk Management Tool RRR = regulatory reporting requirements: Board Notice 14 of 2009 Quarterly regulation 28 non-compliance reporting Audited annual financial statements: Board Notice 77 of 2014 Statement of responsibility by trustees Statement of responsibility by principal officer Valuator’s report 3 audit reports (large funds > R50m NAV s.t. full scope audit, s15 factual findings report based on AUP, reg28 report) Types of audit reports (stand-alone funds, RAs, Preservation funds) Statement of net assets & funds Statement of changes in net assets & funds Notes to the financials Schedule IA – look through for derivatives to reference asset (derivatives not an asset class unlike private equity & hedge funds

Page 10 Regulatory Reporting Requirements A Governance Tool Regulation 28 quarterly non-compliance reports (discretionary & non- discretionary breaches): Non- discretionary (soft) breaches are uncontrollable such as market movements (12 months to rectify) Discretionary (hard) breaches are controllable such as out of mandate trades, wrong codification, wrong switches etc Triennial valuations (where applicable) & financial soundness Section 13B annual reporting by administrators Annexure C: Independent auditors report Annexure D:Management representation letter Reporting formats are prescribed after consultation with industry Registrar can issue administrative penalties for non-submission of statutory returns

Page 11 Regulation 28 combines nine Principles & Rules (i) Promote trustee education iro PF investments, governance & related matters; (ii) Monitor compliance with Reg28 by its advisors & service providers; (iii) In contracting services consider B-BBEE; (iv) Ensure fund’s assets appropriate for liabilities (ALM); (v) Perform due diligence, risk analysis before contracting e.g. credit, mkt & liquidity risks, operational risk for assets not listed on an exchange, etc. (vi) Before making contractual commitment in 3 rd party managed foreign asset or in foreign asset, perform reasonable due diligence iro currency risk & sovereign risks etc. (vii) In risk analysis take credit rating into account (but not sole criteria & not to exclusion of fund’s own due diligence) (viii) Understand changing risk profile of assets of fund over time through comprehensive risk analysis e.g. credit risk, mkt risk, liquidity & operational risk, currency risk, geographic & sovereign risk of foreign assets; (ix) Consider any other factors that may materially affect sustainable LT performance of fund assets incl. Environmental, social & governance factors (ESG)

Page 12 Some Regulation 28 Notices Notice on Guaranteed Insurance Policies: certificate to be issued by Statutory Actuary List of approved public entities funds may invest up to 10% Conditions for use of securities lending Conditions for investing in private equity Exemption Notice timing of audit certificates Conditions for investing in hedge funds (draft)* Conditions for use of derivative instruments (draft)** * Hedge funds now regulated under CISCA ** Draft regulation of OTC derivatives & single counter exchanges

Page 13 Reg 28: Asset spreading requirements Role of Audit Committee & risk management

Page 14 Considerations in terms of Investment Policy Statement & AUP Primary considerations for boards of trustees in revising the IPS: Current investments Degree of risk tolerance & Volatility of contributions Current & future liabilities Structure of your fund DB or DC or hybrid Liquidity & cash flow requirements & Maturity of your fund & Profile of your members & beneficiaries Essential elements of an IPS: Asset mix & expected rate of return Categories of investments e.g. list of acceptable derivative instruments to be used by the fund, if any) (see Notice conditions for the use of derivatives by retirement funds) Diversification Liquidity requirements Pledging & borrowing of fund assets (exercise extreme care) & Securities lending (see Notice containing conditions) Management fees & compensation ESG (environmental, social & governance factors) & Voting rights & Valuation procedures Related party transactions Se

Page 15 Current status Discretionary breaches: Minimise/ eliminate hard breaches such as wrong switches/ out of mandate trades as far as possible through systems changes & sanctions issued by trustees & registrar Non-discretionary breaches: Manage soft breaches such as market movements and correct within 12 month cycles from date of breach – don’t wait for the last minute to fix – could be costly… Good governance requires decisive action ! * Discretionary breaches already declining… ** Non-discretionary breaches due to mkt movements expected to remain

Page 16 Future landscape ► Non-financial information such as ESG becoming just as important as financial information through integrated reporting & advent of King IV; ► SAICA, IRBA, FSB, NT, industry RFPG & workgroup; ► FSB Workgroups with other industry bodies for consistency in interpretation incl. Batseta, IRFA, ASISA, SASLA, ASSA, SAVCA, IODSA, CRISA, etc. as well as National Treasury & SARS & SARB & SAPS, Organised Labour, Institutions of higher learning, NGOs, etc. ► Possible Interpretation Notice on regulation 28 to enhance consistency in industry

Risk-based supervision High Impact Administrator - Assets Under administration > R10 Billion Administrator Risk Rating Fund Risk Rating High Impact Funds - Asset Value > R100 Million High risk funds with a risk rating > 80 Compliance visit Fund Risk Assessment - Result - Adjustment of rating - Normal supervision - Controls in place to manage risk - Result - Adjustment of rating Compliance visit Administrator Risk Assessment High risk administrators with risk rating > 81 - Close supervision - Removal of trustees - Inspection - Liquidation - Curatorship -Referral to Enforcement Committee - Close supervision - Withdrawal of license - Inspection - Referral to Enforcement Committee - Normal supervision - Controls in place to manage risk

Page 18 Pensions Departmental Structure Surveillance & Enforcement - - Compliance visits 1. Funds 2. Administrators - Complaints Licensing & Registration - Registration of rules - Licensing of administrators - Analysis of annual Section 13B returns Prudential - - Analysis of financials - Supervision of liquidations Research & Policy - - Provides inputs for changes to legislation - Issue of directives circulars & information circulars

Page 19 Useful links

Page 20 AUDIT COMMITTEES !!!! Keep on assisting trustees in enhancing good governance of retirement funds savings ► Remain within your written TORs and delegations ► Remain accountable to the Fund & the Board ► Remain accountable to members through TCF !!!

THANK YOU