1. Public Investment Commissioners1 PRESENTATION TO PORTFOLIO COMMITTEE ON FINANCE Public Investment Commissioners 27 June 2003

2. Public Investment Commissioners2 CONTENTS 1.Fair Value of Portfolio 2.Asset Allocation 3.Investment Performance 1999-2002 4.Issues raised by the Office of the Auditor- General 5.Plans going forward

3. Public Investment Commissioners3 FAIR VALUE OF PORTFOLIO

4. Public Investment Commissioners4 Fair Value of Portfolio R' Billion 31-Mar-9931-Mar-0031-Mar-0131-Mar-02 Capital Market98.00110.80125.00136.60 Equities39.1061.5081.90105.80 Money Market25.2029.2025.4022.50 Property1.00 1.20 Other *13.8019.1019.8026.30 TOTAL177.10221.60253.10292.40 * Includes Structured Investment Products, Investment Policies and the Isibaya Fund

5. Public Investment Commissioners5 Rand Value of Portfolio

6. Public Investment Commissioners6 ASSET ALLOCATION

7. Public Investment Commissioners7 Asset allocation methodology Asset allocation ranges are provided to the PIC by its clients Asset allocations are based on liability profiles, risk and return requirements and liquidity needs of the clients Tactical asset allocation, i.e. specific asset allocation over the short to medium term is informed by prevailing market conditions and forecasts for individual asset classes The asset allocation is influenced by the magnitude of new cashflows and is not adjusted instantaneously as investments are made in such a way that market impact is minimised

8. Public Investment Commissioners8 Asset Allocation 1999 - 2002

9. Public Investment Commissioners9 Asset Allocation 1999-2002

10. Public Investment Commissioners10 INVESTMENT PERFORMANCE

11. Public Investment Commissioners11 Performance Per Asset Class 1999 - 2002

12. Public Investment Commissioners12 Performance per asset class for the four year period ended 31 March 2002

13. Public Investment Commissioners13 Annualised return per asset class for the 4-year period ended 31 March 2002

14. Public Investment Commissioners14 PIC’s performance relative to the median return - AFLMW

15. Public Investment Commissioners15 RESPONSES TO ISSUES RAISED BY THE OFFICE OF THE AG

16. Public Investment Commissioners16 AUDIT OPINION THE AG ISSUED AN UNQUALIFIED AUDIT OPINION FOR THE OPERATIONS OF THE PIC

17. Public Investment Commissioners17 AUDIT OPINION Assets managed on behalf of other parties QUALIFICATIONS Financial risk management Movement of funds Bank reconciliation Accounting practice

18. Public Investment Commissioners18 Financial Risk Management The PIC has since adopted a comprehensive risk management framework and policies Limitations in the current personnel structure prevents the PIC from implementing this framework The PIC has commenced with the process of appointing risk management personnel

19. Public Investment Commissioners19 Movements of funds There was not sufficient detail in the recording of transactions in the general ledger due to systems interface problems. The matter has since been resolved. All the transactions affecting funds under management have been accounted for.

20. Public Investment Commissioners20 Bank Reconciliation Changes in accounting processes resulted in system related problems that had a negative impact on the quality and validity of bank reconcilliations The Commissioners requested a forensic audit of the bank reconciliations to resolve this matter A preliminary report of the forensic audit has ruled out any irregularities

21. Public Investment Commissioners21 Accounting Practices The presentation of financial statements was not in line with GAAP Accounting for investments in associates was not in line with GAAP Changes in foreign exchange rates not in line with GAAP The presentation of investments in properties not in line with GAAP Discussions with the AG on compliance with GAAP are continuing

22. Public Investment Commissioners22 AUDIT OPINION Assets managed on behalf of other parties EMPHASIS OF MATTER (Affecting Financial Statements) Accounting for structured investment products Ownership of some properties could not be confirmed

23. Public Investment Commissioners23 Accounting for Structured Investment Products These are often very complex structured products for which there is usually no consensus on treatment in the accounting profession As reported by the Auditor-General, controls and accounting improved during the latter part of the year

24. Public Investment Commissioners24 Ownership of some properties could not be confirmed These are properties purchased and paid for by the former Bop and Transkei pension funds and for which transfer of ownership never took place Lawyers have been instructed to resolve this matter

25. Public Investment Commissioners25 AUDIT OPINION Assets managed on behalf of other parties EMPHASIS OF MATTER (Not Affecting Financial Statements) Weaknesses in internal control Possible restructuring Inadequate client reporting Delayed tabling of the previous year’s annual report Non Compliance with the PFMA

26. Public Investment Commissioners26 Weaknesses in Internal Control This refers to two aspects, viz;  Lack of a formal risk management system; and  No internal audit function Both these matters are being addressed with the recruitment of staff

27. Public Investment Commissioners27 Inadequate Client Reporting This issue is only relevant to our largest client, the Government Employees Pension Fund It is due to the fact that information regarding the performance of structured investments and the outsourced portion of the PIC’s equity portfolio is only available once the relevant client reports are received from the relevant third parties. As from 1 April 2002 this matter has been resolved.

28. Public Investment Commissioners28 Non-compliance with the PFMA The main reasons for this reporting matter were;  Late submission of financial statements  Late tabling of annual report

29. Public Investment Commissioners29 PLANS GOING FORWARD

30. Public Investment Commissioners30 Strategic Plans Organisational Structure is being reviewed Implementation of risk management framework and policies Tactical asset allocation models to be reviewed Refinement of strategy for investments through the Isibaya Fund

31. Public Investment Commissioners31 THANK YOU