PSPF in E10bn deficit
MBABANE – An alarm has been sounded about the long-term financial position of the Public Service Pensions Fund (PSPF). Auditor General (AG) Timothy Matsebula says the situation that the fund is currently in may lead to government, in the long-term, failing to pay pension benefits to its employees upon retirement.
This is the AG’s interpretation of an actuarial valuation of the fund that reflects a deficit amounting to E10 139 135 000 in the financial year ended March 31, 2021.
The PSPF is a public organisation that was established in 1993 for the management and administration of pensions for government (public sector) employees.
The fund was established under Section 3 of the Public Service Pensions Order, 1993, and is a contributory defined benefit scheme.
With effect from May 1, 2007, the Public Service Pensions Order regulations were amended.
All members contribute at a rate of five per cent of pensionable salary, while the participating employers contribute at a rate of 15 per cent of pensionable salary.
An actuarial valuation, according to Investopedia, is an appraisal of a pension fund’s assets versus liabilities, using investment, economic, and demographic assumptions.
Numerica -a group of consulting firms delivering analytics and actuarial services to clients throughout India and around the world – says the purpose of an actuarial valuation is to calculate the ‘present value’ of payments that would be made to employees in future as part of an employee benefit plan.
EVALUATION
The AG, meanwhile, describes an actuarial evaluation as an analysis that compares the assets and liabilities of a pension fund.
Matsebula says after noting the deficit, he raised concern that an excess of liabilities over assets results in a deficit and this affects the longterm sustainability of a defined benefit pension plan.
A deficit, as explained in the Cambridge Dictionary, is the amount by which something, especially an amount of money, is smaller than it should be or the total amount by which money spent by a business or government is more than the money it receives.
The AG says he warned that the results of the actuarial valuation of past services indicate that there were total liabilities amounting to E37 592 711 000, which exceeded the actuarial value of assets of E27 453 576 000 by E10 139 135 000.
“This deficit means that the amounts contributed consistently by government employees and the government, when combined with investment earnings, may not be sufficient to pay promised benefits in full over the long-term,´ Matsebula says.
This information is contained in the AG’s Compliance Audit Report of the Government of the .ingdom of Eswatini for the financial year ended March 31, 2021, which was tabled on Friday in the House of Assembly by Minister of Finance Neal Rijkenberg.
The report is going to be utilised by the Public Accounts Committee in seeking answers from controlling officers and other implicated officers on how public funds have been utilised.
The AG has stated in the report that since assets are used to finance liabilities, the outcome of the actuarial valuation indicates that the level of funding is only 73 per cent in the year under review, and there is a shortfall of 27 per cent, which may end up requiring additional financing through increased employees’ contribution.
The implication of this deficit, Matsebula pointed out, is that the contribution rate required to eliminate the past service deficit over the next 15 years is 13.3 per cent of the pensions emoluments.
CONTRIBUTION
“Further, the contribution rate required in order for the fund to attain financial soundness over the next 15 years is 41.5 per cent of the pensionable emoluments. In normal circumstances, pension fund deficits are required to be eliminated over a much shorter period than the future working lives of current em
µµ This deficit means the amounts contributed consistently by government employees and government, when combined with investment earnings, may not be sufficient to pay promised benefits in full over the long-term.”
ployees,” the A* has said.
He then expressed worry regarding what the increase in contributions might lead to for the fund’s members “I raised my concern on the effects that the increase in contributions may have in the economic lives of the government employees and the effects of the deficit in their future benefits, upon retirement.”
DEFICIT
The fund is under the leadership of a new Chief Executive Officer in Masotja Vilakati, who was appointed to the position in March this year.
He came in to replace the late /angalakhe Dlamini, who passed away in 2021 due to a COVID-19-related illness.
Matsebula A* said he went on to seek an explanation from the controlling officer on how this E10 billion deficit would be financed without negatively affecting the lives of the government employees who may be required to finance the shortfall or lose their futire earnings if the deficit problem was not rectified.
In response, the controlling officer is said to have concurred with the A*’s observation and stated that there was a plan of action on strategies the fund had embarked on to improve the funding position and this included engaging the government to bridge the funding gap, converting mandates of the external portfolios held by foreign asset managers into equity, offshore portfolio being assigned to specific asset managers and to lower operating expenses.
“He further explained that, these strategies are yet to be quantified in terms of the length of time it will take to full implementation,” the A* said.
Furthermore, the controlling officer is reported to have stated that the root cause of the actuarial valuation deficit was that the fund was not fully funded at inception and that in some instances, benefits were paid to members who may not have contributed adequately.
BENEFITS
Secondly, the controlling officer reportedly said the benefits paid were independent of contributions received, in some cases five times higher than the contributions.
“In other instances, the benefit would be paid even if no contributions have been received, i.e. death within days of appointment. Of further note that the funding level is the comparison of the present value of the forward looking liabilities and assets of the fund as at a particular date,” the controlling officer is reported to have explained to the A*.
He is reported to have went on to inform the A* that the management of the Pensions Fund had reasonable belief that the fund would not be liquidated in the foreseeable future, hence the gradual improvement of the funding level through aggressive investments was considered adequate.
“:e have not reached a stage where we believe there is need for members to contribute more than the current 20 per cent of one’s basic salary or requesting government to finance the deficit,” the controlling officer is quoted responding.
The A* has indicated his appreciation at the controlling officer’s effort and stated that improvements made on the financial position of the fund would be followed up in the next financial audit.
In its annual report for the 2020 2021 financial year, the fund highlighted that it had reached unprecedented levels of income amounting to E6.985 billion compared to only E355 million the previous year.
EXPENSES
The fund said this was mainly driven by the unrealised revaluation gains of equities in external assets that stood at E3.996 billion. This appreciation reportedly drove the fund’s net surplus to E5.395 billion compared to a loss of E1.132 billion in the previous year.
The fund also reported that total expenses for the year reflected an increase from E1.487 billion 2020 to E1.590 billion 2021 .
It was also noted by the fund that starting from last financial year, the total benefits paid out to retired members had been higher than the total contributions received from active members of the fund.
The benefits paid out reportedly stood at E1.325 billion compared to the actual total contributions by members that amounted to E1.237 billion.
The fund also reported an improvement in the funding level from 69 per cent in 2020 to 73 per cent in 2021.
This improvement was attributed to the good performance of the fund in the year under review despite the actuary making conservative actuarial estimates in view of the effects of COVID-19 on the portfolio.
The Board of Trustees said it would continue to explore strategies to improve the funding level and maintaining the fund’s growth trajectory in the positive direction.
Meanwhile, in his report, the A* has stated that he found that the fund had not performed a verification of beneficiaries to verify that all of them existed during the period under review.
Matsebula said he was concerned that there was a possibility of financial loss due to annuities paid to nonexistent beneficiaries.
IMPLEMENTED
“I advised the management that, in light of the current COVID-19 pandemic, they should consider other forms of verification such as contacting the beneficiaries telephonically, recording the responses from the beneficiaries and investigate any unsatisfactory or questionable responses. I also advised the controlling officer to investigate instances of annuities paid to nonexistent beneficiaries, and update me on the implementation of effective internal controls that verify timeously the existence of beneficiaries,” the A* said.
In his response, the controlling officer is said to have stated that some internal controls were implemented by the fund through the engagements of banks to provide closed banks accounts, link to the Birth, Marriage and Death BMD database and receiving death reports twice a year from the Ministry of Home Affairs.
Further, the controlling officer reportedly stated that in the previous years, prior to COVID 19, proof of life verifications occurred once a year.
“The physical verification process was stalled due to the prevalence of COVID 19. However, following the forced non-verification of the existence of beneficiaries in the financial year ended March 31, 2021, management implemented other internal controls to mitigate the risk. The controls in place, as alluded to in our response letter of April 4, 2022, are more effective than conducting the annual verification exercise,” the controlling officer is quoted to have responded.
Besides the lack of verification, the A* said he also reported to the controlling officer that certain beneficiaries were identified to have received death benefits that were against the rules of the fund, and these benefits were paid yet the beneficiaries did not qualify to receive them.
“I raised my concern on the unlawful double payments and or funds paid to undeserving beneficiaries. This was an evidence of non-compliance with the fund’s rules and regulations. Also, the beneficiary management becomes complex due to beneficiaries with more than one beneficiary number.
INVESTIGATION
“I advised management to conduct a comprehensive investigation to identify and eliminate undeserving beneficiaries, and update me on the implementation of effective internal controls that verify timeously the undeserving beneficiaries,” Matsebula said.
The controlling officer, in response, reportedly stated that quarterly reviews had been made and no undeserving beneficiaries were identified.
He reportedly pointed out that the fund had adopted the use of national identity number as a unique identifier and ongoing negotiations with the Ministry of Home Affairs for live connectivity.
He is said to have further stated that payments made to undeserving beneficiaries were recovered on a monthly basis, through a deduction from annuities lawfully earned by the beneficiaries.
“The effort of the controlling officer towards ensuring effective internal control is appreciated however, the matter has not been addressed adequately as there was no evidence of recouping the paid benefit to the undeserving members,” the A* added in his report.