A registered retirement fund is required to have a valuator investigate and report on its financial condition at least once every three years. The valuator’s report must be sent to the FSCA and to every employer participating in the fund.
The provisions governing the appointment of a valuator and the nature of the valuator’s investigation are set out in section 9A and section 16, respectively, of the Pension Funds Act (PFA).
One of the purposes of a valuation is to establish whether a fund has sufficient assets to meet its obligations to members when they retire or make claims. A valuation should also identify any shortfalls or surpluses in the fund, indicating to the board of management (trustees) the appropriate risk management and investment strategies to be put in place.
The filing of valuation reports with the FSCA enables the Authority to monitor the financial health and compliance of the fund. This oversight is designed to prevent mismanagement and ensure the fund is adequately funded.
The FSCA can, however, exempt a retirement fund from a valuation. This is in terms of section 2(5) of the PFA and Board Notice 59 of 2014 (BN59), specifically section 3, which sets out the conditions that must be met for an exemption to be granted.
In a recent reconsideration application, the Financial Services Tribunal (FST) was called up to decide on the following aspects of an exemption provision:
- Does the FSCA have a discretion to grant or refuse a valuation exemption?
- Is the FSCA obliged to grant an exemption once it has been established that a fund has met all the conditions set out in section 3 of BN59?
- In the case that came before the Tribunal, did the FSCA correctly exercise its discretionary powers?
The reconsideration application was brought by the Textile Open Provident Fund, which applied for an exemption in October 2022. The FSCA rejected the fund’s application because the fund’s annual financial statements (AFS) disclosed it had significant reserves, which the Authority believed made it unclear whether members were receiving their benefits.
The fund argued that the provisions of section 2(5) of the PFA are peremptory, and the FSCA does not have any real discretion if the fund has met the conditions set out in BN59. In other words, once it is established that the fund has complied with the conditions set out in BN59, the FSCA must exempt the fund from compliance with sections 9A and 16.
Section (5)(a) states: “The registrar may, where practicalities impede the strict application of a specific provision of this Act, exempt any fund from, or in respect of, such provision on conditions determined by the registrar.”
‘May’ not ‘must’
The Tribunal found that the FSCA is not obliged to exercise its discretion in favour of the fund by granting a valuation exemption. In this respect, it drew attention to the use of the word “may”, as opposed to “must”, in the relevant provision.
The FSCA may exercise its discretion only where practicalities impede the strict application of sections 9A and 16. The onus is on the fund to show that practicalities impede the strict application of the sections. Where the fund fails to discharge this onus, the FSCA does not have any discretion to grant or refuse a valuation exemption.
The FST said the fund’s case was not that practicalities impeded the strict application of sections 9A and 16. Its case was that it was entitled to the exemption because it complied with all the requirements of BN59.
The Tribunal said it was clear from the language used that the provisions of section 2(5) read with BN59 are not peremptory. Although the FSCA is authorised to grant a valuation exemption in circumstances set out in BN59, it is not obliged to do so even where the fund has complied with the conditions of section 3. Again, the use of the word “may” in the context of BN59 does not mean “must”.
Annual financial statements are not enough
The FSCA rejected the valuation exemption application because the fund’s AFS showed significant reserves in its reserve accounts, representing 8.1% of the fund’s assets. Together with an allocated 2% of the assets, this was a total of 10.1% of the fund.
In response, the fund argued it implemented internal controls, such as the annual financial reviews, which look at the position of the fund. If a problem is discovered, it will be attended to immediately without waiting for three years to perform a valuation.
The fund further submitted that the breakdown of what happened to the reserve accounts is included in the AFS, and to the extent that the FSCA required clarity, it should have engaged the fund.
But the FSCA submitted it cannot determine the financial condition of the fund from the AFS, and the appropriate way to determine the financial condition of the reserve account is through a valuator’s investigation and report.
The FSCA said the AFS do not serve the same purpose as the valuation report. The AFS report on the fund’s financial position, whereas the purpose of the valuation report is to report on the fund’s financial condition, which encompasses a broader assessment of the fund’s overall financial health, performance, and regulatory compliance.
The Tribunal agreed with the FSCA, saying submission of the AFS alone does not fulfil the intended purpose of section 16.
The FST went on to state that fact that the fund was previously exempted does not automatically entitle it to another exemption. The FSCA is required to make a new decision, and as such, it must exercise a discretion.
It noted that if the FSCA exercises its discretion in favour of the fund, the fund will be exempted from valuation for six years, which is a long time.
The fund also submitted that it was prepared to engage the FSCA to address any concerns the Authority might have about the reserve fund.
The Tribunal said the FSCA was not opposed to engaging with the fund. But the decision to refuse the valuation exemption was based on the information that was before the FSCA at the time it considered the application. It did not assist the fund at this stage to engage the FSCA to achieve a different outcome.
A necessary expense
The final ground for reconsideration was that appointing a valuator was expensive and would result in the members incurring a cost unnecessarily.
The Tribunal agreed with the FSCA that sections 16 and 9A place a default obligation on a fund to appoint a valuator. Therefore, the fund must make provision for the cost of having its financial condition investigated. This expense is incurred on a tri-annually, “and the fund has ample time to make provision for costs relating to the valuation. The expense of appointing a valuator cannot override the public interest and the purpose of the valuation.”
The FST dismissed the reconsideration application.