Unemployment Insurance Fund & Compensation Fund Annual Report 2006/7 briefings

Meeting report

Unemployment Insurance Fund (UIF) Annual Report 2006/2007.
A delegation from the Unemployment Insurance Fund tabled and briefed the Committee on the Annual Report for 2006/07.

Highlights of the report were commented upon by Mr Boas Seruwe, Commissioner of the UIF, Mr R Chauke, Manager, UIF, and Mr Sagren Govender, Executive Manager, Legal, UIF

It was indicated that the UIF strategic objectives or priorities were to develop and sustain a safety net for unemployed workers, to improve on the benefit regime, improve compliance by investing in infrastructure, enhance service delivery through institutional reform and increase stakeholder awareness and support for the Fund. The Fund had experienced a decline in benefits. This was due to the growing economy that had resulted in more people becoming employed.

A history of the Fund’s revenue was given. Revenue increased by R1,1 billion or 16% for 2006/2007 and reflected an improvement in compliance. Contributions to the Fund had risen by 16% to R8 billion and investment went up by 56% to R1,3 billion. The Fund had thus improved in investing the money it received from contributors. There was increase of the net surplus by 30% to R6 billion, which essentially represented the profits made by the Fund.

Investments in the Public Investment Corporation (PIC), which were mainly in bonds and in companies listed on the stock exchange, had increased by 40% and were currently worth R19.9 billion. The benefit expenditure decreased by 3% in  consequence of the economic growth experienced by South Africa.

The asset evaluation conducted by the UIF Actuary in 2006/2007 concluded that the reserves required to meet potential future liability were estimated at R8.6 billion, as at 31 March 2007. The Fund had however met and exceeded the required amount since the evaluation. The asset evaluation also concluded that the Fund could continue as a going concern for the next 10 years with no need of extra funding.

The UIF had been focusing on improving its accountability, with the Auditor General’s unqualified report being a major achievement. There had been no audit qualifications in the 2006/2007 year, signifying an improvement in accountability. The major areas of improvement specifically were the Bank reconciliation process, the benefit payment to contributors, fixed asset management and the supply chain process.

Four matters of emphasis were raised, which the Fund had been addressing. The matters of emphasis include the recovery rate, that had been very low in the 2005/2006 financial year, but had increased in the 2006/2007 year. Other matters of emphasis were being addressed mainly through the compliance office, the financial advisory committee and the audit committee who were monitoring the recommendations made by the Auditor General’s (AG) office. These did not relate to breakdown of internal controls. The first emphasis of matter related to the interpretation of Section 13(3) of the Unemployment Insurance Act, 2001. The Fund’s interpretation was not agreed upon by the AG, but was endorsed by the Office of the Chief State Law Advisor, which in addition recommended that the section be amended to make it less ambiguous. The relevant section had thus been targeted for amendment in the next Unemployment Insurance Act Amendment Bill. The second emphasis of matter included important findings that the Fund did not have effective controls in place to recover benefits paid in error. The cumulative amount of benefits paid in error doubled in the reporting year to R66.1 million. It should nonetheless be noted that this did not relate to payments made to individuals without particulars, but rather to previously unemployed individuals who failed to notify the Fund when they became employed. Various projects to improve the detection and prevention of benefits paid in error were in place. Specifically, the Fund introduced a new adjudication functionality in its operational system, hence the increase in the amount of benefits now shown as having been paid in error, as they were now being detected. The adjudication functionality, which was in the process of being implemented in all the provinces, electronically detected discrepancies using updated employee information submitted by employers. The recovery rate had therefore substantially improved in the current financial year as compared to prior years.

The third emphasis of matter pertained to the cash basis of accounting not being in line with the accounting framework applicable to the Fund. Advice was received from the Accountant General on improving UIF compliance with General Accepted Accounting Principles (GAAP). Specifically, the Fund was advised to not only indicate the amount received but to estimate and indicate the amount owed to the Fund.

The fourth emphasis of matter related to errors that occurred when the UIF did not have a proper financial system, resulting in the writing off of R3.8 million in respect of  prior years. These errors had been resolved since the implementation of the new financial system.

It was further pointed out that the service improvement initiatives for 2006/2007 indicated in the presentation were new drives to improve the Fund’s internal system. The medium term outlook for the UIF referred to external initiatives that were going to be implemented. These would include the improvement of social assistance, improving the benefits provided by the Fund through using financial reserves accumulated throughout the years. The legislative mandate referred to the ongoing determination whether the current legislation governing the UIF was still relevant.

Discussion
The Chairperson welcomed the report by the UIF. She asked for further clarification on the three-year strategic plan, particularly the progress made in 2006/2007 as page 13 and 19 of the report indicated three targets not achieved.

Mr Seruwe replied that the three-year strategic plan was only implemented at the beginning of the 2006/2007 financial year. Some of the targets not achieved were due to the transition from a manual to an electronic system, with the latter having only become operational in August 2007. Campaigns to increase the use of the system were going to take place in December and would ensure that the targets would be achieved in the next financial year. There had also been a drive to switch to a new online system, although this was not yet complete.

Ms A Dreyer (DA) referred to page 24 of the Annual Report and asked for further clarification on the expenditures highlighted.

Mr Chauke responded that there were some printing errors in the report and the section indicated as ‘other’ was meant to read ‘benefit expenditures.

Mr N Nene (ANC) asked for more information on the short courses indicated on Page 23 of the Annual Report, and the pass rate for the courses.

Mr Chauke responded that the short courses listed were programmes accredited with the University of Pretoria. The same applied to supervisory training, supply chain management and the investment analysis courses, with the exception of short courses like finance management which were in-house training programmes. With regard to the pass rate, 13 individuals had written exams with three having passed in the first sitting. The rest of the results were yet to be received.

A Member asked for more information on the bursary schemes.

Mr Chauke replied that the bursaries offered were more or less contracts for a three-year degree.

Ms Dreyer commented that there were over 60 terminations, as indicated on page 26 and 27 of the report. These were disproportionately higher than the number of appointments. She asked for an explanation.

Mr Chauke responded that the bursary schemes offered by the Fund were more or less contractual agreements and individuals could not simply leave after the completion of their degree. It was necessary to have a formal termination process.

Mr B Labuschagne (DA) also referred to job terminations and appointments, and wondered if the greater number of terminations could be related to the capacity constraints in the Fund’s medium term outlook, as indicated on page 38 of the Annual Report. He asked what was the Fund’s percentage vacancy rate.

Mr Chauke replied that there were 352 vacancies for the entire country .These vacancies were sitting at labour centres, provincial offices and at the various UIF offices. The high job terminations reflected in the report were due to printing errors. There were actually more appointments and promotions than terminations.

Ms Dreyer aired her concern over the printing errors, which created a very bad picture of the Fund, especially since the report was a public document.

Mr Labuschagne asked for further clarification on the capacity constraints indicated on page 38 of the Annual Report.

Mr M Mzondeki (ANC) commended the improvements made in this financial year. He asked about the process involved in the amendment of the Act, mentioned on page 32 of the Report.

Mr Seruwe replied that the amendment process was already under way and had been approved by the Fund’s Bboard. The matter was currently with the legal advisors,  after which the Minister would take it through the normal channels to Cabinet and Parliament. This would happen in 2008.

Mr Mzondeki commented on the monthly reminders sent out to employers by the UIF and indicated that he was not convinced on the usefulness of the scheme.

The Chairperson requested if there were any awareness drives being conducted by the UIF.

Mr Seruwe responded that the Fund had planned awareness workshops that would inform members of the new and less cumbersome online system. The Fund was also in the process of planning awareness campaigns on the processing centres, to inform people of the location of the centres and the services offered.

The Chairperson asked to know the outcome of the feasibility studies in Guateng and the Western Province.

Mr Govender replied that the feasibility studies were on scanning documents. The studies had shown that was possible to switch the scanning process from a manual to an online process.

A Member asked to know the disability targets of the UIF.

Mr Chauke responded that the target was to have 5% of the staff as people with disabilities, although currently there were only 2%.

Mr Mzondeki proposed that the UIF make amendments to the report and provide a revised document, as there were too many errors.

The Chairperson agreed that an amended document was needed by the Committee.

Compensation Fund Annual Report 2006/2007
Mr Shadrack Mkhonto, Commissioner, Compensation Fund and his delegation gave a presentation on the 2006/2007 Annual Report.

It was noted that after a few investigations by the Auditor General (AG) it was decided to suspend several senior managers. The delegation present today thus only consisted of three managers who were currently working at the Compensation Fund. The suspension of several members of the senior management team had been a challenge, which was still being addressed.

Aside from that, several other challenges were experienced during the financial year. These included the decline in investment income as a consequence of the economic trends that occurred during the year. 95% of the Fund’s investments were required to be invested into bonds, which ensured that a specific return was received. However, this investment strategy was under review based on the noted improvements in the economy.

There had been improvement in the Fund benefits. The 19.5% decrease in the Administration expenses indicated in the presentation was due to less usage of outsourced services, and partly due to the vacancies created by the suspension of senior managers. Provisions - declined as a consequence of the review on the bad debts account. The claim payments made in the 2006/2007 financial year amounted to R1,4 billion. The claim payments also included R798, 940 compensation paid directly to workers as opposed to medical aid funds.
A graph was included indicating the disparities in the number of claim payments and the number of payments made. The bulk of the payments were going to doctors and not patients.

Achievements in 2006/2007 included the pilot project to decentralise claims registration and assessment in the Eastern Cape. This was part of the objective to decentralise to all provinces. It was the intention to have completed by the end of 2007, although this had not been possible. Service Imbizos were successfully held in 7 provinces to try and resolve issues relating to legal resource centres.

There were several qualifications received in the audit report. Progress had been made in resolving these qualifications as of September 2007. Corrective actions indicated in the presentation included the appointment of a debt collection agency, although this was still under review. Additional expert resources were required with regards to the debt collection policy.

Other matters brought up in the audit report included the actuary’s recommendation that more detailed data on medical claims and pension payments be collated to enhance the accuracy of actuarially-calculated provisions. It was agreed that an Actuary database be set up by next year in order to provide the necessary information required. 

Discussion
The Chairperson aired her concern over the governance issues brought up in the presentation.

The Chairperson gave her acknowledgement of the progress made by the Compensation Fund, particularly the claims process, by which now claims were processed within 90 days of receipt.

Ms Dreyer pointed out that the main service of the Compensation Fund, according to the governing legislation, was primarily to collect levies and pay out finances. However, it appeared from the Annual Report and presentation that 10 years later the Fund was still not fully functional in terms of its core mandate. In particular, it was disturbing to find out that the Fund was only now in the process of establishing an integrated financial management system. This could be the source of all the problems that the Fund had been facing. She therefore asked how had the Fund been operating during the last ten years.

The Commissioner replied that a specific answer could not be given, although there was a turnaround strategy already in place, which the Minister of Labour had signed, to address some of the issues being faced by the Fund.

Ms Dreyer referred to the suspension of the top managerial staff indicated in the presentation. She asked exactly how many people had been suspended and what were the circumstances surrounding the suspensions.

The Commissioner replied that four officials had been suspended. These were the Chief Financial Officer, the Senior Supply Chain Manager, the Chief Operating Officer and a Senior Manager. The circumstances surrounding the suspension involved a process that started with forensic report from 2005, which was subsequently taken to the Director-General in October 2007. On the basis of that report the Department of Labour advised the Director-General to suspend the officials to allow investigations to be conducted. The report did not directly point to any corruption by the officials but related to their performance, although the investigations being conducted could bring up other issues.

Ms Dreyer asked to know the overall percentage vacancy rate at the Compensation Fund. 

Ms Dreyer requested to know how the Fund was addressing its backlog in claims payments. The late processing of claims was possibly the reason behind the huge claims by doctors, who might lodge multiple claims because the initial and subsequent claims were not processed quickly enough.

The Commissioner requested that he be permitted to provide detailed answers in writing on the questions on backlogs and the vacancy rate. He however indicated that the Fund was addressing the weakness in the system that allowed multiple claims to be lodged without being detected.

The Chairperson aired her concern on the suspension of several managerial staff as they occupied important strategic positions that would definitely affect the functionality of the Fund. She asked what interim arrangements had been made, and whether there were plans to cope in the future if the suspensions were to become dismissals.

The Commissioner responded that the Fund was in the process of procuring external service providers to assist with the duties of the suspended officials. Furthermore the UIF Commissioner was providing the Compensation Fund with assistance to cope with the situation.

A Member asked to know the Fund position on HIV/AIDS in terms of policy, and in regard to  situations when an individual contracted the virus whilst working. It was certainly an occupational hazard for medical practitioners who conducted surgery and treated patients.

A delegate from the Compensation Fund replied that the Fund did indeed have a policy on HIV/AIDS, which was in the process of being renewed. In cases of a worker contracting the HIV/AIDS during work, he or she had to go through a process involving two HIV/AIDS tests. If the first were to show negative, but the second, after the window period had elapsed, showed positive, then it would be assumed that the worker did indeed contract the virus during work as claimed

Ms L Moss (ANC) aired her concern over claims that did not get to the injured person. Such situations have been reported in the farming areas, where the farmer owner received the bulk of the compensation paid out, leaving the injured worker with little to nothing.

A representative from the Compensation Fund replied that the Fund did focus on the rural areas in terms of educational campaigns, using various sources of media.

Mr Labuschagne referred to page 1 of the Annual Report, containing an overview, but asked for more clarification on the Fund’s backlogs. He aired his concern over the 366 839 claims still to be adjudicated and said that some of the claims could have been lodged seven years ago. He asked when these would be paid out. Mr Labuschagne commented that the slow processing of claims implied a lack of competence and incapacity of the Fund.

Mr Nene suggested that plans be put in place for the Committee to receive quarterly reports on the progress being made by the Fund in addressing the issues highlighted in the meeting.   

The Chairperson indicated that the Commissioner should be present in the next meeting to be held in 2008. She also requested that a full report on the suspensions and issues raised be provided to the Committee at that meeting. She further requested that the Fund provide written answers to the rest of the questions, due to lack of time to address the issues fully now.

The meeting was adjourned