The Government Employees Pension Fund Annual Financial Statements for 2006/07 were interrogated by the Committee. Questions posed by the Committee related to the internal control systems, inadequate segregation of duties, lack of fraud prevention strategy, and significant backlogs in benefit payments. Also under the spotlight were the invalid payments made to members, unclaimed benefits, interest on contributions, valuation of equity instruments and inconsistency regarding the accounting policies of asset managers as well as fraud, legal and regulatory non compliance. The Committee further questioned the investment properties not registered in the name of the Fund, the executive entitlement regarding the MTN shares, issues arising from the disinvestment by the Public Investment Corporation from the individual fund managers, instances of fraud within the Fund and possible conflicts of interest relating to the Public Investment Corporation and external fund managers. Members were concerned that perhaps the Fund was not taking the matters seriously enough and should make further efforts to deal with all the issues.
The Committee then reviewed the audited financial statements of the Independent Complaints Directorate. The Committee questioned several key issues, including the acting staff designations, and the approved establishment of 535 personnel, which the Committee felt was unlikely, as the staff complement was only 270 at present. Personnel challenges were fully explored, with reference to reasons for the vacancies, high staff turnover and trends for termination. Other areas questioned by Members included irregular expenditure, leave administration, disciplinary action against staff found guilty of ICD policy contravention, the external practice review and the evaluation of assets. The investigation of police and SAPS' compliance with ICD recommendations was also a focus. The Committee asked for a progress report on SCOPA's resolution concerning Special Investigations and how actual performance was being linked to performance information.
Comments were made by a representative of the National Treasury as to why the ICD had not received funding and how the staffing would be funded in future.
Government Employees Pension Fund (GEPF): Interrogation of 2006/7 Financial Statements
Mr G Madikiza (ANC) questioned the GEPF's internal weaknesses and why it was necessary for the Auditor General (A-G) to inform the Fund of these weaknesses. He also wanted to know what had been done to rectify these deficiencies.
Mr Martin Kuscus, Chairperson, GEPF Board of Trustees, said that the issue should be put into context. He informed the Committee that the Board had only been appointed in the 2005/6 financial year. It took time for the board to assert its role. All the trustees acted part-time. The institutional environment, policy framework and staff had to be considered in order to effectively discharge their mandate. Progress had been made in this regard. The A-G report appeared at time when the GEPF was a work in progress. GEPF’s Board had forcefully addressed the highlighted control weaknesses.
Ms D Ntshingila, Acting Chief Financial Officer, GEPF, responded that GEPF had a finance and audit committee and this was a mitigating control along with other committees. Different committees corrected different control weaknesses. The GEPF was monitoring progress.
Mr Madikiza referred to the finding that there was a lack of reporting controls and a high level of dependence on key individuals.
Mr Phineas Tjie, Chief Executive Officer, GEPF, responded that staffing had been a problem since they took over but this was no longer the case.
Mr Madikiza asked why there was such a high turnover of staff.
Mr Tjie replied that there were still gaps but that the basic staff were in place in operational areas.
Mr Madikiza asked about the high number of contract staff.
Mr Kuscus replied that all contract staff had now been made permanent and all staff had been appropriately placed.
The Chairperson asked if this included consultants.
Mr Kuscus replied that this was only a tiny part of the staff complement. Some business process reengineering, IT and actuarial services had been outsourced. This was to help the GEPF focus on its core business.
Mr Madikiza queried procurement and asked by what system the GEPF was bound as it was not bound by National Treasury regulations. He asked if it had its own internal policies.
Mr Kuscus said that GEPF had adjusted to the NT policy on procurement.
The Chairperson noted the outsourcing of the IT department and asked for a reason for the insufficient staff. He said the components still needed to be managed.
Mr Kuscus replied that the GEPF did not outsource a great deal. The Chief Information Officer had left. As a result weaknesses became glaringly obvious. GEPF had appointed someone and had sufficient capacity now to manage IT.
Mr Madikiza asked about the report that procurement was now under National Treasury regulations
Mr Tjie responded that GEPF had aligned with the National Treasury as a best practice.
Mr Madikiza noted that the A-G had recommended that GEPF migrate to the National Treasury's regulations on procurement. He wanted to know what the objections were to this suggestion.
Mr Kuscus responded that the legislation governing the GEPF did not compel it to be governed by the Public Finance Management Act (PFMA). It had no objections as legislation was not in their domain. That was currently being argued at a legislative level. The Minister of Finance had informed the GEPF that work was being started on this.
Mr Madikiza asked why the audit unit was limited in scope of work.
Mr Tjie responded that GEPF had outsourced to external auditors due to a conflict of interest. He said they could not attract suitably qualified interrogators. The GEPF had recently appointed a Head of Internal Audit.
Mr Madikiza referred to fraud to the value of R 36.1 million, detected by the A-G. He asked why the GEPF did not detect this and what the reason for this fraud was.
Mr Tjie replied that it had been reflected in the fraud register, therefore GEPF did detect it internally. The GEPF did have a fraud prevention plan in place and had outsourced fraud management.
The Chairperson asked if fraud management was still outsourced.
Mr Tjie replied that the Head of Forensic Auditing was internal, but GEPF sometimes needed external expertise.
Mr Madikiza remarked that if a fraud prevention plan was in place and fraud occurred, then someone was not be doing their job.
Mr Tjie responded that the nature of fraudulent activity was very complex. GEPF could not hold any official responsible as fraud often involved external people and bodies as well.
Mr Madikiza said that somebody would have to drive that plan in order to detect the fraud. He reiterated that the fact that fraud had occurred surely meant that someone was not doing their job.
Mr Tjie responded that fraud had been detected. Investigations had taken place and disciplinary action had been taken where appropriate.
The Chairperson said that prevention was always better than cure. He added that the plan was supposed to improve detection and this plan was not effective in practice.
Mr Kuscus replied that it was the strength of the plan that had exposed the fraud. GEPF was not merely detecting fraud after the fact. They had also caught fraudsters in the act.
Mr Madikiza reported that the A-G alleged that the finance and internal audit divisions were not talking to each other.
Mr Tjie replied that the communication was now in place.
Mr Madikiza referred back to the R36.1 million fraud. He asked how many culprits had been disciplined and how much of the amount had been recovered.
Mr Tjie replied that he had no definite figures that time. As far as he could recall, 22 cases had been opened. Some of the cases were external, and some internal. All internal people involved were suspended and three had been convicted and sentenced to date.
Mr Madikiza reported that certain benefit files were not available to the A-G. Pertaining to the fraud amount, he asked how it was possible to know if these were not fraudulently paid.
Ms M Kola replied that the system was manually intensive and that GEPF was integrating document management with the backend systems. Documents were stored off-site, but if requested the GEPF could provide them.
Mr Tjie added that those were old cases. When the payments were made, copies were made of the files. He acknowledged that there might be instances where files may be missing.
Mr Kuscus responded that GEPF was engaging in data cleansing as the reliability of the data was questionable at times. This was aimed at tighter co-ordination of data input to ensure that it remained current.
The Chairperson noted that document management was a very critical aspect. He asked why files were kept off-site and how they were managed.
Ms Kola replied that when the GEPF processed a benefit payment it used back-scanning and then sent the file off-site. It had a mechanism to retrieve these documents.
The Chairperson asked if the file management was also outsourced.
Mr Kuscus replied that this was a matter of risk management and was a disaster recovery backup. The bulk of files were kept off-site and secure under a service provider.
Mr Madikiza said that the bottom line was that the files were not available when the auditors needed them.
The Chairperson remarked that perhaps the GEPF needed to be excused as documents were managed externally. He stated that he did not agree with this practice.
Ms Kola replied that there were two components to the missing file. There was a time lag after the request, or the missing file might be part of a historical problem. She reported that a retrieval mechanism was now in place.
Mr E Trent (ANC) asked if there had been any follow up with the A-G’s comments. He asked if GEPF had taken action with regard to the service providers and if so, what was done.
Ms Kola reported that the GEPF were now doing front scanning. Documents were scanned before handling. The auditors would have access to the pre-scanned document.
Mr Madikiza requested a follow up report on the files and asked if GEPF would object to the insinuation that the files were lost.
Mr Kuscus replied that they would have to validate the request. Anything else would be speculation.
The Chairperson stated that the report came out in September of last year and GEPF had not done anything to correct the comments. He said this was not good enough. He also requested information on the missing files.
Mr Madikiza referred to the risk indicators and recruitment. He asked if screening and vetting was adequate.
Mr Tjie responded that GEPF had an arrangement with National Intelligence Agency and a private company who did pre-scanning before they invited candidates for interviews.
Mr Madikiza asked when this arrangement had come into being.
Mr Tjie replied that he had joined in 2006 and the arrangement was already in place.
Mr Madikiza referred to the A-G’s comments on supply chain management and procurement, specifically, the segregation of duties. He stated that this was a recipe for corruption.
Mr Tjie replied that the GEPF had hired a Head of Supply Chain Management. It was also engaging a service provider in supply change management. The service provider would start up the immediate supply chain management and would be retained for no more than four months, to arrest control weaknesses.
Mr Madikiza asked if procedures were in place.
Mr Tjie responded that GEPF had policies since before his time and the policies were aligned with those of the National Treasury.
Mr Madikiza asked if the policy allowed for non-segregation of duties.
Mr Tjie responded that this function fell under the CFO, and that the new structure was segregated.
Mr Madikiza raised the issue of the high rate of rate of backlog payable benefits. He wanted a reason why the interest on this could not be treated as negligence.
Mr M Stephens (DA) asked about the negative inheritance from the previous stage. He wanted to know what the status was of properties not registered in the name of the Fund.
Mr Kuscus referred to the protracted legal process involved in the liquidation. There was substantive progress for the transfer of the title. For instance, it needed to go through the Gazette process. He reported that 72% of the properties had been transferred and 15% had been lodged with the Deeds Office. Registration was imminent. Timelines, however, were out of their hands.
Mr Stephens asked what had happened to the other 13%.
Mr Kuscus responded that those properties were under dispute.
Mr Stephens asked about the executive entitlement of the MTN shares and the invested amount being understated by R15 million. He asked who was entitled to these shares and what was the progress.
Mr Bradley Green, Head of Actuaries, GEPF, responded that the parties had ironed out the discrepancy. It was not intentional but had come about due to a variance in interpretation of a formula.
Mr Stephen queried disinvestment from the PIC (Private Investment Corporation), involving Nedcor. He asked what the situation was at the moment.
Mr Green replied that when a fund was sold over to the PIC, legal ownership of the shares did not change. It still belonged to the GEPF. It was being managed by a particular manager. The PIC then disinvested from that manager. The investment manager then had to liquidate the shares or transfer the shares. In this case it was a transfer to the PIC, but legal ownership did not change and the investment manager booked that entry at market value. The problem was that the GEPF was not realising the profits at that time. The GEPF had interacted with investment managers and the PIC and have agreed on how to account for this with the A-G's consent.
Mr Stephens said it seemed there was a financial conflict, where the fund manager was also the purchaser of funds,
Mr Green replied that they had concluded a comprehensive investment mandate in June 2007. The fund would mitigate risk by creating an exclusive mandate for the PIC, thereby segregated responsibilities.
Mr Stephens queried the instances of fraud by employees. The recommendation of the A-G was that the IT environment be improved. He asked how that was being responded to.
Mr Tjie replied that the new Information and Communications Technology (ICT) environment would address this. PriceWaterhouseCoopers was assisting GEPF with this
Mr Stephens took this to mean that there would no repeat of the pin number theft.
The Chairperson asked what the policy was on board meetings.
Mr Kuscus replied the GEPF Board held bi-monthly meetings.
The Chairperson said that added up to six meetings a year, but the A-G reported that GEPF had held 10 meetings in the 2006/7 financial year.
Mr Kuscus replied that the problems necessitated the extra meetings to kick-start the functions of the GEPF.
Mr Mofokeng asked if there was any hope of recovering the R36.1 million involved in the fraud, and what the progress was on this. He asked to what extent the Fund had outsourced and what the approximate figure was for the payment of the consultants.
Mr Kuscus replied that there were currently 22 cases open. The legal process needed to be finalised first. GEPF could only make a call on recovery once this process was completed. He could report that most of the money had not left the system.
Mr Gerber asked about the properties the GEPF owned. He observed that he could not see property taxes in the report and asked under which item they would fall.
Mr Kuscus responded that at the time of reporting, the properties had not been registered in GEPF’s name. The tax was currently reported in the accounts of the PIC but was being moved forward to appear on the GEPF records.
Mr Green added that the income was taxed. The Retirement Fund tax was under review but they had definitely paid the property tax.
Mr Gerber asked about the Regional Services Council levies and noted that nothing had been paid in 2007.
Mr Green replied that they had been phased out in 2007.
Mr Gerber referred to two different figures reported for Administration Expenses in 2007.
Mr Green responded that the accounts payable was reflected during the 2007 year but nothing was payable by the end of the financial year.
Mr Gerber wanted to know what “personnel remuneration for in source contracts” referred to.
Mr Tjie said that this referred to contract workers.
Mr Gerber asked about the investment in the company “Black Ginger” and the financing of an acquisition of Telkom shares. He asked for an explanation of this.
Mr Green responded that the investment preceded the current audit. It was an entity that was established and financed to acquire a stake in Telkom. Black Ginger acquired the shares at a discount. If the shares were to be sold at present value the GEPF would stand to make a lot, due to the difference in pre-value market price and the blended purchase price. The usual investment risks applied.
Mr Gerber asked how many directors there were on the board of Black Ginger.
Mr Kuscus responded that they were a vehicle for the warehousing of the shares.
Mr Gerber referred to the Finance and Audit Committee report. He specifically asked about invalid payments to members. This had caused an overpayment of R39 million, due to GEPF not being informed of members’ deaths and further overpayment due to paying the wrong pensioners.
Ms Kola responded that GEPF interacted with Department of Home Affairs and were now were able to suspend payments timeously. The debt collection policy was that GEPF would recover from those that they could. A data purification process was underway to make sure that data was correct.
Mr Gerber asked about the unclaimed benefits policy. He said that people would lose the benefit within three years if they had not made a claim. He asked if there was a possibility that the benefit could still be claimed even after the three year period had elapsed.
Mr Kuscus responded that the fund now had a revised dispensation regarding this. He noted that this could not be too open ended but it also could not be too tight. The latest figure arising from the discussions was 7 years and he added that if there was proof of entitlement, GEPF would make the payment even after the period had elapsed.
Mr Gerber said that this was good news. He asked if the equity instrument was valued at closing prices 1:41:19 and if the valuation problem had been solved, especially with a view to the future.
Mr Green replied that it was part of the mandate of the PIC. He said that there were system constraints with the external asset managers. He said that they would be able to reconcile the position as required by regulation. Regarding the inadequate segregation of duties, he reported that an attempt was made to hire people to take on additional roles but the candidates rejected offers.
Mr Gerber asked what the offers were.
Mr Tjie responded that they offered R 591 000 per annum for the Risk Manager position and R540 000 per annum for the Head of Internal Audit.
Mr Gerber asked if there was a particular reason why the candidates had declined.
Mr Tjie responded that perhaps the candidates thought they could negotiate.
Mr Gerber summarised the report section of the deficiency disclosures, and noted the trend of the closing comments that little value was added to the consumer. He said he found this quite strange and that he was worried that the same comment may be applied to their meeting with SCOPA.
Ms Ntshingila noted that the auditors indicated that the financial statements had been prepared in accordance with accounting policy.
The Chairperson said that the Committee was gaining the impression that GEPF was not taking this meeting with SCOPA seriously enough.
Mr Kuscus responded that GEPF regarded these matters as very important. He said the A-G report would enhance governance and was invaluable. Her stated that it was unfortunate that the wording carried that interpretation. GEPF had not meant to be dismissive.
Mr Tjie acknowledged this and said that they were not there at the time the report was drafted.
The Chairperson stated that it sent a negative message.
Mr Gerber queried the loss on sale of assets and investment. He asked where the R15 million was lost and noted that it was substantially higher than the previous year.
Mr Green responded that some properties had been inherited. The PIC was the holder of investments and was currently cleaning out and renegotiating old contracts. He stated that these losses should be accepted now rather than facing bigger losses in the long term.
Mr Madikiza referred to the backlogs of benefits payments and the interest accrued.|
Mr Kuscus responded that the GEPF was merely the fund administrator, not the employer. The employers needed to make sure that the inputs to the pension fund were correct. Of the 24000 backlog payments, 55% had to be sent back to the originating department due to problems. He said that the process was complex, as the GEPF had no power to compel departments to submit correctly. They also had to consider disputes. The GEPF had undertaken a road show to the various provinces to explain the minimum requirements to people, as well as communicating with trade unions.
Independent Complaints Directorate (ICD): Interrogation of Financial Statements 2006/7.
The Chairperson queried whether the position of the Acting Director was to become a permanent position. He referred to the approved organisational structure of 535 people approved in 1997, and noted that only 270 of those positions had been filled.
Mr Patrick Mongwe, Acting Director: ICD, replied that ICD had applied to the National Treasury for additional funding to achieve this. ICD had received no funding to date..
The Chairperson noted all the functions of the ICD and wondered if the poor staffing did not set it up for failure. He said this did not make sense to him but was it was also not SCOPA’s area of focus. He stated that when he looked at the challenges, they all spoke to personnel, and clearly ICD needed personnel to be effective.
The Chairperson asked the ICD to shed light on the irregular expenditure and leave administration..
Mr Mongwe replied that the irregular expenditure of R113 000 had been attended to satisfactorily. It had arisen out of a contravention of procurement policy. The junior staff member was given a final written warning. In respect of leave administration the ICD had established a controlled leave register. Since 2007, leave must go through the national offices. The provincial heads must also submit a leave register. The ICD was satisfied that this matter had been attended to.
The Chairperson again referred to the small staff complement and noted that the bulk of the terminations were occasioned by transfers to other departments. Very few had left due to disciplinary action. He asked what had been put in place to stem the tide of staff losses.
Mr Mongwe responded that this was difficult to address. The staff retention policy was inadequate. Counter offers were a particular challenge. ICD itself would try to make counter-offers in most cases, but did not have inexhaustible resources to compete in these circumstances. The ICD conducted exit interviews as to why a person wished to leave. ICD was always told that it was a question of remuneration. A job evaluation was undertaken to address this, and the scientific finding confirmed that ICD’s remuneration was not competitive. ICD had not, however, received the resources to address the problem from the National Treasury and there was no other way but to implement the job evaluation.
The Chairperson referred to the disciplinary action taken against staff and commented on how this further depleted capacity. He said that SCOPA would take this matter on board when compiling its report. He asked if the internal audit was subject to an external practice review, and what that was. He also what progress had been made on rebuilding the internal process structure.
Mr Mongwe reported that pornography was the issue in twenty of the disciplinary cases, and that none of the persons disciplined was guilty of misusing funds. There had been contravention of some internal policies but ICD had received advice from the National Treasury that the policies may need review.
Mr Mongwe noted that internal audit was assessed by outsiders. The internal audit now complied fully with regulations and the Auditors were prepared to rely on the findings. He commented that it was a shame that the person running the internal audit was only at the level of Assistant Director. This was unacceptable and if ICD could not implement the job evaluation the ICD would be in danger of losing key staff.
The Chairperson referred to the issue of the qualification. It was on the evaluation of assets. It was reported that assets were not bar coded and assets worth less than R5 000 were incorrectly classed as capital.
Mr Mongwe responded that all these matters had been attended to. All assets were now bar coded. ICD had separate registers for major and minor assets. Asset classifications had been corrected and verified.
Mr Trent asked who had approved the establishment of 535.
Mr Mongwe replied that the 535 was approved in 1997, for the ICD to function properly. It was still only employing 270 staff but had received no response when funds were requested from National Treasury.
Mr Trent noted the high staff turnover and asked where the people were going.
Mr Mongwe replied that the ICD was labeled as a flat structure department and this made it difficult for people to have career growth. The possibility of promotions was remote or non-existent ,as the upper salary levels were not present. The funds were not sufficient to cater for these levels, and the funding only allowed sufficient to cover annual cost of living increases.
Mr Mongwe said that the reason why ICD had received the qualification was because there was no asset management unit. The inability to counter-offer was also an impediment to staff retention.
Mr Trent noted the concern about investigating the police. The lack of expertise was the core of the problem. He pointed out that the ICD did not own a property but had non-residential properties on its books. He asked for clarity on this.
Ms Elize Verster, CFO, ICD, responded that this related to the offices in Kingwilliams Town. They had to upgrade the offices there. The Johannesburg office also had to be refurbished and this was the expenditure incurred. She added that ICD had since moved out of the building, hence was no longer reflected on their books. She said the building belonged to the Department of Public Works, and it was the rule of the National Treasury that occupants would carry such costs for the first two years, hence the cost came out of the ICD budget.
Mr Trent referred to SCOPA’s resolution on Special Investigations. He asked what had happened and why it was taking so long to be resolved.
Mr Mongwe replied that the investigation had been concluded. The ICD could not disclose the findings as these went to the Minister of Safety and Security. The findings had never been forwarded to the ICD and it did not know what action has been taken.
Mr Trent asked about the compliance survey to find out if the South African Police Services (SAPS) had complied with ICD recommendations. He observed that it appeared that SAPS did not take notice. He said this was unacceptable in terms of their mandate, and asked what the problem was.
Mr Mongwe replied that it was a frustration for the ICD that recommendations were not complied with. Often SAPS would impose a lighter punishment, against the ICD’s recommendations. ICD would be told that this was an employer / employee relationship that had nothing to do with the ICD, therefore they could not correct errant police behaviour. ICD needed the legal enforcement tools that would make it compulsory for SAPS to comply. If SAPS could not do so, it should have to report on the reasons. The ICD was asking the legislature to make provision for this in the SAPS Act..
Mr Trent stated that this was tantamount to wasteful and fruitless expenditure. He said that he appreciated the comprehensive report to SCOPA’s resolutions. The A-G was generally happy with the information provided by the ICD. It had the systems in place, so that the performance information was reliable. He asked how far it had gone with the linkage to actual performance.
Mr Mongwe responded that when the new management took over, the ICD had a qualification and a disclaimer. Since then, the disclaimer had been removed. He stated that he was confident that the ICD would not receive a qualification in the next A-G report. It had done its part to improve conditions with the few resources at its disposal.
The Chairperson acknowledged that progress had been made. He said it all boiled down to leadership, which had been ably provided. He was happy that the asset management issues have been solved. He added that staffing and the grey area around Mr Mongwe’s position remained worrying.
Ms S Petersen, National Treasury representative, reported that it was not true that the ICD’s request for funding was ignored. The National Treasury (NT) had approved a phased increase of staff over the years. The ICD did not receive the money due to limited resources.
Several members referred to the fact that the fiscus had a budget surplus, therefore the argument of limited resources did not apply.
Ms Petersen responded that the ICD budget had increased by more than annual inflation. The ICD had many vacancies and as a result personnel funds had been shifted to other areas. The NT had provided funds to increase the salaries of investigators.
The Chairperson stated that the area of concern was the timeframes and how the target would be achieved.
Mr Trent said that he was concerned that it would take 20 years to reach the 535 personnel target and with an ever growing police force, something had to be done as a matter of priority.
Mr Mofokeng stated that the NT must be consistent with underspending departments. He asked if this money could not be transferred to successful departments and agencies.
The Chairperson said the NT needed to review the pace. He asked if this target would still be relevant if the growth of the SAPS was considered.
The meeting was adjourned.
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