Analysis and presentation of data
4.2 Analysis of Annual Reports for financial years ended 31 March 1992, 31 March 1993, 31 March
4.2 Analysis of Annual Reports for financial years
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The statutory deficit increased by 53% from R 6.8billion as at 31 March 1991 to R 10.5billion as at 31 March 1992. This increase was due to the following:
A 13% discount rate with which the shortage would grow until it is redeemed;
Contributions which were perceived to be too low;
More deaths than anticipated;
Less than expected Pension Fund investments performance; and Pensioners increased from approximately 90 000 to more than 92 000 within one year.
This deficit, however, showed a decreasing trend over the six-year period to 31 March 1998. As at the end of these financial periods, the actuarial deficits were stated in the books of the company as follows:
Figure 1
Actuarial deficits of the Transnet Pension Fund (statutory deficit)
31 March R'billion %decrease
1992 10.5 53
1993 6.4 39
1994 4.6 28
1995 4.2 9
1996 3.2 24
1997 3.2
1998 3.0 6
1999 (0.9) 130
2000 (2.4) 167
The rate of decrease of these deficits was significant during 1991/2, 1992/3, 1993/4 and 1995/6 financial years. The main reasons for these improvements, per the Pension Fund Chairmen, during these years, were higher returns flowing from improved investment strategies, especially with a bias towards equity portfolio and increased in the market assets values of the fund. On the other hand, the decrease in the rate of reduction of these deficits during 1994/5, 1996/7 and 1997/8 financial years is mainly attributable to the general poor performance of the bond markets during these years, coupled with the collapse of the economy in the emerging markets, which resulted in high interest rates and the weakening of the South African Rand against hard currencies. 1998/9 and 1999/2000 financial years experienced actuarial surpluses for the first time in the history of the Pension Fund. This improvement is attributable to improved investments strategies, which resulted in good returns, increased market
value of investments portfolio, reduction of liabilities without changing benefits as a result of reduction in pension increases.
The shortfalls relating to the Pension Fund statutory deficits experienced during the seven financial years to 31 March 1998 had not been provided for in the books of the company on the basis that the actuarial shortfall as determined on the 1 April 1990, plus interest of at least 12 percent per annum, was guaranteed by the Government of the Republic of South Africa. The guarantee obligation of the Government shall reduce as the company funds the shortfall and shall lapse when it is fully funded. In terms of the old AC 116, which was applicable during that period, it was not mandatory to make provision in the employer company books for retirement benefit fund shortfall. Paragraph.48 of that statement, as it was then applicable, only required an employer company to disclose the fact that the fund is financially unsound and to disclosed strategies as to how the shortfall would be funded. This information was adequately disclosed in terms of the statement. This statement was superseded by the new AC 116, which became effective during the financial periods commencing on or after 1 January 2001. This statement made it mandatory to make provision for post-retirement obligation, including post- retirement medical aid benefit for both retired and active employees.
However, not withstanding the fact that provision for the shortfall was not mandatory in the employer company's books in terms of the old AC 116, it would be prudent to make provisions for these Pension Funds shortfalls as, even though they were guaranteed by the Government, the company had an obligation to fund them either by increased contributions or the appropriation of profits, both requiring the payment of cash or assets with monetary values. In terms of paragraph 37 of AC 000, prudence is defined as the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities and expenses are not understated. Therefore, based on this statement, the exclusion of these shortfalls in the balance sheets and the income statements of the company amounted to an understatement of both liabilities and expenses.
However, the fact that these shortfalls were not provided for did not compromised fair presentation of the company financial information as this provision was not mandatory in terms of the old AC 116.
The actuarial surpluses experienced during 1998/9 and 1999/2000 financial years was not capitalised in the books of the company as no decision had been made by the Government and the company as to whom the surplus belong. In the absence of anything to the contrary, surplus could only be capitalised in the balance sheet of the company as
at the end of these financial years if the company was not prohibited from so doing in terms of the Pension Fund Act and provided this surplus meets the recognition criteria of an element of the financial statement in terms of AC 000. In terms of the Pension Fund Amendment Act (which was gazetted subsequent the financial years concerned) the employer company could include this surplus in its income statement and capitalise it as an asset in its balance sheet under certain circumstances. In its 2002 Annual Report, Edgars Consolidated Stores Limited (Edcon) capitalised a portion of its pension fund surplus in its balance sheet.
Proposals were submitted to the authorities to offer pensioners an enhanced pension in exchange for them assuming all their medical aid liabilities. Similarly, a portion of the surplus will be utilised to pay lump sums to medical aid member's provident fund accounts to meet the company's existing post-retirement medical aid liability for services rendered to date. The surplus is adequate to cover enhanced pensions plus all post-retirement medical aid liabilities and the balance of the surplus of approximately R 240million will be available to meet claims of former members in terms of the Pension Funds Second Amendment Act.
The Financial Services Board has confirmed that the allocation of the actuarial surplus to fund post-retirement medical aid obligations is not an improper use of the actuarial surplus. It is expected that the surplus will be distributed from the pension fund in the next twelve months (Edcon 2002 Annual Report, p70, 2002). Note 5 (Retirement fund) to the financial statements for the year ended 31 March 2002 was as follows:
The funded status of the Edcon Pension Fund determined in terms of AC 116 and IAS 19 is as follows:
2000