Integrated annual report 2018
Welcome to Sentinel Retirement Fund ‘Your retirement – our passion
To position and grow Sentinel to continually provide sustainable retirement solutions to all its members in a socially responsible manner.
Welcome to Sentinel Retirement Fund ‘Your retirement – our passion
Sentinel Retirement Fund is dedicated to providing innovative and sustainable retirement solutions to all its members by delivering cost-effective, superior investment returns and quality service.
We will continue to be pioneers in the industry for the benefit of stakeholders on our lifelong journey together.
Welcome to Sentinel Retirement Fund ‘Your retirement – our passion
- We act with prudence and reasonable care
- We act with skill, competence and diligence
- We act in the best interest of all our members and beneficiaries
- We abide by applicable laws, regulations and rules
- We communicate with all stakeholders in a timely, transparent and accurate manner
- We review on a regular basis the efficiency and effectiveness of our success in meeting our principal goals.
Sentinel Retirement Fund at a glance
annual contributions by 38 971 members
Joint review by the
Chairman of the Board and
Chief Executive Officer
Chief Financial Officer’s
annual contributions by 38 971 members
total assets at
30 June 2018
payments to 34 357
Shareholder engagement activities
resolutions voted on
12-month investment return at 30 June 2018
Pension increase versus inflation
Total asset allocation at 30 June 2018
Joint review by the Chairman of the Board and Chief Executive Officer
“Our most significant opportunities will be found in times of greatest difficulty.” Thomas S Monson
This joint leadership review enables us to present a high level integrated overview of the performance of Sentinel Retirement Fund for the past year
The period under review has been challenging with investment markets, both domestic and globally, continuing on a rollercoaster path of severe ups and downs. The volatility experienced has exacerbated uncertainty and concerns by many for their future financial stability. Overall performance achieved by Sentinel, however, reflects the positive results of longer-term prudent and innovative structures put in place to minimise the impact of poor performing investment markets and support the protection of capital over the longer term.
Progress was again made on the strategic objectives outlined in the previous year’s integrated annual report, although the Fund continued to struggle with making any meaningful gains to grow the participating employer and membership base.
Consistently excellent investment returns
The past year has been characterised by extreme global and domestic investment market uncertainty and volatility. Continued geopolitical tension, uncertainty surrounding the exit of Britain from the EU and global trade turmoil all negatively impacted international and local investment markets. Emerging markets were particularly hard hit as investors sought safety and acceptable returns with the far reaching impact of the trade war sparked by President Trump through his America First campaign, ongoing war and instability around the globe and extreme weather conditions linked to global warming further exacerbating negative investor sentiment and volatility.
The yo-yo performance of the rand continued as ‘Ramaphoria’ quickly waned and emerging market sentiment soured. A sell-off of South African domestic bonds reached record levels following a series of economic downgrades. Extended weak domestic economic growth, uncertainty surrounding expropriation of land without compensation, a volatile rand and relatively high oil prices weighed heavily on South African consumers and resultantly, domestic investment markets. The attractiveness of South Africa as a stable emerging market investment destination has suffered as a result of these factors and the continued poor financial performance and turmoil surrounding a number of stateowned enterprises as well as poorly performing government departments, provincial governments and local authorities. A number of corporate failures, including among others the implosion of Steinhoff International Holdings NV, further negatively impacted the domestic equity market and its performance.
Sentinel’s investment model, based on risk mitigation principles and long-term returns, from a widely diversified portfolio of domestic and offshore assets that spreads risk across numerous asset classes and specialist investment managers, stood us in good stead absorbing the above market shocks without placing the sustainability of the Fund under threat. This model remains a prudent mechanism for countering volatile and uncertain markets.
It is pleasing to note that, given the extreme levels of unpredictability and uncertainty experienced over the past year, all of the Sentinel life-stage portfolios and the pensioner portfolio were able to deliver real growth, net of asset management and administration costs, with assets under management growing to R85,2 billion. Positive asset class returns were mainly the result of stronger performance from international equities (15,8%) and Africa Equities (14,8%) while SA Listed Properties underperformed (-9,9%) after a number of years of relatively strong performance.
Despite market volatility across many asset classes, the Fund has managed to safeguard performance in line with long-term real return objectives. Achieving superior asset-based returns has, however, become increasingly difficult as investment managers struggle with exceptionally volatile trading conditions.
In delivering the 2018 National Budget, the Minister of Finance announced an increase to the limits that retirement funds are allowed to invest internationally and in Africa. Sentinel welcomes this and currently has a policy of utilising the allocation of investments the Fund is allowed to make offshore (30%) and in Africa (10%). A well-diversified portfolio remains a cornerstone of the Sentinel investment strategy and with the South African economy now being only 0,4% of world GDP, it makes sense to have a diversified geographical allocation of investments.
Sentinel operates on similar non-profit principles that characterised the mutual societies of old and exists for its members, pensioners and beneficiaries, being service rather than profit driven. We focus on keeping administration and investment management costs as low as possible, offering a highly competitive and transparent fee structure.
The Fund has for a number of years reported portfolio returns both gross and net of all costs. In further support of our commitment to transparency, we will now additionally report all costs and fees separately including indirect fees levied on products such as fund-of-fund investments. This will also comply with recently announced regulations that compel the full disclosure of all fees and costs.
The Fund invests in its people, value-adding infrastructure such as advanced IT and member communication systems. Our focus on minimising total cost has resulted in the costs to members and pensioners remaining significantly lower than competing funds, which ultimately grows the retirement savings capital of members and the benefits paid to pensioners and beneficiaries.
Sentinel takes pride in its industry leading governance structures and reporting mechanisms. We published our first integrated annual report in 2012 and in our 2016 integrated annual report, the Fund introduced several best practice reporting principles as recommended by the IIRC. These included a business model infographic, a focused approach to the Fund’s material issues, and the incorporation of the ‘six capitals’.
In striving to achieve our strategic objective of maintaining and enhancing excellence in management and governance, the above concepts and the principles embodied in King IVTM have been further expanded on in this integrated annual report and in our processes. To further enhance its governance structures, a Nominations Committee has been established by the Board of Fund which has been tasked with ensuring that Board, sub-committee and executive appointments are made in the best interests of the Fund and its participants.
With the merger of the Mine Employees Pension Fund (MEPF) into Sentinel on 1 July 2013, the Board of Fund of the MEPF was incorporated into the Sentinel Board of Fund with the understanding that the enlarged Sentinel Board of Fund (23 Trustees) would be reduced in size over the next five years. Effective 1 July 2018, the Sentinel Board of Fund has been reduced in size from 19 Trustees to 11 Trustees including an independent Trustee. The Board subcommittees have also been restructured, reducing the number of committee members and introducing additional skills and expertise where required. This further supports the enhancement of governance and oversight structures that is fundamental to Sentinel’s strategic objective.
The Sentinel Board of Fund and Board sub-committees have for many years been subject to an annual evaluation and appraisal process. The Fund reviews this process regularly and will continue to enhance the process to extract maximum value and benefit from it.
To meet our objective of service excellence within acceptable cost parameters, a strategy of a motivated and highly skilled workforce supported by best of breed systems has driven our administration.
With an experienced management team and stable staff complement, the Fund has been able to retain expertise and institutional memory supporting an administration function that remains consistently first rate. Sentinel is, however, mindful of the need to transform in line with South Africa’s demographics, and we remain committed to our EE planning to ensure that this allows us to meet our set targets.
Being a self-administered fund, staff are employed directly by Sentinel. All employees have access to facilities to improve their skills, including a study assistance programme and performance management system with clear and measurable objectives, allowing them to be developed up through the levels in a manner that grows the expertise and skills required for Sentinel to meet and exceed its exceptional service standards.
A product of this has allowed the Fund to introduce an enhanced member benefit statement in 2017/2018 reflecting not only the regulated requirements, but also a graphic tool reflecting any potential shortfall a member may have in achieving a 75% replacement income at retirement and possible remedial steps to address such a shortfall. Our extensive member communication programme together with a benefit counselling service is aimed at educating members with regard to the potential pitfalls that may be encountered in achieving this replacement income.
Over a number of years, Sentinel has developed a robust risk management process by implementing a dynamic risk identification and reporting mechanism that enables newly identified material risks to be monitored from an early stage. These risks are evaluated and continuously monitored with the Fund’s risk register being updated as and when changes take place. The Fund has also further enhanced its comprehensive combined assurance framework to optimise the assurance obtained from all lines of defence including management and internal and external assurance providers in the risk areas identified.
With effect from 1 October 2018, PricewaterhouseCoopers Inc (PwC) will be appointed as internal auditors to Sentinel Retirement Fund replacing KPMG Services (Pty) Limited. This appointment resulted in PwC resigning as external auditors effective 30 September 2018. Deloitte & Touche have been appointed as the external auditors of the Fund to replace PwC.
Sentinel is one of only a few self-administered retirement funds that provide an in-house default annuity option to members upon reaching retirement. Our ‘cradle to grave’ model supports a seamless and costless transition from being a member to becoming a pensioner in the Fund. There are, therefore, no advantages in transferring accumulated retirement savings in Sentinel into other service provider annuities, while there may well be financial and administrative penalties and costs when following this route.
At retirement, members have costless access to the in-house Sentinel pension income choice model and retirement counselling to assist them in exercising an option. This model offers a wide range of annuity options within the Fund including a with-profit guaranteed annuity that provides spouse-pension and term-certain guarantee options and also a living annuity option. The Sentinel default annuity at retirement, in terms of Regulation 39, is a with-profit guaranteed annuity that includes a 75% spouse-pension provision, if applicable, and a five-year term-certain guarantee period.
The annuity income that retirees can obtain is based on their accumulated retirement savings at retirement. To achieve the industry target of a 75% of final salary replacement ratio, this capital amount depends on how long they have contributed to the Fund and whether they have contributed consistently at the recommended level of at least 15% to retirement savings over this period. Members with 35 years’ continuous contributory service, with no leakage through withdrawal benefits, and who have followed the Sentinel life-stage investment model (the default in terms of Regulation 37) may anticipate a replacement ratio in excess of 75%.
Sentinel follows a liability-driven investment strategy and performs an asset liability modelling (ALM) exercise at least every 18 months in support of achieving the above outcome of enabling a 75% income replacement at retirement and providing with profit increases to annuitants that targets a minimum of 80% of CPI annually.
On 1 September 2017, Regulation 37 – default investment portfolios, Regulation 38 – default preservation and portability, and Regulation 39 – annuity strategy became effective with all existing retirement funds having 18 months to implement these. Sentinel has the majority of the requirements of these regulations in place and is in the process of amending its rules, where applicable, to fully comply specifically with regard to Regulation 38 that deals with membership classification around the preservation of retirement capital and the portability of such capital between retirement funds.
Uncertainty regarding the implementation of annuitisation for provident fund members and compulsory preservation for all retirement fund members is, however, an ongoing concern requiring clarity and direction. This uncertainty adds to the insecurity experienced by existing and prospective members and participating employers and remains a major obstacle in our efforts of growing the Sentinel member and employer base due to the differences relating to provident and pension funds.
Although many stipulations of South Africa’s broad-based black economic empowerment (B-BBEE) regulations are not directly relevant to retirement funds such as Sentinel, these funds play an enormous part in the domestic economy by virtue of the quantum of assets under management. Retirement funds are also currently required by Regulation 28 of the Pension Funds Act to consider ESG criteria together with B-BBEE as part of their supplier selection. The funds, therefore, have a major role to play in the transformation of the financial sector, mainly through the appointment of private sector service providers such as investment managers.
Sentinel supports black economic empowerment and transformation via three channels. Firstly, through our internal employment equity (EE) plan, in which we develop employees from designated groups. Secondly, by recruiting promising candidates as interns and training them in the financial, investment and retirement fund fields and thirdly, by supporting a black investment manager incubation programme. This incubation programme assists start-up black investment management firms to establish themselves in the asset management industry.
The incubation programme has been under way for 11 years and is proving highly successful in bringing black talent into the institutional investment industry. As at 30 June 2018, 15 black investment management firms have graduated from the programme, while a further eight black investment management firms are being supported by Sentinel.
Domestic and global investment markets are expected to be negatively impacted for at least the next 12 to 18 months by relatively high levels of uncertainty and volatility. The instability flowing from uncertainty related to the finalisation of Brexit, the outcome and longer-term impact of the recent global trade turmoil and South Africa’s own political turmoil and low economic growth will continue to weigh on our financial performance. The uncertainty coupled with the 2019 South African elections is also anticipated to add to uncertainty and additional challenges.
Creating an inclusive growth environment that is underpinned by a stable growing economy is a major challenge. This requires tough, sometimes unpopular, decisions that supports certainty with regard to policy and mapping the road to the longer-term financial stability of all South Africans.
Sentinel has a well-diversified asset base and, through various strategies and initiatives, we are confident that the Fund will manage the challenges that these uncertain times bring.
On 30 June 2018, the term of office of the Board of Fund and certain sub-committee members came to an end. We express our deepest gratitude to each of them for their diligence and the excellent contribution each one has made to the success of Sentinel, over many years.
We also welcome all new Board members and sub-committee members who join Sentinel on 1 July 2018, including those whose term of office has been renewed. Our combined efforts will ensure that the successes of the past will continue and that new levels of excellence will be attained as we strive to enhance these even further.
We extend our sincere thanks to the Sentinel Board members, committee members, management and staff for their dedication and commitment to the Fund and its participants. In particular, we thank Mr Madula Mananye, our Principal Officer, Mr John Liackman, the Chairman of the Investment Committee, Mr Francois Cooper, the Chairman of the Audit and Risk Committee, and Mr Abe Bardin, the Chairman of the Human Resource and Remuneration Committee, for their efforts.
We further thank all Sentinel service providers and business partners for their contribution to our success and also sincerely thank our participating employers, members and pensioners for their ongoing loyalty and support.
AB la Grange
Chairman of the Board
Chief Executive Officer
27 September 2018
Chief Financial Officer’s report
I am once again pleased to announce that the Fund is in a sound financial position and able to meet its liabilities. This is also confirmed by the independent valuator of the Fund.
This report details and evaluates the financial wellbeing of the Fund against the following important criteria:
- Solvency of the pensioner reserve and ability to grant pension increases
- Solvency of the risk benefit reserve and the ability to service the risk benefit offering
- Ability to fund cash needs as required
- Investment performance
- Cost control of administering and investing member assets.
The financial statements of the Fund only reflect the net assets. It is therefore essential that the actuary of the Fund values the long-term pensioner liabilities annually to ensure the pensioner assets are sufficient to meet future liabilities. The main assumptions used to determine the solvency of this reserve are also evaluated annually to ensure reasonableness and relevance to the Fund’s actual liability profile.
Total funds and reserves
The Board has, in conjunction with the investment consultant, adopted an asset allocation in respect of the pensioner reserve that is based on a liability-driven investment approach. The overall result of the asset allocation and future return assumptions is an expected real return (discount rate) of 4,6% per annum at 30 June 2018 (June 2017: 4,4%). This rate is monitored and reviewed on a monthly basis.
However, since the target pension increase is 80% of inflation, the Fund formally uses a discount rate of 5,9% (expected future real investment return minus 80% of inflation) to value its liabilities. This is done to ensure that the Fund maintains an adequate solvency reserve.
A brief summary of the valuation assumptions used is set out below (previous two statutory valuation date assumptions provided for comparative purposes):
|30 June 2018
|30 June 2015
|30 June 2012
|Net post-retirement discount rate (80% of CPI*)||5,9%||5,3%||5,8%|
|Net post-retirement discount rate (100% of CPI)||4,6%||3,9%||4,7%|
|Mortality – pensioners||Based on PA90 table with a mortality improvement of 0,5% per annum applied from
1 July 2009
|Based on PA90 table with a mortality improvement of 0,5% per annum applied from
1 July 2009
|Mortality – disability pensioners||PA90 table rated up by 4 years||PA90 table rated up by 4 years||Fund-specific
|Spouse’s age difference (if unknown)||4 years||4 years||4 years|
|Expenses (as percentage of pensioner payroll)||1,0%||1,0%||1,0%|
* Consumer Price Index.
The valuation results for the last five years are reflected in the graph below. Total pensioner assets are compared to the pensioner liability at 30 June plus the additional liability created with the October pension increase and bonus that is awarded after 30 June every year. The remaining balance is the solvency reserve.
Pensioner assets versus liabilities Rm
Pension increase and bonus %
The results confirm that the solvency reserve at June each year remained between 5,9% and 11,8% after taking into account the October pension increase and bonus. The Fund has therefore been able to grant pension increases in line with or in excess of CPI.
The risk benefit reserve balance of R168 million (2017: R166 million) at 30 June 2018 (including unallocated contributions of R25 million at 30 June 2018) was higher than the actuarially recommended reserve level of R166 million. The average reduction of 16% in benefits implemented on 1 January 2016 were effective in stabilising the reserve pool balance to the extent that benefits closely match contributions and investment growth.
Risk pool balance at 30 June (Rm)
*Includes unallocated contributions at financial year-end
Each member’s fund credit consists of the member and employer’s contributions (net of insurance costs and expenses) plus investment returns. The member’s funding is therefore 100% at all times.
The Fund continues to experience large cash outflows and therefore needs to maintain a core of liquid investments.
Below is a summary of the annual net outflows
|Contributions and transfers received||3 432||3 230|
|Investment income||1 710||1 596|
|Less: Benefits and transfers paid and expenses||(8 354)||(7 390)|
|Net cash outflow||3 212||2 564|
The Fund monitors its daily, monthly, quarterly and annual cash flows to ensure assets are liquidated in a timely and responsible manner when required. This liquidation process is based on a well-documented rebalance strategy that forms part of the Fund’s investment strategy.
The following investments are less liquid and are carefully monitored to ensure that these exposures remain within acceptable limits:
- Private equity
- Frontier markets
- Credit bonds
- Hedge funds
- Unlisted property.
Sentinel managed to achieve its objective of meeting the real-return objective and its asset-based benchmarks over a 10-year period. We remain confident that our active approach to investment management will bear fruit. History suggests that the current high level of uncertainty and volatility in investment markets should suit active managers and will add value to investment performances. We need to, however, manage costs actively in this low investment return environment.
Annualised portfolio investment returns (gross of direct costs) relative to real-return objectives and asset-based benchmarks for the financial year to 30 June 2018
Hover over/tap chart for more information
Wealth builder (%)
The Board controls the cost of managing the Fund with assistance from the Audit and Risk Committee. Cost management is based on an annual budget that is approved by the Board on the advice of the Audit and Risk Committee. The actual cost is reported against the budget at Audit and Risk Committee and Board meetings. The total cost consists of two main components, being investment management cost and administration cost. Recovery of these costs is based on the member’s Fund credit, while in the case of the pensioner pool and risk reserve, these are levied against the total pool value. Cost recovery ratios can fluctuate significantly from year to year as some investment managers are remunerated on investment performance relative to their benchmarks.
The graph below indicates actual recovery percentage compared to the budgeted recovery percentage:
Total direct actual versus budget cost recovery ratios 2018(%)
During the current financial year actual recovery ratios were lower than budgeted recovery ratios due to:
- savings on investment management performance fees
- fee rebates received not budgeted and
- personnel cost savings.
The Fund has determined that its investment in Noble Spectatus Fund (Pty) Limited is an investment in an unconsolidated entity. The regulatory financial statements from which the summarised financial statements are derived, are prepared in terms of the Regulatory Reporting Requirements for Retirement Funds which does not require consolidation. The investment has the objective of achieving long-term returns. This investment is managed by an unrelated investment manager who applies various investment strategies to accomplish their respective investment objectives. The operations of this investment are financed by linked units (consisting of linked debentures and linked ordinary shares) which entitle the holder to a proportional stake in the portfolio’s net assets.
The change in fair value of investments is included in the statement of changes in funds and net assets in net fair value revenue for the year.
The Fund is subject to the terms and conditions of the investment’s offering documentation and this investment is susceptible to fair value price movements arising from uncertainties about the future value of the investment. This investment is managed by an asset manager who is compensated for their services on an asset-based fee.
The exposure to this investment at fair value is as follows:
|Net asset value of investment Rm||871|
|Fair value of Fund’s share of net assets of investment Rm||620|
|Percentage of Fund’s share of investment net assets||71,20%|
No events have occurred since the financial year-end that materially affect the financial statements as disclosed.
The Fund’s reserve accounts are in a sound financial position. The pensioner reserve had a solvency reserve of 6,4% after taking into account the October 2018 increase and November 2018 bonus.
The risk reserve benefit changes introduced 1 January 2016 had the desired effect and since then benefits have closely matched contributions and investment growth.
Cash outflows remain a challenge but are being carefully managed. Investment returns were below inflation in a very challenging investment market environment.
Investment returns meet or exceed real return objectives and asset-based benchmarks.
Chief Financial Officer
27 September 2018