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Integrated Annual Report 2014

Sentinel Retirement Fund Integrated Annual Report 2014

Content

Mission statement 1

Key performance highlights 2

Key milestones 4

Who we are 6

Main participating employers and member spread

What we do 8

Governance and management structure 10

Management of the fund

Organisational structure

Board of Trustees 11

Chairman’s review 15

Chief Executive Officer’s review 19

Report of the Board of Trustees 24

Strategy

Key stakeholders

Performance review

Corporate governance

Approval of financial statements 57

Statement of responsibility by the Principal Officer

57

Report of the independent auditor 58

Report of the consulting actuaries 59

Financial statements 60

Statement of funds and net assets

Revenue account

Statement of changes in funds and net assets

Statement of changes in underlying funds

Cash flow statement

Notes to the financial statements 64

Benefit and membership statistics 76

Administration IBC

Fund offices IBC


You will find this Integrated Annual Report on our website:

www.sentinel.za.com

Welcome to Sentinel Retirement FundOur third Integrated Annual ReportThis is our third Integrated Annual Report prepared in accordance with the guidelines of the King Code of Governance for South Africa 2009 (King III). We acknowledge that the integrated reporting process is a journey, and this is a further step towards providing a balanced, accurate and clear account of our performance relative to our strategy.

The report covers the activities of the Sentinel Retirement Fund for the year ended 30 June 2014, and follows our second Integrated Annual Report published for the year ended 30 June 2013.

Report scope and boundaryThis Integrated Annual Report incorporates the financial, operational and non-financial performance of the Fund to provide a better understanding of the growth and value it has created during the past year.

Reporting principles and approachOur report is compiled taking into account the principles contained in King lll, the Pension Funds Act, No 24 of 1956, and relevant South African legislation.

AssuranceThe Fund operates on a combined assurance framework with four levels of defence. The management of the Fund oversees the daily internal controls and implements the Board of Trustees’ risk management strategy. The internal auditors, KPMG Inc. assess the effectiveness of the internal controls and risk management. The external auditors, PricewaterhouseCoopers Inc. express an opinion on our annual financial statements. The Fund’s actuary, Alexander Forbes provides assurance on the solvency and sustainability of the pensioner and risk reserves. The Audit and Risk Committee of the Fund applies a coordinated approach to the appropriate combined assurance provided.

Growing our investments for

stakeholder value

Pension fund contributions

Investment

“To position and grow Sentinel to provide sustainable retirement benefits to its members in a socially responsible manner.”

Mission statement

Statement of the Board of TrusteesThe Board of Trustees (Board) recognises its responsibility to ensure the integrity of the Integrated Annual Report. The Board has therefore applied its mind to the Integrated Annual Report and in the opinion of the Board, the Integrated Annual Report addresses all material issues, and fairly presents the integrated performance of the Fund and its impacts.

The Financial Services Board (FSB) regulatory financial statements are available on the Fund’s website.

Sentinel Retirement Fund Integrated Annual Report 2014 1

Key performance highlights

Total assets versus membership(Rm/number)

■ Total assets■ Total membership

2010

2011

2012

2013

*201

4

34 2

94

40 0

39

47 5

38

37 9

03

79 9

39

90 000

80 000

70 000

60 000

50 000

40 000

30 000

20 000

10 000

0

* 2014 includes transfer of Mine Employees Pension Fund

12-month investment return as at 30 June 2014 (%)

Wea

lth-

build

er

Infla

tion

prot

ecto

r

Pens

ion

prot

ecto

r

Mon

eym

arke

t

Pens

ione

r

26,3

25,3

22,8

21,1

6,1

30

25

20

15

10

5

0

R3 483 million Annual pension payments to 34 823 pensioners and beneficiaries

8,6% Pensioner increase awarded

R2 670 million Annual contributions by 40 777 contributing members

R79,9 billion Total assets at 30 June 2014

Name changed to Sentinel Retirement Fund


Pension increase vs in�ation (%)

■ Pension increase■ CPI increase■ 80% of CPI

2013

2012

2011

2010

2014

5,00

4,20 5,

00 5,00

5,00 5,

50 6,00

5,50

8,60

6,60

10,00

8,00

6,00

4,00

2,00

0,00

Total asset allocation as at 30 June 2014*

■ SA equity■ SA in�ation-linked bonds■ Africa equity■ Foreign bonds

■ Foreign equity■ SA money market■ SA property■ SA nominal bonds

38,4

22,1

16,1

7,5

6,0

5,52,5 1,9

%

* Hedge fund, private equity and TAA allocations are converted to underlying asset class exposures. Excludes capital protection and Shari’ah portfolios.

Successful transfer-in of Mine Employees Pension Fund on 1 July 2013

Successful conversion to a type “A” umbrella pension fund

Scope of Fund expanded beyond mining industry

Winner of the World Finance “Pension Fund of the Year 2014 – South Africa” award for the second consecutive year


Key milestones

1960First Investment Committee appointed

1946Created as Mine Officials Pension Fund

196823 244 members4 005 pensionersAssets = R152,3 million

1972Natal Collieries Pension and Provident Fund members join the Fund

1984Witwatersrand Gold Mines’ Employees’ Provident Fund incorporated in Fund

Sentinel Retirement Fund is one of the largest self administered pension funds in South Africa. It is structured as a defined contribution pension fund that provides self insured risk benefit cover and monthly pensions.

199836 016 members21 076 pensionersAssets = R17,5 billion



Positioned for growth







2013Successful transfer of Mine Employees Pension Fund into Sentinel creating a R69 billion fund

2014Awarded the World Finance “Pension Fund of the Year” 2014 – South Africa” award

2001Converted to pure DC fund and MOPF renamed Sentinel Mining Industry Retirement Fund

2003Member investment choice implemented

2008Received the Institute of Retirement Fund’s Best Communication Strategy and Overall Winner award

2010Received the Institute of Retirement Fund’s Circle of Winners award

2005First pensioner annual bonus paid

2007Pension income choice implemented

2012First Integrated Annual ReportReceived the Institute of Retirement Fund’s “Best Practice in Fraud & Risk Management Initiatives” trophy


Who we are

Sentinel Retirement Fund (“the Fund”) has a proud heritage of providing retirement fund benefits dating back to 1946 when it was first formed as the Mine Officials Pension Fund.

The Fund has since become one of the largest self-administered, defined-contribution, umbrella funds in South Africa actively managing assets of approximately R80 billion as at 30 June 2014.

Sentinel is registered in terms of the Pension Funds Act, No 24 of 1956 and the Income Tax Act, No 58 of 1962, under registration number 12/8/1215 and SARS approval number 18/20/4/30800.

It is structured as a type “A” umbrella pension fund that also provides in-house self-insured risk benefit cover (death and disability) and monthly pensions. The management and staff of Sentinel administer the Fund and are accountable to the Board of Trustees.

Sentinel actively pursues growth through world-class investment management and the provision of modern flexible benefits underpinned by best of breed systems and specialist skills. Currently the Fund has 45 990 active and deferred members and 91 participating employers. Monthly pensions are paid to 34 823 former members and beneficiaries.

Through its responsible investment strategy, that incorporates economic, social and governance (ESG) factors, and the provision of excellent retirement funding benefits, the Fund makes a meaningful contribution to the communities and markets it operates in.

The Fund is managed from its head office in Parktown, Johannesburg while comprehensive client service is provided from five Client Service Centres situated in Parktown, Welkom, Klerksdorp, Carletonville and Witbank, and a dedicated Client Contact Centre.


Members per participating employer 2014

■ AngloGold Ashanti■ Sibanye Gold■ Lonmin

■ Harmony■ Anglo Coal■ Other

16

15

13

11

10

35

%

Average age of contributory members 2014

■ Under 35■ 45 to 55

■ 35 to 45■ 55 and older

26

32

32

10

%

Average monthly pension paid 2014 (R)

7 13

1

7 25

0

9 000

8 500

8 000

7 500

7 000

6 500

2013

2012

2011

2010

2014

7 91

5

8 37

9

8 84

0

Main participating employers and member spread


What we do

Retirement contribution Risk contribution

Self-insuredDefault cover: Three times annual risk

salary

Member investment choice:

• Three life stage portfolios

• Money market portfolio

• Capital protection portfolio

• Shari’ah portfolio

Two free switches per annum

Split contribution and capital

Default life stage:

Three portfolios based on years to NRA

Automatic switching:

Risk/return based on years to NRA

Normal retirement age (NRA)

Contribution rate

Pensionable salary

Risk salary

Risk benefits

Individual member account

Employer payroll department

Employee/employer agreement

Death and disability cover


Invest capital

Receive capital and income

Investment managementDiversified across:• Asset classes

• Sectors• Investment styles

• Geographies

Administration• Daily unitisation

• Member account maintenance• Compliance

• Regulatory reporting

Member servicesFive client services centres and call centre:

• In-house advisory service– assist with retirement planning– optimal use of available options

• Communication– newsletters– brochures

– annual benefit statement– website

– presentations– interactive eSite

What happens to my savings in the event of…?

Dismissal/resignation/retrenchment• Deferred membership option

• Fund Credit paid out

• Fund Credit transferred to approved fund

DeathFund Credit plus cover amount (if applicable) paid as follows:

• 50% to provide spouse pension

• 50% paid as lump sum in terms of section 37C to dependants and/or nominees

DisabilityFund Credit plus cover amount (if applicable) paid as a retirement benefit.

Retirement

• Maximum one-third lump sum

• Monthly with profit pension payable for life (member and spouse):

– Spouse pension payable at 75% or 100% in event of death of retiree

– Term certain guarantee period of 5, 10, 15, 20 or 25 years

• If minimum R150 000 annual pension from the above, then option of living annuity pension

R


Management of the Fund

The Board of Trustees, the Chief Executive Officer and the Principal Officer are ultimately accountable and responsible for the performance of the Fund. They uphold this responsibility by providing strategic direction and leadership, ensuring good corporate governance and ethics, determining policy, agreeing on performance criteria and delegating detailed planning and implementing of policy to Fund management. The Chief Executive Officer and Executive Committee are responsible for the day-to-day management and administration of the Fund and report to the Board of Trustees. Various Board of Trustees’ responsibilities are delegated to Board subcommittees.

The Board of Trustees comprises 22 trustees, including an independent trustee who is also the Chairman, and 11 alternate trustees, which includes one independent alternate trustee. There are currently no vacancies. Seven employer representatives are appointed by the Chamber of Mines, three employee representatives by the Solidarity Trade Union, two employee representatives by the National Union of Mineworkers, two employee representatives by the Mines’ Professional Association, six employee representatives by UASA – The Union and one employee representative by the South African Equity Workers’ Association. The Board of Trustees appoints the independent and alternate non-executive trustees.

Governance and management structure

Organisational structure

Claims Committee

Chief Executive Officer

Board of Trustees Principal Officer

Review Committee

Investment Committee

Audit and Risk Committee

Human Resources and Remuneration

Committee

InvestmentsFinance

and support services

Risk and compliance

IT support services

OperationsAdvisory services

Business development

Investment managers

Investment consultants

CustodianLegal

advisersIT support

HR consultants

ActuaryExternal

auditInternal

audit

EXECUTIVE

GOVERNANCE

SERVICE PROVIDERS


Board of Trustees

Members of the Board of Trustees during the year under review:

SENTINEL RETIREMENT FUND

TrusteesAppointed/

reappointed Meetings attended

Independent

AB la Grange 1 July 2013 4

Employer representatives

AC Bardin 1 July 2013 4

Ms AM Clarke 1 March 2014 1

JC Fourie 1 July 2013 4

HJ Groenewald 1 July 2013 4

Mrs HH Hickey 1 July 2013 4

DF Maritz 1 July 2013 2

H Vogel 1 July 2013 2

Employee representatives

JPL Bezuidenhout 1 July 2013 4

J de Vos Hugo 1 July 2013 4

GE du Plessis 1 July 2013 4

BJ Drew 1 July 2013 4

LP Grobler 1 July 2013 4

AJ Jacobs 1 July 2013 4

Ms E Kekana 1 July 2013 4

NA Monaheng 1 July 2013 4

SM Motloung 1 July 2013 4

D Smith 1 July 2013 4

SF Stehring 1 July 2013 4

D van Deventer 1 July 2013 3

AP van der Merwe 1 July 2013 4

DE Watcham 1 July 2013 4


Board of Trustees continued

AB la Grange – Chairman

HH Hickey (Mrs)

H Vogel

LP Grobler

GE Du Plessis

D Van Deventer

DF Maritz

JPL Bezuidenhout

NA Monaheng

AM Clarke (Ms)

SF Stehring

JC Fourie

AC Bardin

DE Watcham

BJ Drew

AJ Jacobs

AP Van der Merwe

SM Motloung

J de Vos Hugo

D Smith

HJ Groenewald

E Kekana (Ms)

12 Sentinel Retirement Fund Integrated Annual Report 2014

J Viljoen

JS Fouché

JN Botes

MJ MitchleyPAC Momberg

FC Schroeder

FJ Visser – ChairmanClaims, Review and Executive Committees

MM Mananye

Chairmen of committees Executive committee

PD Zeeman – ChairmanAudit and Risk Committee

JL Liackman – ChairmanInvestment Committee

AC Bardin – ChairmanHuman Resources Committee

Executive Committee

FJ Visser (Chief Executive Officer)MM Mananye (Principal Officer/Chief Risk and Compliance Officer)JS Fouché (Chief Financial Officer)FC Schroeder (Chief Business Development Officer)MJ Mitchley (Chief Operations Officer)J Viljoen (Chief Advisory Officer)JN Botes (Chief Investment Officer)PAC Momberg (Chief Information Officer)

FJ Visser

13Sentinel Retirement Fund Integrated Annual Report 2014

COPY TO BE

SUPPLIED

Statement of changes in accumulated fundsas at 30 June 2014


Investment managementAlthough excellent returns were achieved by the Fund, the investment environment has been largely plagued by uncertainty and unpredictability. Domestic economic growth again disappointed, while most large international economies showed signs of improvement. Geo-political developments and tension, particularly in parts of Africa, the Middle East and Asia, contributed to global market uncertainty and volatility. These tensions negatively impacted, among others, the oil price, which had a ripple effect on our domestic economy, contributing to an increased inflationary environment and further pressure on already cash-strapped consumers.

The underperformance of our domestic economy is nothing new compared to global economic growth (1994 to 2013: Global growth 3,6% and RSA 3,2%) but of concern is that this gap widened dramatically in 2013 with global growth reaching 3,4% while our domestic economy only grew at a modest 1,9%. Local business confidence has also diverged, of late, from global levels.

The protracted five-month platinum mining labour disruption, together with increased levels of general industrial action, has further negatively impacted domestic economic growth and prospects for the local economy and the attractiveness thereof for investors. This, together with the downgrading of South Africa’s credit rating by major credit rating agencies, placed the local currency under pressure and added to the inflationary outlook and volatility in local investment markets.

Chairman’s review

Sentinel has, across all business areas, produced exemplary results once again. Wealth and savings continue to be protected and created for members through the strategies followed by the Fund and the diligent management of risks and returns.

Operating environmentOn 1 July 2013, the Mine Employees Pension Fund (MEPF) was successfully transferred into Sentinel Retirement Fund, in line with the strategic objectives of both funds.

In addition, Sentinel converted to a type “A” umbrella structure supporting a strategic focus to market the Fund outside its traditional operating environment of the mining industry. In this regard, a number of opportunities are being explored and are expected to be implemented over the next six to 12 months.

Sentinel is further committed to ensuring transformation at all levels of society and makes a meaningful contribution to social development. This is supported by an approved Socially Responsible Investment (SRI) policy that allocates a percentage of assets for investment in appropriate SRI projects and opportunities, the procurement and use of BEE-compliant service providers and the employment of appropriate and representative staff to administer the Fund.

The Fund’s participation in an emerging investment manager incubation programme is designed to give start-up black investment managers the support and experience to ultimately gain exposure to the mainstream investment management industry. During the year, nine investment managers were supported through this programme.

AB la Grange


Chairman’s review continued

In March 2014 the Fund, for the second year running, was named the winner of the prestigious World Finance Global Pension Fund of The Year 2014 – South Africa. This highly regarded international accolade testifies to the Fund’s achievements and success over a number of years.

Compliance and governanceSentinel is committed to the highest levels of corporate governance, compliance and transparency. Five Board subcommittees support the Board in its role of managing and monitoring the affairs of the Fund. The independence of the Audit and Risk Committee from management underpins this commitment.

The Fund subscribes to the Code for Responsible Investment in South Africa (CRISA) and has incorporated economic, social and governance (ESG) factors into its investment process. During the period under review shareholder engagement activities included voting on 2 855 resolutions and participation in 32 company engagements. A continual focus on communication and reporting standards, including Global Reporting Initiative Standards, together with a commitment to applicable sustainability reporting, results in this being the Fund’s third Integrated Annual Report.

The provision of appropriate information to members and pensioners is a high priority and a comprehensive member and pensioner communication service is maintained that includes newsletters, brochures, annual benefit statements, group presentations, individual consultations and a website with interactive functionality. An in-house advisory service assists members with retirement planning and the optimal utilisation of Fund product options at no additional charge for this service.

Forward looking commentThe conversion of Sentinel to a type “A” umbrella structure created exciting growth opportunities, allowing Sentinel to expand its unique “self-administered not for commercial profit” offering to a much broader base. Gaining new employers, especially large organisations, is, however, a slow process, as not only the Fund, but also employers need to comply with various legislative requirements and good governance practises. We are confident that the momentum gained will produce results going forward.

In his 2014 budget speech, the Minister of Finance made further announcements with regard to broad retirement reform initiatives in line with various policy documents announced by National Treasury over the past two years. The Fund welcomes the announcements and is ready to implement these, although some uncertainties still need to be addressed in terms of retirement savings preservation.

Global economic sentiment has shown signs of picking up, suggesting improved global growth from mainly the USA, and UK. Although the Chinese economy has slowed to an 18-month low with signs that it may be bottoming out, concerns still exist with regard to shadow banking and Chinese credit levels.

Stronger growth from many major economies bodes well for global investment markets. Notwithstanding this, political tension and conflict in certain geographic areas remains with no long-term solutions evident. This will continue to elevate global levels of investor uncertainty.

Domestic economic growth is expected to remain relatively weak, being negatively impacted by continued high levels of unemployment and increasing levels of inflation with bank overdraft rates anticipated to continue rising over the next 18 months. The rand is also expected to weaken further during this time, adding to inflationary pressure and an already challenging investment environment. An improvement in global economic growth will positively impact investment markets, but more importantly emerging markets, including our domestic economy.

Post 30 June 2014, the collapse of African Bank Investments Limited added to the levels of volatility experienced in the domestic investment market. The Fund’s exposure to this is reflected elsewhere in this Integrated Annual Report.

The main investment challenge in the year ahead will be to maintain strong performance in what can only be described as a very challenging economic environment fraught with elevated levels of volatility and risk.

Sentinel remains well positioned to maximise opportunities, due to its dynamic investment strategy and strategic growth positioning, ensuring longer-term wealth creation for members and pensioners without incurring undue high levels of risk.


Appreciation and changes to the Board of TrusteesDuring this reporting period Mr SA Wall, an employer representative trustee, resigned and was replaced by Ms AM Clarke. With the transfer of the Mine Employees Pension Fund into Sentinel, the following MEPF employee representative trustees joined the Sentinel Board of Trustees on 1 July 2013:

Mr GE Du Plessis Mr AJ Jacobs Ms E Kekana Mr SF Stehring Mr D van Deventer Mr AP van der Merwe

The commitment and insight of those involved with the management of the Fund during the past year has directly resulted in excellence being achieved. For this, I express my sincere gratitude to the entire Board of Trustees, the various Board subcommittees, the Chairperson of the Investment Committee, Mr John Liackman, and the Chairperson of the Audit and Risk Committee, Mr Piet Zeeman.

In conclusionI would like to thank the Chief Executive Officer, Mr Eric Visser, the Principal Officer, Mr Madula Mananye, and the management and staff of the Fund for their unwavering commitment to excellence in all areas of operation and their continued dedication to the Fund.

I am fully confident that our combined efforts to achieve excellence in all that we do will continue to produce world-class performance in both the short and long term.

This Integrated Annual Report provides an overview of the past financial year and readers are encouraged to engage with the Fund if further information or clarification is required.

Andre la GrangeChairman2 October 2014



Chief Executive Officer’s review

It is my pleasure to report that Sentinel has performed exceptionally well this financial year from both an investment and operational perspective.

Our focus on creating wealth for members and pensioners is supported by a continued commitment to maintaining the highest standards of management, service and governance.

Sentinel Retirement

Fund Growth Initiative

Provide excellent flexible investment choices and retirement benefit options

Liability Driven Investing (LDI) Allows Trustees to focus on longer-term commitment the Fund has to its members and pensioners by managing investment risk around specific targets.

Flexible membership structure Allows employers and their employees to negotiate contribution rates, normal retirement age, and risk benefit participation.

1 2

3

FJ Visser


Chief Executive Officer’s review continued

Investment performance at a glance (%)

■ One year ■ Three years ■ Five years

Wealth-builder

Inflationprotector

Pensionerportfolio

Pensionprotector

Moneymarket

Shari’ahportfolio

Capitalprotection

21,1

16,4

21,1

18,5

25,3

20,6

18,1

22,8

19,7

17,2

6,1

6,3 6,7

20,1

13,6

9,1

8,1

26,3

18,8

30

25

20

15

10

5

0

Investment management and performanceSentinel follows a strategy of Liability Driven Investing (LDI) which allows Trustees to focus on the longer-term commitment the Fund has to its members and pensioners by managing investment risk around specific targets. This, together with the Fund’s Asset Liability Modelling (ALM) process, targets specific future outcomes through anticipated risk/return profiles. With regard to pensioners, the Fund has a responsibility to ensure that pensions in payment, with a proportion of inflationary growth, are sustainable over the very long term and that sufficient cash flow is generated through investing to meet monthly pension commitments.

Excellent performance has been achieved over the past 12 months, mainly due to a very strong performance from local and international equity markets, even though market volatility has remained relatively high for certain asset classes.

Domestic equities have again been the top performing asset class, followed closely by international and African equities on a rand return basis. Listed property returns were acceptable, beating inflation, albeit at a far lower level than in the previous financial year. Although Africa Equities provided good returns during this reporting period, volatility for this asset class is anticipated to remain relatively high, while Private Equity continues to lag listed equity returns and is expected to improve as these investments near the exit phase of their investment horizon over the next 12 to 18 months.

Bond and money market returns were again relatively weak, when compared with equity returns, although long-term inflation-linked bonds did provide improved performance in line with the uptick in the rate of inflation. Inflationary pressure is expected to remain over the next 12 to 18 months with the prime lending rate anticipated to mirror this upward move.

Post financial year-end, the collapse of African Bank Investments Limited and the subsequent downgrading of the credit ratings of most South African banks resulted in further volatility in the domestic market.

The Fund’s active investment and disciplined risk management strategies continue to provide excellent results, with overall performance reflecting the impact of these innovative strategies. Sentinel has managed to deliver inflation-beating returns for the various member life stage and pensioner portfolios over 12-month, 36-month and 60-month periods. The performance achieved has exceeded the stated portfolio CPI targets, but has also protected value to some extent in periods of volatility and market weakness.


OperationsThe conversion of Sentinel from a type “B” to type “A” umbrella fund on 1 July 2013 enhances participating employer flexibility in the Fund while the product offering meets the needs of a broad spectrum of employers from within and outside the mining sector. The flexible membership structure allows members and their employers to negotiate contribution rates, normal retirement age, pensionable salary and risk benefit options. Members and their employers are also able to negotiate that portion of remuneration that is utilised to determine Death and Disability Cover, if any.

The Fund provides a home loan guarantee product through a third-party service provider and all large employers now participate in this product.

In support of the Fund’s member retention and growth strategy, the provision of flexible product options from within the Fund, at no additional cost to members and or employers, is continually focused on. These include a Member Investment Choice Model and best-of-breed Pension Income Choice Model that allows qualifying retirees the option to select a “living annuity” type pension from within the Fund. The transition from member to pensioner is extremely attractive as this transition occurs at no cost to the member.

Pension increases and bonusesSentinel has a stated objective to provide annual pension increases at a level of at least 80% of inflation. These increases are not guaranteed although Trustees are cognisant of the importance of providing pension increases that maintain purchasing power. Pension increases are dependent on the funding level of the Pensioner Portfolio and inter alia the investment performance achieved by the underlying assets of this Portfolio. The overriding priority, however, is to keep the Fund financially sound over the long term to ensure sustainability of future pension commitments.

Based on the Fund’s broad pension increase philosophy of ensuring that the purchasing power of pensions keep pace with the eroding effect of inflation, the Board of Trustees granted a pension increase of 8,6% on 16 October 2014 (2013: 6%) compared to an increase in inflation of 6,6% (2013: 5,5%) at 30 June 2014.

In addition, the Board of Trustees also awarded a special once-off bonus of 15% of annual pension to pensioners, payable in November 2014. A once-off 15% of annual pension bonus was paid in November 2013.

GovernanceThe Board of Trustees is supported by five Board subcommittees that assist the Board in effectively discharging their fiduciary responsibilities and managing Fund strategies. The Fund is committed to the highest levels of governance and compliance and to this end, the Audit and Risk Committee plays a pivotal role in ensuring accepted governance and compliance principles are adhered to.

During the period under review, a number of committee mandates were enhanced and updated. Fund employees are also constantly reminded of the Fund’s Ethics Hotline provided through an independent external service provider as an additional measure to combat potential corruption and fraud.

Sentinel subscribes to the Code for Responsible Investment in South Africa (CRISA). In adopting the incorporation of economic, social, governance (ESG) factors by local investment managers into the Funds investment process, shareholder engagement activities included voting on 2 855 resolutions and engaging with 32 companies. The following highlights the main issues voted on:

■ Director affairs■ Remuneration■ Financial assistance

■ Audit affairs■ Capital structures■ Other

36

11

13

21

46%

Client serviceEffective communication with members and pensioners is a priority for Sentinel. This includes not only the provision of information to participants, but more importantly education regarding the benefits and options provided by the Fund and the importance of retirement capital preservation as to ultimately create sufficient wealth to ensure a comfortable retirement.


Chief Executive Officer’s review continued

The Fund’s in-house advisory service supports this strategy by providing advice and assistance to members and pensioners with regard to the Fund product options, retirement planning and general financial assistance. This is further supported by a Contact Centre in Parktown and Client Service Centres in Witbank, Welkom, Klerksdorp, Carletonville and Parktown.

In addition, the Fund provides participants with a website that incorporates a secure interactive function where participants are able to view their Fund details and values online.

Transformation and BEESentinel follows a policy of black economic empowerment through its operating activities, supporting transformation at all levels of society. The main areas include:

a Socially Responsible Investment (SRI) strategy that allocates a set percentage of total assets to appropriate SRI projects and investment opportunities. SRI investments accounted for 5,25% of total assets as at 30 June 2014 while our minimum target is 5% of total assets;

an emerging black investment manager incubation programme aimed at start-up managers who display the potential to add value to the Fund’s investment portfolios and who would not otherwise be included in the Fund’s standard institutional investment manager selection process. At 30 June 2014, the Fund had R993 million of assets allocated to this programme;

service providers to the Fund, including investment managers, must be committed to the transformational goals of the Codes of Broad-Based Black Economic Empowerment; and

the Fund’s own policies on employment and procurement.

AdministrationSentinel is a self-administered defined-contribution pension fund. To enable our commitment to excellence, an administration process driven by technology and appropriate human capital is paramount. During this reporting period, the following was achieved:

Omni Plus, the Fund’s web-based best-of-breed benefit administration system, was upgraded to further enhance efficiencies and functionality supporting the administration complexities of managing a defined contribution fund providing daily member values, unitisation and in support of the Funds flexible product offering.

The integrated workflow solution has progressed well, with most business processes being completely reviewed and the majority of processes being work-flowed to improve claim processing times, accuracy, resource optimisation and control. It is anticipated that this phase of the project will be completed by end September 2014. 38 092 Timely monthly pension payments, both domestic and international, totalling R3 483 million for the year. Budgeted 2014/2015 administration costs are 4,8% higher than the 2013/2014 actual administration costs.

AppreciationI express my appreciation to the Board of Trustees, Board subcommittees and specifically, the Chairman Mr André la Grange, for their continued commitment to the strategic management of the Fund and significant value added in ensuring excellence in the areas of compliance, governance and risk management.

I also extend my gratitude to the management and staff of the Fund for providing the highest standards of management and administration.

I further thank our service providers and strategic partners and, in particular, our investment consultant, Jarred Glansbeek of RisCura, our investment managers and the Fund’s actuary, André Pienaar, for the invaluable contribution made towards the Fund’s successes.

To all participating employers, members and pensioners, for their continued loyal support, I express my sincere gratitude.

FJ VisserChief Executive Officer2 October 2014



Report of the Board of Trustees

Who takes responsibility?The Board of Trustees: For establishing the risk and governance framework and the formulation of strategy by engaging with Board subcommittees, Fund management and industry specialists.

Executive Committee: For the implementation and monitoring of the risk and governance framework as well as the strategy by establishing appropriate plans, policies, procedures and resource procurement including staff and systems.

Service providers: For adhering to contractual obligations, mandate guidelines and objectives by following best practice principles with regards to process, systems, and administration.

MaterialityThe process followed to determine which issues are material to the Fund was as follows:

The Executive Committee held a strategic workshop to perform a SWOT analysis and review the retirement fund competitive landscape. This was followed up by a Board strategic planning session where the results were interrogated and the conclusions reviewed and refined. Based on this process, the following material issues were identified:

1. Governance and risk management (as this will have a direct impact on the Fund’s reputation and hence its ability to execute the membership growth strategy)

2. Investment returns (as this will have a direct impact on the Fund’s ability to meet pensioner and member retirement savings expectations and execute its membership growth strategy)

3. Legislative and regulatory compliance (as this will have a direct impact on the Fund’s ability to continue operating as an approved retirement fund)

4. Growth in active membership (as this will have a direct impact on the Fund’s ability to execute its long-term investment strategy and cost containment)


Strategy

To ensure the long-term sustainability of the Fund it is imperative that these key issues be actively managed through well-defined strategic plans. Following from the above process the Board of Trustees have identified the following broad strategic objectives:

Maintain or enhance the Fund’s excellence in management and governance.

Maintain or enhance the Fund’s investment performance.

Transform the Fund to answer to legislative and other regulatory requirements. Retain and grow the membership base and participating employers.

The following focus areas, for which strategic plans have been developed, flow from these broad strategic objectives:

1. Governance and risk management2. Investment3. Technology4. People5. Member/participating employer growth

1. Governance and risk management strategy

Our objectives: Our principal risk management and governance objective is to ensure that members and pensioners are not exposed to uncontrolled risks.

To attain this, we: create an awareness and understanding of risk at all levels within the Fund; and

instil a culture of risk management and ownership, embedding this in the management processes of the Fund.

Our framework: The Fund operates on a combined assurance framework with four levels of defence.

Level 1: Executive CommitteeLevel 2: Service providersLevel 3: Independent internal and external auditorsLevel 4: Board of Trustees

The Board has delegated the responsibility for creation and monitoring of the risk management and governance framework to the Audit and Risk Committee. This includes independent monitoring of risk management and compliance. The Executive Committee takes responsibility to ensure that the risk management framework is implemented. They do this by taking an active role in the risk management process, being ultimately responsible for the maintenance of and compliance with the risk management framework.

The Executive Committee is responsible for identifying risks and ensuring effective controls are in place to manage these risks and monitoring their application. This includes ensuring that consistent policies and procedures are in place for measuring, managing and reporting risk. The Board is kept informed through regular interaction with the Executive Committee and formal feedback at Board meetings provided by the Chairman of the Audit and Risk Committee.

Our approach: The Executive Committee, in conjunction with the internal auditors, annually reviews the strategic and operational risks during a risk management workshop. This is then followed up by a risk management workshop of the Audit and Risk Committee where the results are interrogated and the risk management framework approved. Upon completion, the internal auditors draw up their annual internal audit plan, linking this to the strategic and operational risks identified. The Fund prioritises its risk exposure according to an impact table. In considering the most appropriate approach to determining risk appetite and risk tolerance levels the following analyses were completed:

A five-year historical analysis of the Fund’s financial data A five-year historical trend analysis of membership fees A five-year historical trend analysis of administration cost


Strategy continued

Materiality of risks are determined on the following basis:

Impact factorFinancial – investment

Financial – operating costs Compliance and legal Reputation and brand

Catastrophic Quantified as potential effect on investment income or asset base

Quantified as potential cost as a percentage on investment income, operating budget or asset value

Quantified as potential size of legal claim against Fund, or potential jail terms or closure of operations

Qualitative assessment

Critical

Serious

Significant

Minor

Risk appetiteThe Fund’s risk appetite is best depicted by the following heat map:

IMPA

CT

LIKELIHOOD

Cata

stro

phic

>25

%Cr

itica

l15

% to

25%

Serio

us10

% to

15%

Sign

ifica

nt6%

to 1

0%M

inor

<6%

Rare Unlikely Possible

Beyond risk appetite

Likely Almost certain


As risk is an unavoidable consequence of the Fund’s activities, risk management is a multi-faceted process which involves:

independent monitoring through the internal audit function; frequent communication via the Audit and Risk Committee to the Board of Trustees;

application of sound judgment where required; the early identification, understanding and reporting of risk by undertaking regular reviews to ensure appropriate actions are taken;

the proactive management of risk to ensure that the risk profile is in line with the Fund’s risk tolerance levels;

optimisation of the risk/return relationship;

ensuring adequate systems of control; ensuring that an effective business continuity plan is in place; ensuring that an ongoing risk management process is in place; and management, monitoring and reporting of risks to ensure that resources are optimally utilised to minimise the probability of negative events.

Our key performance indicators/areas: Positioning on the risk dashboard Positioning on the risk heat map King III assessment

Which significant risks do we face and how do we manage them?

Risk Control

Governance risk – this risk comes through potential improper structures (including delegation of authority) between the Board, the Executive Committee and employees, leading to improper decision making.

Good governance processes that outline responsibilities and accountabilities are a key part of overall risk management. The Board has approved a policy and procedure for managing conflicts of interest. The Board and subcommittees meet at least quarterly to review the business of the Fund.

Fiduciary risk – this is the risk that fiduciary responsibilities are not fully respected or executed by the Board and service providers.

All Board members receive a comprehensive information pack which includes:

Board Charter Rules of the Fund Duties of a trustee Code of Conduct and Ethics Policy and procedure for managing conflicts of interest

The Executive Committee has implemented a system of internal control to ensure effective segregation of duties and operations of the Fund.

Longevity risk – an actuarial term used to describe the potential risk associated with increased life expectancy among pensioners, which in turn could lead to higher pay-out ratios than planned for and an underfunded pensioner portfolio.

Actuarial analysis to identify and monitor trends and to make recommendations with regard to changes in strategy to manage the impact.


Risk Control

Pensioner liability funding risk – this is the risk that pension payments and pension increases become unsustainable into the future.

The major factors influencing the funding level of the pensioner liability is managed by reviewing the following factors regularly:

Discount rate or real return assumption to value liabilities Asset allocation of pensioner assets Mortality assumptions

The risk is managed monthly by reviewing the discount rate used to value liabilities. If the discount rate changes, the annuity tables are also updated to ensure new and current pensioners are treated fairly. The Fund also performs an asset liability analysis at least every 18 months to ensure the appropriate asset allocation mix is maintained to meet the liabilities. Mortality assumptions are also assessed annually to ensure they remain in line with the Fund’s actual experience. The funding level of the pensioner pool is also monitored on a monthly basis.

Asset liability mismatch – the risk that the assets held by the Fund will not fully match the liabilities as per the Investment Policy Statement. The risk is therefore measured relative to the liabilities as defined in the IPS.

The Asset Liability Modelling process is designed specifically to assess the risk of mismatch. The asset allocation and rebalance processes are designed to ensure the risk of asset liability mismatch is controlled. In addition, the Fund employs a floating discount rate policy, which captures market movements, in calculating annuity factors and monitors funding levels on a monthly basis.

Risk benefit funding risk – this risk is that benefit multiples and contributions rates are not competitive and sustainable.

This risk is managed by monitoring the assets and claims against them monthly. A claims subcommittee to the Board manages the claims by ensuring the Rules of the Fund are consistently applied. Contributions to risk benefits and benefit multiples are reviewed annually to ensure this pool remains adequately funded.

Legal, regulatory and policy risk – the risk that a change in laws or regulations or deviation from the Fund’s policies or inappropriate business practices will materially impact a sector, market or security. A change can increase operating costs or change the competitive landscape. Non-compliance could lead to fines or loss of licence to operate.

This risk is managed through representation on industry bodies to ensure changes are monitored and inputs provided on behalf of the Fund. It is further managed through supervisory controls, workflow process controls and comprehensive policies and procedures. Both the internal and external audit function provide an additional level of oversight. External service providers are required to maintain adequate professional indemnity cover and internal control systems. Two independent audit firms are engaged to act as internal and external auditors. External and internal legal counsel is also engaged to advise on legal matters. The Executive Committee reports to the Board quarterly with respect to investment and contributions payment compliance.A compliance charter, a risk management plan and a compliance manual is in place. Active direct engagement with the National Treasury and the Financial Services Board to ensure changes to the regulatory environment are monitored and managed closely.

Strategy continued


Risk Control

Business environment risk – the risk that the Fund does not monitor, anticipate, understand or react timeously to changes in the external environment in which it operates.

This risk is managed through appropriate monitoring mechanisms and adjusting the operating model of the Fund. The Executive Committee actively participates in local and global industry conferences which not only provide up-to-date information on emerging industry issues, but also provide networking opportunities with peer groups.

Liquidity risk – this risk occurs when the Fund is unable to realise assets at reasonable value on demand to meet its commitments as they fall due. This risk is increased by the maturity profile of the Fund.

This risk is managed through cash flow analysis and modelling, asset/liability modelling, integrating long-term and short-term strategies and maintaining an adequate pool of high-quality marketable assets.

Investment risk – the risk of earning lower than expected returns or suffering permanent capital loss or assets not meeting liabilities. This risk includes the following:

Default (credit) risk – the risk that a counterparty fails to meet its commitment to repay capital and interest.

Business risk – the risk that a company suffers and does not perform well or fails entirely.

Inflation risk – the risk that future real value of investment (and therefore increases in benefit/pension) does not match increased cost of living.

Interest rate risk – the risk that arises from changes in the absolute levels of interest rates, spread between interest rates and the shape of the yield curve. This has an impact on both asset (investment) and liability (benefit) values.

Political risk – the risk that arises from change in political leadership or economic policy.

Market risk – the risk of movement in security prices due to factors that affect the market as a whole.

This risk is managed by diversification of exposure to a spread of asset classes, regions, markets, sectors and currencies which is reviewed regularly. The Investment Policy Statement sets out limits in terms of permissible investments and credit quality requirements for a number of investment alternatives. Compliance monitoring and rules for correcting breaches at manager and portfolio level are strictly adhered to.

The Investment Committee develops a strategic plan based on a liability driven investing and asset liability modelling approach. Exposure levels are reviewed and modified as required by changing conditions by either rebalancing or hedging. It is further managed by targeting specific levels of real returns through the appropriate mix of asset classes. The Executive Committee facilitates an annual formal strategy review session for the Investment Committee.

Fraud risk – the risk of intentional misrepresentation of material fact by one party, inducing another party to act, with a consequential loss or damage suffered by the latter. It includes any act, omission, concealment of fact or abuse of position with intent to deceive, gain undue advantage or injure the interests of the Fund whether there is any wrongful gain or loss.

This risk is managed by implementation of an effective governance structure and risk management controls and procedures. The Fund has an anti-fraud and corruption policy in place. This is executed through a fraud response plan. The Executive Committee, with the assistance of the internal auditor, has designed an annual fraud risk assessment process that considers the vulnerability of internal processes to fraudulent acts. A whistleblower hotline, managed by an external party, encourages staff members to report any misconduct. The Fund has a procurement and contract management policy and framework in place. The effectiveness of risk management is reviewed on an annual basis to ensure new risks are identified timeously and all risks are appropriately assessed. All Board and subcommittee members, Executive Committee, staff and service providers are required to sign declarations on conflicts of interest.


Strategy continued

Risk Control

Operational risk – the risk of losses arising from systems failure, processing errors, fraud, forgery and other occurrences.

Operational risk is managed as part of routine operations by a system of internal control requiring segregation of duties, training programmes and internal audit reviews. The Board of Trustees, in consultation with insurance advisers, regularly reviews the insurance cover of the Fund. The disaster recovery and business continuity plan involves a process to identify critical business functions, processes and procedures to be followed in the event of an unforeseen disaster. The plan provides guidance to management for the complete restoration of core business functions and IT facilities.

The comprehensive disaster recovery procedure (Business Continuity Plan) incorporates full back-up of all electronic files daily and these are stored off-site. In the event of a disruption in business, the Fund has secured two disaster recovery sites that will ensure the restoration of operations to near full capacity within 24 hours. Both the plan and the recovery facilities are tested at least once a year.

Each of these risks relates directly to one or more of the strategic risks identified by the Fund.

2. Investment strategy

Our objectives: Our principal long-term goal is to optimise the benefits of our members and pensioners, having due regard to the term and nature of obligations and the associated investment risks.

In reaching this long-term goal we strive to achieve the following associated secondary goals:

Pension on retirement equal to 75%* of salary at retirement (assuming a member has contributed at least 15% of income for 40 years to the Fund). Appropriate benefits and inflationary growth in pensions during retirement targeting a minimum increase of 80% of headline inflation. Provision for dependants in the event of death. Optimal choice of investment portfolios given dynamic markets and changing member risk profiles. Being a responsible investor.

What opportunities do these risks create?By managing governance, fiduciary, operational and fraud risk the Fund will enhance its reputation, which in turn will allow it to execute its membership growth strategy. By managing longevity risk, through appropriate strategies, the Fund will ensure that the long-term sustainability of the Fund is assured. This will ensure that the Fund can continue to maintain its track record with regards to increases granted and bonuses paid to pensioners, once again enhancing its reputation and allowing it to execute its membership growth strategy. By managing the legal, regulatory and policy risk as well as the business environment risk, the Fund could maintain its status as an industry trendsetter, again enhancing its reputation and allowing it to execute its membership growth strategy. By understanding liquidity and investment risks and adopting appropriate strategies to exploit the premium available, the Fund will be able to enhance investment returns, thereby allowing it to execute its membership growth strategy. * Members wishing to target a higher replacement ratio have three options: work longer, save more or accept higher investment risk.


Our approach: We follow a liability-driven investment approach to ensure assets can meet long-term liabilities. A Life Stage Model is utilised in constructing our portfolio range. Portfolios are designed to meet the specific needs of each category of members and as such have different risk and return profiles as reflected below:

Investment portfolios

PensionerPortfolio

Member Portfolio

WealthBuilder

InflationProtector

PensionProtector

Portfolio type Annuity income Aggressive Moderate Conservative

Life stage Post-retirementMore than

12 years to retirement

Between 12 and five years

to retirement

Less than five years

to retirement

Investment objectiveInflation

plus 4,6%Inflation

plus 6,0% Inflation

plus 5,4%Inflation

plus 5%

Risk tolerance7% above or below

benchmark10% above or below



benchmark

In addition to the “life-stage” portfolios, members also have the choice to invest in a money market portfolio, a Shari’ah-compliant portfolio and a capital protection portfolio.

Risk/return objectives may be amended from time to time due to changes in liability profile, capital market risk/return expectations or the investment outlook and environment.

“Life-stage” portfolios and the pensioner portfolio share in the same underlying manager structure and risk/return profiles are met by applying different asset allocations as reflected below:

Asset allocation ranges

Asset class Pensioner %

Wealth Builder

%

Inflation Protector

%

Pension Protector

%

SA equity 21 – 31 46 – 56 41 – 51 30 – 40

SA property 4 – 10 3 – 9 3 – 9 4 – 10

SA nominal bonds 0 – 2 0 – 2 0 – 2 0 – 2

SA inflation-linked bonds 26 – 42 6 – 16 7 – 23 17 – 33

SA money market 2 – 4 2 – 4 2 – 4 2 – 4

Africa equity 3 – 9 3 – 9 3 – 9 3 – 9

Foreign equity 19 – 25 19 – 25 19 – 25 19 – 25

Foreign bonds 0 – 2 0 – 2 0 – 2 0 – 2

Notes1. All portfolios are subject to Regulation 28 compliance.2. Portfolios have a maximum exposure of 7% to hedge funds and 8% to private equity.


Strategy continued

The Shari’ah-compliant portfolio is a multi-managed balanced fund, while the capital protection portfolio is a cash and derivatives-based portfolio linked to the capital growth in the local equity and nominal bond markets.

Factors taken into consideration in construction of the asset allocation for each portfolio include, but are not limited to:

regulatory compliance; risk tolerance; volatility of returns;

diversification; real return expectations; and capital preservation.

The asset allocation of portfolios is allowed to move within ranges and is monitored on an ongoing basis. Should an asset class move beyond the approved range, an asset class reallocation will be triggered based on an approved asset rebalance process.

Total asset allocation as at 30 June 2014*

■ SA equity■ SA in�ation-linked bonds■ Africa equity■ Foreign bonds

■ Foreign equity■ SA money market■ SA property■ SA nominal bonds

38,4

22,1

16,1

7,5

6,0

5,52,5 1,9

%

Funds invested in different portfolios

■ Pensioner■ Inflation protector■ Risk and other■ Capital protection

■ Wealth builder■ Pension protector■ Money market■ Shari’ah

52,4

20,3

14,8

8,5

3,4 0,5

0,1

%

* Hedge fund, private equity and TAA allocations are converted to underlying asset class exposures. Excludes capital protection and Shari’ah portfolios.

Asset allocation at Fund level has remained more or less in line with the strategic allocation ranges set in the Investment Policy Statement. The pensioner portfolio remains the single largest portfolio. To ensure the long-term sustainability of the Fund, active membership would need to grow.

While investments are subject to regulatory limits, market risk is reduced by spreading exposure across geographies to the extent allowed by regulation. The investment management function has been outsourced. Investment managers are appointed having due regard to their investment style, philosophy, track record, financial strength, ability to add value above a passive benchmark equivalent and portfolio fit into the overall Fund investment structure. The multi-manager structure is monitored on an ongoing basis to ensure managers stay within mandates and deliver on risk-

adjusted performance objectives. The monitoring includes a formal annual feedback session to the Investment Committee.

Benchmarks are set for each portfolio, asset class and investment mandate taking into account the specific asset/liability and risk profiles.

The Investment Policy Statement of the Fund complies with all material requirements of Circular PF130, King III as well as the CRISA Code, and is available for inspection by stakeholders at the registered office of the Fund.

The investment strategy dynamically adjusts for major local and foreign market or economic shifts. In this regard portfolios are specifically protected when circumstances require. Short-term asset/market pricing discrepancies are further exploited through a global tactical asset allocation mandate.


Responsible investingAs a responsible owner we take engagement seriously and therefore subscribe to the following principles enshrined in the CRISA Code:

Incorporate sustainability considerations, including environmental, social and governance, into our investment approach.

Demonstrate acceptance of ownership responsibilities. Collaborate to promote acceptance and implementation of responsible investment principles.

Recognise potential conflicts of interest and proactively manage these.

Be transparent about policy contents, and how they are implemented, to enable stakeholders to make informed assessments.

We achieve these principles through: ensuring our investment managers incorporate ESG (economic, social and governance) factors into their investment analysis;

actively engaging with company management, attending annual general meetings and exercising our voting rights;

engaging with institutional investors and investor bodies to leverage resources in an effective way to encourage improved transparency and performance on sustainability factors;

insisting on full disclosure of potential conflicts of interest and managing these where they exist; and

disclosing to stakeholders our policies and their implementation.

Our partners: We believe in active management and engage service providers who we believe will contribute to us attaining our long-term goals. To achieve an optimal risk/return profile we apply a well-diversified investment structure.

A summary of our investment manager structure as at 30 June 2014 follows:Equity – South African listedThe benchmark for equity managers is the FTSE/JSE shareholder weighted total return index, adjusted subject to mandates.

Equity – SA listed

■ Prudential■ Coronation■ Other

■ Allan Gray■ Abax

25,4

21,2

21,0

21,0

11,4

%

Foreign and African listedThe benchmark for Africa equity managers is the FTSE/JSE All Africa 30 (excluding South Africa) total return index. The benchmark for foreign equity managers is either the MSCI (World) or the MSCI (All Country World), adjusted subject to mandates.

Equity – Foreign/Africa listed

■ Investec■ Morgan Stanley■ Aberdeen■ Other

■ All Seasons■ Sanlam■ TriAlpha

18,5

17,4

15,511,8

11,7

10,1

15,0

%


Strategy continued

PrivateThe Fund invests in a combination of fund-of-private equity funds and single private equity funds. The current target allocation is 1,75% domestic, 2,00% Africa and 1,25% international.

PropertyThe Fund invests in a combination of listed and unlisted property. The current target allocation is 50% listed and 50% unlisted. The benchmark for listed property is the FTSE/JSE South African listed property total return index.

Bonds and cash – South AfricaGiven its characteristic of being a natural hedge for pension fund liabilities, the Fund’s bond exposure is largely through inflation-linked bonds. The benchmark for nominal bond managers is the BEASSA total return all bond index, for short-term inflation-linked bond managers the Barclays SA total return inflation-linked bond index, and for long-term inflation-linked bond managers the RSA R202 government bond. The benchmark for money market managers is the Alexander Forbes composite short-term fixed interest index.

Bonds/cash – SA

■ Sanlam■ TriAlpha

■ Prudential■ Other

47,4

25,5

19,5

7,6

%

ForeignThe Fund has exposure to credit bonds, but the fixed interest beta is swapped for equity beta and hence classified as equity within the asset allocation.

Hedge fundsThe Fund invests in fund-of-hedge funds. Benchmarks are a combination of relevant equity, bond and cash indices. The current target allocation is 5% domestic and 2% international.

The following service providers are utilised:

RisCura Solutions (Pty) Limited Investment consulting Asset liability modelling Investment manager research Risk reporting Transition management

InkunziESG (Pty) Limited Shareholder engagement Proxy voting ESG reporting

Standard Bank of South Africa (Pty) LimitedCustodial and cash management (local)

State Street Southern Africa (Pty) LimitedCustodial and cash management (offshore)

Our key performance indicators/areas: Investment returns relative to long-term real return objectives and asset-based benchmarks Cost recovery ratios Being a responsible investor Pension increases granted

3. Technology strategy

Our objectives: Our principal goal is to ensure that the Fund can serve the needs of stakeholders in an efficient and cost-effective way.

In reaching this goal we strive to achieve the following secondary goals:

To ensure systems are operated within the rules and applicable laws and that policies are in place to protect, archive and secure data while privacy is maintained. Flexibility to adopt appropriate new technology to enhance service delivery.

Our approach: We embrace information technology as a critical enabler for business, and partner with leading software development houses globally. By remaining at the leading edge of system functionality we are able to offer our members and pensioners the best options and services available. Staff development and information technology training is undertaken


in support of us attaining our objective. Our comprehensive disaster recovery procedure incorporates full back-up of all electronic files daily to an off-site location. In the event of a disruption in business, the Fund has secured two disaster recovery sites that will ensure the restoration of operations to near full capacity within 24 hours. Both the plan and the recovery facilities are tested at least once a year.

Our partners: Software providers

Microsoft – operating systems, network solutions, database storage

SunGuard – pension/member administration software Sage – accounting software Milestone Group – unitisation software Stat Pro – investment management performance monitoring and compliance software

SunGuard – business process management and business intelligence software

Service providers Global ASP – application hosting Vodacom Business – cloud computing, connectivity Telkom and Neotel – connectivity Zinia – internet service provider Kyocera – printing Nashua Mobile – cellular communication

Our key performance indicators/areas: Introduction of new technology and maintenance of equipment and software

Information technology cost per member/pensioner System productivity levels

4. People strategy

Our objectives: Our goal is to attract and retain the appropriate skills and talent to ensure the human resource function can support all of the Fund’s business areas. The Fund is committed to the underlying principles of the Employment Equity Act and the Basic Conditions of Employment Act. Our approach: We believe career growth supports the Fund’s overall business objectives. To this end, self-development, training and coaching is encouraged and supported for all staff. In particular we encourage career growth for previously disadvantaged groups through training, development and

education programmes. A succession planning policy is in place to ensure continuity. We continuously enhance systems and processes to meet the unfolding needs of members and pensioners. To ensure our skills set can meet the challenges inherent to the process, we continuously build our intellectual capital. Our key performance indicators/areas:

Succession planning and intellectual capital development Implementation of our employment equity plan Enhancement of the internal human resources regulatory framework Enhancement of internal staff communication Retention strategy for key employees Remuneration management

5. Member/participating employer growth strategy

Our objective: Our principal goal is to ensure the long-term sustainability of the Fund.

In reaching this goal we strive to achieve the following secondary goals:

To be the “fund of choice”, setting the benchmark in terms of investment performance, benefit options, operational excellence and value-add The retention and growth of the membership base

Our approach: We aim to provide appropriate benefit products and options within the ambit of legislation. We actively engage with members, pensioners, organised labour and employers and promote the Fund through effective communication, education and advice. Our aim is to influence and guide the decision-making process of members, pensioners, organised labour and employers.

Our key performance indicators/areas: Effective and efficient implementation of the communication strategy Ensuring Fund products adhere to legislation and member requirements Introduce the Fund to potential new participating employers with the aim of growing the membership base across all industries in South Africa


The key stakeholders of the Fund are its members, pensioners and participating employers. In addition to these, other stakeholders include organised labour organisations, investment managers, government, the retirement fund’s regulator and various other service providers who have a relationship with the Fund.

Stakeholder Key issues/concerns Response Engagement strategy Outcome

Members Retirement savings that meet expectations through flexible products

Member investment choice

Education and advice

Product development

Newsletters

Brochures

Group sessions

Individual consultations

Website and online portal

Good Fund image and reputation

Pensioners Sustainable pension that keeps track with inflation

Annual pension increases

Education and advice

Pension income choice

Newsletters

Annual information session

SMS communication

Website

Good Fund image and reputation

Participating employers Benefits for employees that meet their needs

Flexible employee benefit product with participation flexibility

Group and individual visits

Written communication

Information sessions

Website

Good relationships

Tenure of participation

Organised labour Appropriate benefits for their membership

Flexibility of Fund products and options

Represented on Board of Trustees

Good relationships

Government/regulator Regulatory changes (impact on effective asset management)

Proposals on alternatives

Formal submissions

Engage through industry body representatives

Influence proposed changes

Social security reform (impact on membership)

Awaiting final proposals Formal submissions

Engage through industry body representatives

Influence proposed changes

Investment managers Investment risk/return(low return/high volatility environment)

Constant monitoring Formal annual feedback session

Regular informal updates

Update expectations

Adjust strategy as required

Regulator Adhere to rules and regulations as well as accepted best practice

Risk management

Increased complexities brought about by new regulations

Independent compliance function and Audit and Risk Committee constant monitoring

Proposals and feedback on relevant matters

Achieve best practice levels of compliance

Key stakeholders


Performance review

How did we measure up against expectations?In defining the strategic objectives of the Fund we set ourselves specific key performance indicators/areas against which we can measure progress and achievements.

Governance and risk management

Key performance indicator: strategic risk heat mapOutcome – 2014:The risk heat map below reflects the strategic risks as identified by the Audit and Risk Committee. Inherent risk is the risk assessment based on an assumption of no controls. Residual risk is the risk assessment taking into account controls in place.

IMPA

CT

LIKELIHOOD

Cata

stro

phic

>25%

Criti

cal

15%

to 2

5%Se

rious

10%

to 1

5%Si

gnifi

cant

6% to

10

%

Min

or<6

%

Rare Unlikely Possible Likely Almost certain

● Residual risk ● Inherent risk

1. Loss of key senior individuals/corporate memory/intellectual capital

2. Not meeting long-term performance objectives

3. Poor data integrity

4. Decrease in membership

5. Potential impact of retirement reform

6. Solvency of risk pools

7. Operational failure

8. Liquidity risk at Fund level

9. Solvency of pensioner pool

10. Regulatory and governance non-compliance

10

10

9

8

1

7

5

6

19

8

7

3

4

5

6

2

3

4

2


Key performance indicator: King III assessmentOutcome – 2014:Internal Audit is required in terms of King III, Principle 7.3 to provide a written assessment of the effectiveness of the system of internal controls to the Audit and Risk Committee. In response to the King III requirement the following written statement was provided.

ApproachThe prevailing internal controls implemented by the Fund were assessed, based on the scope of work as reflected in the approved internal audit plan, as follows:

a review of the relevant process at the Fund; review of the policy and procedures relating to the processes; and sample testing for key controls identified.

Assessment of internal controlFor the year ending 30 June 2014, based on the scope of the internal audit work performed for the Fund, the approach followed, the results of reviews and subject to the limitations of coverage and sampling, KPMG identified a number of areas for improvement. These have been reported throughout the year. The number and significance would suggest that overall a satisfactory control framework is in place with compensating controls to mitigate the key risks. Improvements needed in certain key areas to address the control deficiencies were identified.

Performance review continued


Investment

Key performance indicator: investment returns relative to long-term real return objectives and asset-based benchmarksOutcome – 2014:The Fund has managed to maintain relative performance in line with long-term real return objectives, but asset-based benchmark outperformance proved more challenging.

Annualised portfolio investment returns relative to real return objectives and asset-based benchmarks for the financial year to 30 June 2014:

■ Wealth builder■ Asset benchmark■ CPI +6,0%

One year Three years Five years

26,3 28

,2

13,0

21,1 22

,5

12,3

18,5 20

,6

11,9

35

30

25

20

15

10

5

0

%

Wealth builder

■ Inflation protector■ Asset benchmark■ CPI +5,4%


25,3 27

,0

12,3

20,6 22

,0

11,7

18,1 20

,0

11,4

35

30

25

20

15

10

5

0

%

Inflation protector

■ Pension protector■ Asset benchmark■ CPI +5,0%


22,8 24

,6

11,9

19,7 20

,9

11,3

17,2 18

,7

11,0

35

30

25

20

15

10

5

0

%

Pension protector

■ Pensioner■ Benchmark■ CPI +4,6%


21,1

23,0

11,5

18,8 20

,0

10,8

16,4 17

,6

10,5

35

30

25

20

15

10

5

0

%

Pensioner


■ Money market■ Asset benchmark■ CPI +1%


6,1

5,5 6,

5

6,3

5,5 6,

5

6,7

6,0 7,

1

35

30

25

20

15

10

5

0

%

Money market Shari’ah and Capital protection

One year Three year

20,1

9,1

13,6

8,1

35

30

25

20

15

10

5

0

%

■ Shari’ah■ Capital protection

Market indices

■ All Share Index■ SA Inflation-linked Bond Index■ MSCI EFM Africa (ex SA) (USD)

■ SA Listed Property Index■ SA Short-term Money Market Index■ Barclays Global Aggregate Bond Index (USD)

■ All Bond Index■ MSCI All Country World Index (USD)■ ZAR/USD

32,7

6,0

5,4

12,0

5,5

20,5

17,3

7,4

7,7

20,6

18,4

8,7

11,7

5,5

7,8

7,3

2,6

16,3

21,6

20,9

9,5

10,5

6,0

11,9

3,3 4,

6 6,6

35

30

25

20

15

10

5

0One year Three years Five years

%



Key performance indicator: cost recovery ratiosOutcomes – 2014:Members and pensioners are levied two types of fees, a monthly asset management fee and a monthly administration fee. Recovery of these costs is based on a member’s Fund credit, while in the case of the pensioner pool it is levied against the total pool value.

Cost recovery ratios*

■ 2014 ■ 2013 ■ 2012 ■ 2011 ■ 2010

0,64

0,60

0,67

0,58

0,58

0,51

0,47 0,48

0,40 0,41 0,

45

0,39

0,46

0,35

0,35

0,44

0,35 0,

39

0,31

0,31

0,70

0,60

0,50

0,40

0,30

0,20

0,10

0,00Wealth builder Inflation protector Pension protector Pensioner

%

* Cost recovery ratios can fluctuate significantly from year to year as some investment managers are remunerated on performance relative to their benchmarks.* Costs are expressed as a percentage of assets.

Key performance indicator: being a responsible investor

Ex t e rna l m

anag

e r E

SG i

n te g

r at i

on

P roxy vo t ing and engagement

SR

I a l l o ca t i on s

Engagement policy

Proxy voting policy

Responsible investing policy

Outcomes – 2014:The Fund follows a holistic approach to responsible investing and ownership. At the core is a robust responsible investing policy, driven by a proxy voting policy and guidelines and a focused engagement policy and programme. Three legs to its responsible investing are active ownership through proxy voting and engagement, ESG integration through external investment managers and allocation to targeted SRI investments.


This year marks the third year since the Fund adopted the Code for Responsible Investment in South Africa (CRISA). The Fund fulfilled the CRISA principles as follows:

Principle Fulfilment

1. An institutional investor should incorporate sustainability considerations, including environmental, social and governance (ESG), into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.

The Fund uses a multi-specialist and multi-manager approach by outsourcing its investments to third-party asset managers. An ESG due diligence is conducted to ensure asset managers integrate ESG issues into their investment analysis and processes.

2. An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.

The Fund has a robust responsible ownership framework with three layers: an overarching responsible investing policy; a proxy voting policy; and a focused engagement policy and programme. In the year under review the Fund voted on 2 855 resolutions and participated in 32 company engagements.

3. Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors.

Where possible, the Fund collaborated with like-minded shareholders through collaborative engagements.

4. An institutional investor should recognise the circumstances and relationships that hold potential for conflicts of interest and should proactively manage these when they occur.

The Fund has engaged an external responsible ownership partner to actively manage its proxy voting and engagement programme. This manages any potential conflicts of interests.

5. Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.

The Fund publishes its voting and engagement record. Its responsible investing activities are integrated into the Integrated Annual Report.



What we voted on:The fund voted on 2 855 resolutions for the year under review. It opposed 17% of the resolutions and supported management in 83% of the instances. This is a marked improvement as corporates are becoming responsive to shareholder engagement.

Against votes

Capi

tal s

truc

ture

s

Dire

ctor

affa

irs

Rem

uner

atio

n

Audi

t affa

irs

Fina

ncia

l ass

ista

nce

Othe

r

28

25

21

14

7

5

30

25

20

15

10

5

0

%

Voting theme

Dire

ctor

affa

irs

Audi

t affa

irs

Rem

uner

atio

n

Capi

tal s

truc

ture

s

Fina

ncia

l ass

ista

nce

Othe

r

46

21

13

11

6

3

50

40

30

20

10

0

%


Outcomes – 2014:The Fund believes that black economic empowerment is best served by supporting entrepreneurship. Small business development is where new jobs and skills will be added, thereby growing the economy. The core initiative is our emerging investment manager incubation programme. The programme is designed to give start-up black investment managers the support to build critical mass and a track record to ultimately gain exposure to the mainstream investment management industry. The programme is managed by 27 Four Investment Managers in conjunction with the Fund.

As at 30 June 2014 the Fund supported the following investment managers through this programme:

Balondolozi Investment Services First Avenue Investment Management Cachalia Capital Aeon Investment Managers Mianzo Asset Management Prowess Investment Managers Meago Perpetua Investment Managers 27 Four Investment Managers


Outcomes – 2014:With regard to social development, the Fund targets a minimum level of 5% exposure to high-impact socially responsible investments. Exposure as at 30 June 2014 amounted to 5,25% of total assets.

Key performance indicator: pension increases grantedOutcomes – 2014:

Pension increasesOur pension increase philosophy is to increase pensions annually by a minimum of 80% of the Consumer Price Index (CPI). Pension increases are considered, and are based, inter alia, on the investment return achieved on the underlying assets of the pensioner portfolio, funding level at financial year-end and the increase in CPI for the year to 30 June when determining an annual pension increase effective 16 October each year.

What we engaged on:32 Companies were engaged on a variety of ESG issues.

Environmental issues (15%)

■ Risk management■ Sustainability

■ Disclosure

34

33

33

%

Social issues (33%)

■ Sustainability ■ Safety

90

10

%

Governance issues (52%)

■ Remuneration■ Stakeholder issues

■ Board affairs■ Shareholder affairs

36

32

19

13

%


The Board needs to ensure that the long-term financial stability of the Fund is not jeopardised while attempting to counter the erosive effect of inflation on the purchasing power of pensions. The Fund’s pension increase methodology has been implemented in terms of the Pension Fund Second Amendment Act, No 39 of 2001, which includes provisions requiring pension funds to pay a specific minimum pension increase to pensioners.

Pension increase and bonus

■ Pension increase ■ CPI increase ■ Bonus* Increase as % of CPI

6,6

8,6

15,0

6,0

15,0

109,1

130,3

90,9

100,0

119,0

5,5

5,5

5,0

10,0

5,0

10,0

5,0

5,0

10,0

4,2

16

14

12

10

8

6

4

2

02013 2012 2011 20102014

%

* Percentage of annual pension.

We have managed to maintain our track record of pension increases at a minimum level of 80% of CPI. Further to the increase granted of 8,6% effective 16 October 2014, the Board was able to grant a once-off bonus of 15% of annual pension which will be paid in November 2014.



Technology

Key performance indicator: introduction of new technology and maintenance of equipment and softwareOutcomes – 2014:During the course of the current financial year a number of new application software solutions were added to the Fund’s application architecture. These were:

Stat Pro Revolution – investment management performance monitoring software;

Stat Pro Compliance – investment compliance monitoring software;

P Control – multi-manager and unitisation software; Infinity Process Platform – workflow automation and business intelligence software; and

Omni Plus – upgraded to web-enabled version of member administration software.

Key performance indicator: information technology cost per member/pensionerOutcomes – 2014:It should be expected that information technology cost will rise over the short term as the Fund introduces new technology to meet the requirements of the type “A” umbrella fund. Cost per member/pensioner should, however, reduce once new contributing employers join the Fund.

The cost per member/pensioner related to the introduction of new technology was within budget.

Key performance indicator: system productivity levelsOutcomes – 2014:Software is used to monitor productivity levels of both hardware and operating systems on a 24/7 basis. Included in the monitoring process is transaction-level monitoring as well as at a business process management level.

People

Key performance indicator: succession planning and intellectual capital developmentOutcomes – 2014:The following interventions have been completed over the current financial year:

The development of a short-term or emergency succession plan for all key positions. The development of medium-term succession plans, along with development plans, towards ensuring competent succession from within over the medium term. Emphasis on the identification of previously disadvantaged succession candidates. The assessment of competencies across the organisation using psychometrics and other measures.

The following interventions are currently in process: The focused development of previously disadvantaged individuals through coaching, training, mentoring and educational support. The development of intellectual capital among all employees, through individual development plans, training and other tailored development programmes. The development of emotional capital across the Fund through issue monitoring, focused training, change management and the continual improvement of the employee assistance programme and related support.


Key performance indicator: implementation of our employment equity planOutcomes – 2014:The following interventions have been completed over the current financial year:

The updating of the employment equity philosophy, policy and strategy.

The enhancement of the representativeness of the Employment Equity Committee.

The training of Employment Equity Committee members. The implementation of new recruitment and selection guidelines.

The following intervention is currently in process: The introduction of a learnership programme for previously disadvantaged learners from within and outside of the organisation.

Key performance indicator: enhancement of the internal human resources regulatory frameworkOutcomes – 2014:The following intervention has been completed over the current financial year:

The development of a human resources fraud risk approach.

The following interventions are currently in process: The improvement in reporting to the Department of Labour. The upgrading of human resources policies and the introduction of new policies where appropriate.

The enhancement of the performance management process.

The following intervention is planned over the next year: The more effective management of time and attendance.

Key performance indicator: enhancement of internal staff communicationOutcomes – 2014:The following intervention has been completed over the current financial year:

The introduction of periodic newsletters.

The following intervention is currently in process: The development of human resources dashboards for individual departmental management.

Key performance indicator: retention strategy for key employeesOutcomes – 2014:The following interventions are currently in process:

The monitoring of the needs of key employees. The development of an effective employee value proposition.

Key performance indicator: remuneration managementOutcomes – 2014:The following intervention has been completed over the current financial year:

The re-grading of positions where required.

The following intervention is currently in process: The management of remuneration structures and levels against the market.



Membership/participating employer

Key performance indicator: effective and efficient implementation of communication strategyOutcomes – 2014:Communication, as well as the provision of accurate information and advice to individuals, proved to be particularly challenging this year as the implementation of “T-Day” on 1 March 2015 was announced during the 2014 budget speech. This forms part of National Treasury’s retirement reform initiative. Specific attention was given to the impact of these changes as well as the holistic reform plans. Furthermore, Fund-specific information such as reflected below was communicated.

Members and pensioners use our client services network when information or assistance is required. These facilities consist of a web interface (including a

secure interactive section), a call centre for general telephonic enquiries, five service

centres for face-to-face enquiries and a fund advisory service for more personalised

interaction.

Where opportunities arise, we interact with groups of members and pensioners to provide information which is of mutual interest to both, such as our investment strategy, investment performance, Fund

product explanations, tax implications and retirement reform initiatives.

547complete advisory

consultations

28 Venues

Annual pensioner road show

attended by

4 081 pensioners

494visits per month

to service centres

66 996inbound calls

6 333outbound calls

39member information

sessions

118 997website hits

PUBLICATIONS

2 Bulletins: “Newsletter for active member”

2 Informants: “Newsletter for pensioners”

12 Breaking News Flash: “Monthly investment returns”

1 Breaking News Flash: “Administration Fees”

1 Breaking News Flash: “Risk benefit cover tables”

1 Breaking News Flash “Pensioner roadshow invitation”

1 Breaking News Flash: “Office closure”

1 Breaking News Flash: “Pension increase and bonus”

1 Taxation in SA brochure

Annual Member benefit statement and brochure

Annual Pensioner benefit statement and brochure

COMMUNICATION CHANNELS

E-mail to 14 711 members and 3 439 pensioners

Printed material mailed to 47 employers

Printed material couriered to 71 employers

Printed material mailed to rest of pensioners


Key performance indicator: ensuring Fund products adhere to legislation and member requirementsOutcomes – 2014:The following were reviewed in the current financial year:

Member Investment Choice Model (including Life Stage Model).

Pension Income Choice Model (including guaranteed pension option with choice on applicable elements and a flexible pension option). Risk Cover (providing cost-effective cover for death and permanent disability).

National Treasury published a discussion paper on charges in the retirement industry and announced, during the 2014 budget speech, changes to the tax deduction dispensation for retirement fund contributions.

This paper and other related papers that were published previously, together with the tax deduction announcements, will

shape the future of our industry over the foreseeable future. It was therefore critical that the Fund use its relationship with National Treasury to actively engage on these issues. The Fund is excited about the outcome as many of the initiatives are in fact in line with the long-term strategic direction of the Fund. We have worked extensively to ensure that we will be ready to implement changes, not only when legislated, but possibly even before.

Key performance indicator: introduce the Fund to potential new participating employers with the aim of growing the membership base across all industries in South AfricaOutcomes – 2014:The Fund has engaged in discussions with a number of potential new participating employers to attract members. Discussions with some of these employers have progressed well and we hope to finalise official agreements early in the new financial year.

Membership and pensioners

■ Contributing members■ Non-contributing members■ Pensioners

2010

2011

2012

2013

2014

34 823

5 213

40 777

22 222

3 59931 108

22 267

4 683

30 548

22 382

4 555

30 691

22 318

3 69232 086

100 000

80 000

60 000

40 000

20 000

0


Corporate governance

Our values We act with prudence and reasonable care.

We act with skill, competence and diligence.

We act in the best interest of 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.

We believe that good governance is good business because it helps us deliver long-term stakeholder value. As a Fund, we measure ourselves against standards for good governance, internal controls and risk and compliance management that reflect best practice and high standards of stewardship. Governance links decision-making authority to accountability and ensures that those managing the Fund are capable and that their interests are properly aligned with the interests of those they serve. The Fund is committed to the highest levels of corporate governance, compliance and transparency and employs five Board subcommittees to support its role in managing and monitoring the affairs of the Fund. The Fund is committed to the principles of sustainability reporting where applicable.

Given the current operating environment, the Fund is sustainable in its areas of operation over the short and long term. Confirmation of this, together with relevant information applicable to stakeholders, can be found throughout this Integrated Annual Report.

Post-year-end eventsExposure to African Bank Investments Limited (under curatorship)During August 2014, African Bank Investments Limited was placed under curatorship by the South African Reserve Bank. The Fund had exposure to African Bank Investments Limited through various investments effected by our investment managers on our behalf. As at 30 June 2014, the market value of our investment in African Bank Investments Limited, as reflected in the annual financial statements of the Fund, was R455 million. Regardless of the outcome of this process, it is not expected to materially affect the financial position of the Fund.

Governance practicesThe Fund is overseen by a Board with an independent mindset, with financial, legal and other relevant expertise. Their knowledgeable counsel is an invaluable resource for good decision making and effective management of the Fund. Strong practices have, over the years, contributed to building the Fund’s reputation as being a top performer from an investment perspective and superior provider of pension and member services.

Responsibilities of the BoardThe Board of Trustees (Board) is ultimately accountable and responsible for the management and performance of the Fund. They uphold this responsibility by overseeing the strategic direction and leadership, ensuring good corporate governance and ethics, determining policy, agreeing on performance criteria and delegating detailed planning and implementation of policy of the Fund to the Executive Committee. Day-to-day management of the Fund is delegated to the Chief Executive Officer. The Board robustly challenges and approves strategic plans, the annual budget, the Investment Policy Statement, other policies, and Code of Conduct and Ethics for the Board, employees and service providers. The Board reviews progress against strategic objectives and confirms that strategies and decisions are aligned with the interests of all stakeholders. The Board reviews and approves its own charter and committee mandates.

Effective oversight and controlsThe Board meets regularly to monitor the Fund’s management compliance with policies and its achievements against objectives. A structured approach is followed for delegation, reporting and accountability. The Board mandated various subcommittees to assist the Board in discharging its duties. Management provides vital and valuable reports to inform Board members of increasing risks.


This supports good decision making, allowing sufficient time for Board members to challenge management’s thinking and probe emerging or growing risks.

Experts on investment and economic-related topics are invited to speak to Board members regularly to ensure they are well briefed on matters of key importance.

THE BOARD IN ACTION

Meetings held: 5 (including strategic planning session)

Attendance: 96,5%

P Review and approval of strategy

P Committee mandates reviewed and approved:

§ Investment Committee

§ HR and Remuneration Committee

§ Audit and Risk Committee

P Appointment of HR and Remuneration Committee chairperson

P Appointment of Audit and Risk Committee chairperson

P Review and approval of annual financial statements

P Approval of annual pensioner increase and bonus

P Review of the actuarial valuation of the pensioner pool

P Review and approval of annual risk benefit adjustments

P Review and approval of General Rule amendments

P Policies reviewed and approved:

§ Shareholder Engagement

§ Code of Conduct for Service Providers

§ Procurement and contract management

§ Cost recovery methodology

§ Anti-fraud and corruption

§ Pension increase

P One day strategic planning session

P Approval of annual budget

P Approval of insurance renewal

P Approval of internal and external audit plans and fees

P Quarterly reviews:

§ Investment performance/risk

§ Feedback from Investment Committee

§ Feedback from Audit and Risk Committee

§ Feedback from HR and Remuneration Committee

§ Review of declaration of interest

§ Compliance with the Act

§ Financial reports

§ Statistical reports

§ Reserve accounts

§ Rocklands curatorship progression

TRUSTEE TRAINING

The following topics were covered at internal trustee training sessions:

� Difference between type “A” and type “B” Umbrella Fund rules and management structure

� Factors influencing funding levels and understanding the floating discount rate

� Retirement reform initiatives

� Understanding the Sentinel product range

The Board approves and reviews the mandates, performance and effectiveness of the following committees on a regular basis:

Audit and Risk Committee Investment Committee Claims Committee Review Committee Human Resources and Remuneration Committee

The committees do not perform any executive functions. They provide a forum for discussing issues within their mandate and the development of recommendations for consideration by the Board. A report-back of the committee meetings is done at subsequent Board meetings.

To achieve its objective, the Audit and Risk Committee has drawn together four sets of assurances – those of management, the internal auditors, the external auditors and the actuaries, based on their accountabilities. At every committee meeting, the committee has an in-committee session with the internal and external auditors with no member of management present.


Committee members ensure that the Fund’s standards are respected and that policies and procedures are relevant. To this end, the internal auditor reports directly to the Audit and Risk Committee.

Based on the assessment of the system of internal controls and King III assessment conducted by the internal auditors, as well as information and explanations given by management, discussions held with the external auditor on the results of their audit and the actuarial information received from the actuary, the committee is satisfied that the Fund’s system of internal control is effective and forms a basis for the preparation of reliable financial statements for the year under review.

In addition, during the 2014 financial year, the committee was not made aware of any:

material breach of any laws or legislation; or material breach of internal controls or procedures.

AUDIT AND RISK COMMITTEE

Chairman: PD Zeeman

(Independent non-executive)

Members: JPL Bezuidenhout J de vos Hugo

D Smith JC Fourie

HJ Groenewald HH Hickey (Mrs)

F Cooper AB Bardin

J Masha AP van der Merwe

By invitation: AB la Grange FJ Visser

JS Fouche JN Botes

MM Mananye MJ Mitchley

Internal Auditors External Auditors

MANDATE

➞ Enterprise risk management review

➞ Establishment of risk tolerance levels

➞ �Review of risk registers

➞ Monitor effectiveness of system of internal controls and reporting

➞ Approval of external audit plan, terms of engagement and fees

➞ �Approval of internal audit plan and fees

➞ Review and approval of annual financial statements

➞ �Review of internal audit reports

➞ Review of compliance with legislation, regulations and policies

➞ Evaluation of internal and external audit performance

Compliance risk managementThe Fund has established a compliance function which serves to provide a system of assurance to the Board that the Fund complies with applicable laws and regulations. The Fund aims to comply with the letter and spirit of its obligations. To this end, the Board of Trustees has adopted and implemented a centralised compliance structure and framework within the Fund in order to ensure the success of the compliance function as a whole.

MANDATE IN ACTION

Meetings held: 3Attendance: 84,8%

P Review and approval of enterprise risk management policy and framework

P Review and approval of anti-fraud and corruption policy and framework; and fraud response plan

P Review and approval of procurement and contract management policy and framework

P Review and approval of:

§ Strategic risk registers

§ Risk appetite methodology

§ Risk dashboard

§ Operational risk registers

P Review and approval of internal and external audit plans and fees

P Review and approval of fidelity and indemnity insurance cover

P Approval of the annual operating budget

P Standard reviews

§ Internal audit progress report

§ Reserve accounts

§ Computer progress report

§ Adjudicator cases

§ Regulatory compliance

§ Third party matters of risk reported

§ Conflict of interest, misconduct and fraud

§ Compliance with legislation

§ Matters referred by the Board

Corporate governance continued


The framework includes compliance function and Compliance Risk Management Plans (CRMPs). The compliance function, which impacts all activities of the framework, is the mechanism that ensures that the business receives support and advice to help manage its compliance risks effectively. The compliance function plays a proactive advisory role by advising the Board, committees, management and employees. The function advises on compliance risks, responsibilities, obligations, concerns and other compliance issues while taking into account business practices and operational constraints. The CRMP is a snapshot of the compliance obligations and risk, inherent risk rating, controls and responsibilities arising from laws, regulations and standards that apply to the Fund and its operations.

INVESTMENT COMMITTEE

Chairman: JL Liackman

(Independent non-executive)

Members: JPL Bezuidenhout J de vos Hugo

BJ Drew JC Fourie

HJ Groenewald HH Hickey (Mrs)

AJ Jacobs D van Deventer

NA Monaheng AJ Pienaar


JS Fouche JN Botes

MM Mananye Investment consultant

MANDATE

➞ Investment strategy review

➞ Member portfolio review

➞ Manager selection/review

➞ Mandate compliance

➞ Regulatory compliance

➞ Investment risk management

➞ Investment performance review

➞ Service provider selection/review

The CRMP is an output of six key activities which are: understanding the legal and regulatory environment; identification of compliance obligations; analysis and evaluation of risk; compliance risk mitigation; risk monitoring; and risk reporting.

MANDATE IN ACTION

Meetings held: 5 (including annual feedback session)Attendance: 96,4%

P Review and approval of private equity strategy

P Review of asset liability modelling process

P Performed ALM and revised asset allocation

P Revised floating discount rate methodology

P Completed member portfolio risk/return analysis

P Reviewed resource sector performance within market context

P Reviewed integrated annual report (investments)

P Life Stage portfolio review

P Investment consultant conflict of interest review

P Credit exposure review

P Africa benchmark review

P Approval of annual engagement programme

P Policies reviewed:

§ Shareholder engagement

§ Investment committee mandate

§ Service provider code of conduct/conflict of interest

P Three day investment manager feedback session

P Mandate reviews – 12

P New mandates – 2

P Mandate terminations – 1

P Quarterly reviews:

§ General market overview

§ Investment performance/risk

§ Asset allocation and cash flow

§ Mandate and regulatory compliance

§ Responsible investment

§ Investment management cost

§ Ad hoc investment income

§ Socially responsible investments

§ Rockland, curatorship progress


Integrity and ethical conductEthics hotline serviceThe Fund has established an ethics hotline which is managed by an independent external reporting service to allow employees to report unethical or inappropriate behaviour, theft, corruption or fraud anonymously. The process is completely confidential. Matters reported through this service are referred to the Audit and Risk Committee. The committee is responsible for ensuring that the matter is thoroughly investigated and appropriate action is taken. An ethics hotline policy which sets out, among others, the objectives, ethical principles and reporting is in place.

Code of Ethics and ConductThe Board of every pension fund is required by law to act with due diligence, and good faith, and must avoid conflicts of interest in managing the operations of a pension fund. The Board remains committed to conducting the business of the Fund fairly, honestly, efficiently and in compliance with all legal requirements. To achieve this, the Board has established Codes of Ethics and Conduct for the Board, officers, management, employees and service providers. The codes are designed to help create a culture of trust, transparency, honesty and integrity. The Board, management, employees and service providers are required to acknowledge, in writing, their commitment to comply with their respective Codes of Ethics and Conduct.

In addition, a policy and procedure for managing conflicts of interest for the Board, officers and employees was put in place to manage and, where possible, eliminate such conflicts. They are required to disclose any personal or business interests that might lead to a real, potential or perceived conflict of interest.


CLAIMS COMMITTEE

Chairman: FJ Visser

(Chief Executive Officer)

Members: JPL Bezuidenhout SM Motloung

GE du Plessis DJ Ngwane

VR Esselaar SF Stehring

LP Grobler D van Deventer

L McMaster AP van der Merwe

By invitation: FC Schroeder MM Mananye

MJ Mitchley

Occupational Health Consultant

Disability Assessment Administrator

MANDATE

➞ Allocation and distribution of death benefit lump sum amounts in terms of section 37C of the Act

➞ Consideration of disability benefit applications in terms of the rules

➞ Interpretation and clarification of the rules in relation to risk benefits

➞ Legal and adjudicator benefit matters

MANDATE IN ACTION


P Review and approval of allocation of death benefits to beneficiaries and nominees

P Reviewed and approval of disability applications

P Referral of disability applicants for further medical evidence

P Death claims:

§ Approved 254

P Disability claims:

§ Reviewed 348

§ Approved 221

§ Deferred 49

§ Not approved 78


Fidelity and indemnity coverThe Board considers the fidelity and indemnity cover to be adequate.

REVIEW COMMITTEE

Chairman: FJ Visser

(Chief Executive Officer)

Members: JPL Bezuidenhout VR Esselaar

GE du Plessis E Kekana

SM Motloung HJ Groenewald

AJ Jacobs BJ Drew

AC Bardin AM Clarke

D Smith D van Deventer

LP Grobler

By invitation: AB la Grange FC Schroeder

MM Mananye MJ Mitchley

J Viljoen

MANDATE

➞ Review and approval of benefit improvements

➞ Review and approval of rule amendments

➞ Consideration of matters referred by the Board

MANDATE IN ACTION

Meetings held: None

Attendance: N/A

P Review and approval of the general rules and special rules of participating employers

P Review benefit and product enhancements and/or changes

ReservesThe following reserves were created in terms of the Rules of the Fund:

Risk benefits reserve to fund member disability and death benefits

Pensioner reserve to provide for future pensions Mismatch reserve to fund accounting and administration errors made with the investment and disinvestment of member Fund credits and benefits.

Rule amendmentsVarious amendments to the Rules of the Fund were approved and registered during the year under review. In addition to implementing changes arising from new legislation, the Fund often initiates amendments to keep it current with broader policy issues and simplify the rules where possible.

HUMAN RESOURCES AND REMUNERATION COMMITTEE

Chairman: AC Bardin

(Non-executive)

Members: JPL Bezuidenhout HH Hickey (Mrs)

JDAF van Niekerk AM Clarke

S Singh AP van der Merwe

DF Maritz K Morodi


MANDATE

➞ Establish and maintain remuneration policy for Board, committees, executive management and other employees

➞ Review and approve payments and increases to Board, committees, executive management and other employees

➞ Monitor the effectiveness of retention and succession planning strategies and their implementation

MANDATE IN ACTION


P Review and approval of remuneration of the executive management and other staff

P Review and approval of fee increases for the Board and committees

P Review and approval of the Human Resources and Remuneration Committee mandate

P Review and approve succession plans and human resources policies


Legislative updateThe Fund must comply with the laws and regulations that govern and apply to registered pension funds in South Africa. The Fund will potentially be affected by a number of retirement reform proposals. The pace of legislative and regulatory changes and an increasingly complex legislative environment since the 2008 financial crisis has highlighted the importance of the Fund’s advocacy efforts on proposed laws and regulations. The Fund provides comments on proposed legislation and to advocate sensible and effective regulation.

In performing its duties, the committee takes local and national remuneration levels and trends into account. The Fund has committed itself to fair employment policies and practices as defined in applicable labour legislation in general and in the Employment Equity Act, No 55 of 1998, in particular. The Fund encourages career growth for previously disadvantaged groups of employees through its training, development and education programme. Career growth, in turn, contributes to the Fund’s overall business objectives. The committee plays an integral part in succession planning, especially for the Chief Executive Officer, Principal Officer and executive management. The Fund has submitted its employment equity report in accordance with legislation.

RemunerationThe remuneration policy of the Fund is aligned to key strategic performance areas. Remuneration levels are reviewed annually and are designed to attract and retain key employees and motivate and reinforce performance. Trustee remuneration takes market trends and other relevant factors into account.

Housing loan facilitiesHousing loan guarantees to members are granted in terms of Rule 14.6 and the provisions of section 19(5) of the Pension Funds Act, and are secured by members’ withdrawal benefits.

Information technology governanceThe primary objective is to evaluate the Fund’s governance and management processes to ensure that the information technology department delivers value in a controlled and cost-effective manner. The Fund’s compliance with the information technology principles captured in Chapter 5 of the King III Code of Conduct is reviewed on a regular basis.

Assessment of the IT governance framework is based on the following: Board responsibility Performance and sustainability Information technology governance framework Information technology investment Risk management Information security Governance structures



Approval of financial statements

The annual financial statements of the Sentinel Retirement Fund are the responsibility of the Board of Trustees. The Board of Trustees fulfils this responsibility by ensuring the implementation and maintenance of accounting systems and practices, adequately supported by internal financial controls. These controls, which are implemented and executed by the Fund’s employees, provide reasonable assurance that:

the Fund’s assets are safeguarded; transactions are properly authorised and executed; and the financial records are reliable.

The summarised financial statements set out on pages 60 to 75 have been prepared for communication purposes with limited disclosure compared to the regulatory financial statements which are compiled in terms of the Regulatory Reporting Requirements for Retirement Funds in South Africa. The regulatory financial statements have been prepared and reported to the Financial Services Board (FSB). The summarised financial statements set out on pages 60 to 75 have been prepared in accordance with the criteria as set out in Note 1.1 of the notes to the summarised financial statements.

The regulatory financial statements have been reported on by the independent auditors, PricewaterhouseCoopers Inc., in the course of executing their statutory duties. They have been given unrestricted access to all financial records and related data, including minutes of all relevant meetings. In addition, the independent auditors reported on whether the summarised financial statements are derived from the regulatory financial statements and that the Board of Trustees believes that all representations made to the independent auditors during their audit were valid and appropriate. The report of the independent auditors is presented on page 58.

The summarised financial statements of the Fund set out on pages 60 to 75 were approved by the Board of Trustees. The financial statements have been signed by the Chairman, two trustees and the Principal Officer on behalf of the Board of Trustees.

AB la Grange HJ Groenewald SM Motloung MM MananyeChairman Board Member Board Member Principal Officer

2 October 2014

Statement of responsibility by the Principal Officer

I confirm that for the period under review the Sentinel Retirement Fund has timeously submitted all regulatory and other returns, statements, documents and any other information as required in terms of the Pension Funds Act and to the best of my knowledge all applicable legislation.

MM MananyePrincipal Officer

2 October 2014


Report of the independent auditor

Independent auditor’s report on summary financial statements to the Trustees of the Sentinel Retirement FundThe summary financial statements, set out on pages 60 to 75, which comprise the summary statement of funds and net assets as at 30 June 2014, and the summary statement of the revenue account, statement of changes in accumulated funds, statement of changes in underlying funds and cash flows for the year then ended, and related notes, are derived from the audited regulatory financial statements of Sentinel Retirement Fund for the year ended 30 June 2014. We expressed an unmodified audit opinion on those regulatory financial statements in our report dated 2 October 2014.

The summary financial statements do not contain all the disclosures required by the Regulatory Reporting Requirements for Retirement Funds in South Africa. Reading the summary consolidated financial statements, therefore, is not a substitute for reading the audited regulatory financial statements of the Sentinel Retirement Fund.

Trustees’ responsibility for the summary financial statementsThe trustees are responsible for the preparation of a summary of the audited regulatory financial statements in accordance with the basis described in note 1.1 on page 64.

Auditor’s responsibilityOur responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (ISA) 810, “Engagements to Report on Summary Financial Statements”.

OpinionIn our opinion, the summary financial statements derived from the audited regulatory financial statements of Sentinel Retirement Fund for the year ended 30 June 2014 are consistent, in all material respects, with those regulatory financial statements, in accordance with the basis described in note 1.1 on page 64.

Financial reporting frameworkWithout modifying our opinion, we draw attention to the principal accounting policies of the regulatory financial statements in which the applicable financial reporting framework is identified, as prescribed by the Registrar. Consequently the regulatory financial statements and related auditor’s report, as well as the summarised financial statements and related auditor’s report, may not be suitable for another purpose.

PricewaterhouseCoopers Inc.Director: JJ GrovéRegistered Auditor2 Eglin RoadSunninghill2157

2 October 2014


Report of the consulting actuaries

The last statutory actuarial valuation of the Sentinel Retirement Fund was completed as at 30 June 2012, and confirmed that the Fund’s assets exceeded its liabilities.

The Mine Employees Pension Fund transferred into the Fund on 1 July 2013. An interim valuation of the combined Fund has been completed as at 30 June 2014 and the Fund is still in a sound financial condition.

Contributory and non-contributory members have their own individual fund credits, which are matched by equivalent assets at 30 June 2014. In addition, there is a risk reserve of R157 million and a mismatch reserve of R66 million.

The pensioners have a separate pool of assets in the Fund. This pool was 123,4% funded as at 30 June 2014 before any bonus or pension increase was awarded in October 2014.

AR PienaarFellow of the Institute of Actuaries

In my capacity as valuator of the Fund and as an employee of Alexander Forbes Consultants and Actuaries, a division of Alexander Forbes Financial Services.

Sandton2 October 2014


as at 30 June 2014

Statement of funds and net assets

Notes2014

Rm2013

Rm

FundsMember accounts and reservesMembers’ individual accounts* 36 758 22 841Pensioner reserves 41 660 23 773Risk reserves 157 62Other reserves 65 46Amounts to be allocated 586 303

79 226 47 025

Employment of fundsFurniture and equipment at book value 2 8 1Investments at fair value 3 79 392 47 155Current assets 539 382Accounts receivable 201 246Contributions receivable 120 86Transfers receivable 36 13Cash and bank 182 37

Total assets 79 939 47 538

Non-current liabilities 223 117Unclaimed benefits 223 117Current liabilities 490 396Accounts payable 271 249Benefits payable 219 146Transfers payable – 1

Net assets 79 226 47 025

* Included in members’ individual accounts are flexible annuitants of R194 million (2013: R91 million) who have exercised their option of a flexible pension in terms of rule 5.2.4 of the Fund.


for the year ended 30 June 2014

Revenue account

Note2014

Rm2013

Rm

Income 14 980 9 095Interest 409 289Collective investment schemes distribution 249 161Income from insurance policies 209 106Fair value gain on investments and other income 14 113 8 539Expenditure (359) (208)Administration expenditure 6 (359) (208)

Net fair value revenue for the year 14 621 8 887

Included in the fair value gain on investments are unrealised gains of R1 488 million from foreign currency movements (2013: gains of R2 535 million).



Statement of changes in funds and net assets

Note2014

Rm2013

Rm

Balance at the beginning of the year 47 025 39 636

Add: Contributions received and transfers in 24 294 2 242– Employees 1 015 755– Employers 1 655 1 237– Transfers from Mine Employees Pension Fund 21 562 –– Transfers from other funds 62 250Less: Benefits awarded and transfers out (6 714) (3 740)– Pensions (3 483) (2 106)– Lump sums awarded 8 (3 210) (1 425)– Transfers to other funds (21) (209)Add: Net fair value revenue for the year 14 621 8 887

Balance at the end of the year 79 226 47 025

Members Rm

Pensioners Rm

Risk benefits Rm

Other reserves

Rm

To be allocated

RmTotal

Rm

Opening balance 22 841 23 773 62 46 303 47 025Contributions 2 380 – 286 – 3 2 669Benefits and interest on benefits (3 208) (3 483) – (2) – (6 693)Administration fees (42) (30) (20) – (10) (102)Growth/(deficit) allocation 7 231 7 318 29 5 141 14 724Gross growth and investment income 7 374 7 457 29 5 116 14 981Less: Portfolio management fees (143) (139) – – 25 (257)Transfer from Mine Employees Pension Fund and other funds 8 949 12 420 89 17 149 21 624Transfers between reserves (1 372) 1 662 (289) (1) – –Transfers out/in (21) – – – – (21)

Closing balance 36 758 41 660 157 65 586 79 226


Statement of changes in underlying funds


Cash flow statementfor the year ended 30 June 2014

Note2014

Rm2013

Rm

Cash flow from operating activitiesInvestment income received 1 501 884Cash payments to employees and suppliers for administration of the Fund (306) (163)

Net cash flow from operations 9 1 195 721Net cash inflow/(outflow) from transactions with members 17 678 (1 491)Contributions and transfers received 24 237 2 244Benefits and transfers paid (6 559) (3 735)

Cash surplus/(deficit) 18 873 (770)Net cash (outflow)/inflow from investing activities (18 728) 752Purchases of furniture and equipment (10) (1)Net purchases and disposals of investments, including movement in cash and short-term deposits (18 718) 753

Net increase/(decrease) in cash and bank for the year 145 (18)Cash and bank at the beginning of the year 37 55

Cash and bank at the end of the year 182 37



Notes to the financial statements

1. Principal accounting policies and presentation 1.1 The summarised annual financial statements were derived from the regulatory annual financial statements which were

compiled in terms of the Regulatory Reporting Requirements for Retirement Funds in South Africa.

The purpose of the summarised annual financial statements is to give the reader a broad overview of the financial position of the Fund as well as other relevant cash flows and income and expense account movements, without providing the level of detail as per the regulatory financial statements for the following reasons:

Summarised data is provided to take account of the fact that investments are managed within a multi-manager structure. The regulatory financial statements are geared towards extensive detail on individual investments that are not relevant in a multi-manager structure, as the multi-manager structure is more tailored towards the type of mandates and managers itself.

Cash flow information is provided as it is giving essential information in respect of the Fund. The cash flow information is derived from the information disclosed in the regulatory financial statements.

The revenue account (investment income and expenditure) and the changes in accumulated funds (member/pensioner transactions) are disclosed separately for enhanced understanding of these items.

1.2 The financial statements summarise the transactions and net assets of the Fund. They do not take account of liabilities such as the payment of future pensions and other benefits. The accumulated funds as reflected are therefore not available for distribution, as these are required to meet future liabilities.

1.3 The financial statements are prepared in accordance with the historical cost and going-concern basis. Investment properties and financial instruments are, however, accounted for and carried at fair value. Relative changes in fair value are accounted for in the revenue account. The main accounting principles, which are consistent with previous years, are:

1.3.1 Investments All investments are classified and measured at fair value through the revenue account. 1.3.1.1 Financial instruments Financial instruments comprise investments in equities, deposits, debt instruments, derivative

instruments, listed and unlisted property unit trusts, loan stock and other property entities, accounts receivable and accrued investment income, cash and bank and financial liabilities.

A financial asset or a financial liability is recognised when its contractual arrangements become binding and is derecognised when the contractual rights to the cash flows of the instrument expire or when such rights are transferred in a transaction in which substantially all risks and rewards of ownership of the instrument are transferred.

Financial instruments are accounted for on trade date and are initially measured at cost, which includes transaction costs. Subsequent to initial recognition, these instruments are measured and reported at fair value. Changes in the fair value of the instruments are accounted for through the statement of changes in accumulated funds.

Fair value is determined as set out below: Listed investments For listed investments, fair value of instruments traded on active liquid markets is based on

regulated exchange quoted ruling closing prices on the respective regulated exchanges at the close of business on the last trading day on or before year-end.


Unlisted investments For unlisted investments fair value is determined by using one or more of the following methods

where appropriate: – by estimating using pricing models; or – by applying appropriate valuation techniques such as discounted cash flow methods; or – by estimating the price based on recent transactions; or – by estimating a market yield by using appropriate listed bond yields that fit the maturity profile

adjusted for credit risk. Private equity investments Private equity investments are investments in equity capital that are not quoted on a public

exchange.

Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines.

1.3.1.2 Collective investment schemes Investments in collective investment schemes are valued at fair value, which is the quoted unit values,

as derived by the collective investment scheme manager with reference to the rules of each particular collective investment scheme, multiplied by the number of units.

1.3.1.3 Insurance policies 1.3.1.3.1 Linked insurance policies If the policy is unitised, the value is equal to the market value of the underlying units.

Other linked or market-related policies are valued at the market value of the underlying assets for each policy, in line with the insurer’s valuation practices.

1.3.1.3.2 Non-linked insurance policies Non-linked insurance policies with insurers are valued on the basis of the policyholder’s

retrospective contribution to assets (i.e. accumulation at the actual investment return achieved on gross premiums).

1.3.1.4 Derivative instruments Derivative instruments comprise financial futures contracts, swaps, financial option contracts, financial

options on futures contracts and bond option contracts. Derivative instruments are measured at fair value. Changes in fair value are included in the revenue account for the period in which they arise. Fair values are obtained from regulated exchange quoted market prices, including discounted cash flow models and option pricing models, as appropriate.

1.3.1.5 Hedge fund investments Hedge fund investments are investments which attempt to reduce the investment risk of the fund using

advanced investment strategies. Hedge fund investments are designated as fair value through the statement of changes in accumulated funds by the fund and are initially recognised at fair value on trade date.

1.3.1.5.1 Listed hedge fund investments Hedge fund investments are subsequently measured at fair value and the fair value

adjustments are recognised in the statement of changes in accumulated funds. The fair value of hedge fund investments traded on active liquid markets is based on regulated exchange quoted ruling closing prices at the close of business on the last trading day of the financial year.


1. Principal accounting policies and presentation (continued) 1.3.1.5.2 Unlisted hedge fund investments – no right to the underlying instrument Hedge fund investments are subsequently measured at fair value and the fair value

adjustments are recognised in the statement of changes in accumulated funds. The value of the financial asset owned by the Fund is measured in relation to the percentage holdings by each investment partner in the total fair value of the hedge fund. The fair value is estimated using pricing models or by applying appropriate valuation techniques such as discounted cash flow analysis or recent arm’s-length market transactions in respect of hedge fund instruments.

1.3.1.5.3 Unlisted hedge fund investments – right to the underlying instrument Hedge fund investments are subsequently measured at fair value and the fair value

adjustments are recognised in the statement of changes in accumulated funds. As the Fund has the right to the underlying instrument, a look-through principle is applied, and the underlying instruments are separately measured and disclosed. The fair value is estimated using pricing models or by applying appropriate valuation techniques such as discounted cash flow analysis or recent arm’s-length market transactions in respect of the hedge fund instrument.

1.3.1.6 Investment in participating employers Investments in participating employer(s) comprise loans, investments in listed equities and other

investments. Refer to the respective policies for the basis of accounting.

1.3.1.7 Structured products Investments in structured products are valued at the gross total fair value of all the underlying

instruments included in the structure.

1.3.1.8 Accounts receivable and accrued investment income Accounts receivable and accrued investment income are stated at cost less provision for impaired

debts. Accounts receivable are financial assets measured at cost which approximates fair value, less any allowance for impairment.

1.3.1.9 Accounts payable Accounts payable are financial liabilities measured initially at fair value, net of transaction costs that are

directly attributable to the liability and subsequently measured at amortised cost using the effective interest rate method.

1.3.1.10 Cash and cash equivalents Cash and deposits comprise cash in hand, deposits held at call with banks and other short-term highly

liquid investments with original maturities of three months or less.

Cash, cash equivalents and bank are measured at fair value.

1.3.1.11 Financial liabilities Financial liabilities are recognised at amortised cost, namely original debt less principal payments and

amortisations which approximate fair value, except for derivatives, which are subsequently measured at fair value.

Notes to the financial statements continuedfor the year ended 30 June 2014


1.3.1.12 Provisions and contingent liabilities Provisions are recognised when the Fund has a present legal or constructive obligation as a result of

past events, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of discounting to present value is material, provisions are adjusted to reflect the time value of money. A contingent liability is not recognised in the statement of funds and net assets, but disclosed in the notes to the financial statements, unless the possibility of an outflow of resources embodying economic benefits is remote.

Contingent assets A contingent asset is not recognised in the statement of funds and net assets, but is disclosed in the

notes to the financial statements when an inflow of economic benefits is probable.

1.3.1.13 Impairment The Fund assesses at each statement of funds and net assets date whether there is objective evidence

that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Fund first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant. If the Fund determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

If there is objective evidence that an impairment loss has been incurred on loans and receivables or held to maturity investments carried at amortised cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flow (excluding future credit losses that have been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of changes in accumulated funds. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under contract. As a practical expedient, the Fund may measure impairment on the basis of an instrument’s fair value using an observable market price.

If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as improved credit rating), the previously recognised impairment loss is reversed in the statement of changes in accumulated funds.

1.3.1.13.1 Impairment of non-financial assets Assets that have an indefinite useful life, for example land, are not subject to amortisation

and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s net carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.


1. Principal accounting policies and presentation (continued) 1.3.1.13.2 Impairment of loans and receivables A provision for impairment of loans and receivables is established when there is

objective evidence that the Fund will not be able to collect all amounts due according to their original terms.

1.3.1.14 Foreign currencies Transactions in foreign currencies are translated at the rate of exchange ruling at the transaction date.

At year-end, assets and liabilities in foreign currencies are translated at the rates of exchange ruling at that date. Foreign exchange differences arising on translation are dealt with in the revenue account in the year in which the difference occurs against fair value revenue.

1.3.2 Contributions Contributions are measured at the fair value of the consideration received or receivable. Contributions are accrued

and recognised as income in accordance with the actuarial recommendations, and the rules of the Fund. Contributions received are apportioned between retirement funding and funding for risk. The apportionment is governed by the rules of the Fund. Contributions are brought to account on the accrual basis except for voluntary contributions, which are recorded in the period in which they are received. Any contributions outstanding at the end of the reporting year are recognised as a current asset – contribution receivable. Any contributions received in advance at the end of the reporting year are recognised as a current liability – accounts payable.

1.3.2.1 Contributions transferred from surplus accounts Contributions transferred from surplus accounts include any contributions that are funded from the

surplus accounts and relate to contribution holiday after surplus apportionment has been approved and the corresponding approval of the utilisation of the employer and member surplus accounts.

1.3.2.2 Interest charged on late payment of contributions Compound interest on late payments or unpaid amounts and values shall be calculated for the year from

the first day of the month following the expiration for the year in respect of which the relevant amounts or values are payable or transferable until the date of receipt by the Fund.

1.3.3 Benefits Benefits payable and pensions are measured in terms of the rules of the Fund. Benefit payments and monthly

pension payments are recognised as an expense when they are due and payable in terms of the rules of the Fund. Any benefits not paid at the end of the reporting year are recognised as a current liability.

1.4 Investment income 1.4.1 Collective investment schemes’ distribution Distributions from collective investment schemes are recognised when the right to receive payment is established.

1.4.2 Income from policies with insurance companies Income from investment policies from insurance companies is included in the adjustment to the movement of the

financial asset.

1.4.3 Interest on late payment of contributions Interest on late payment of contributions is accounted for in the statement of changes in accumulated funds using

the effective interest rate method.



1.4.4 Adjustment to fair value Gains or losses arising from changes in the fair value of financial assets at fair value through the statement

of changes in accumulated funds are presented in the statement of changes in accumulated funds in the year in which they arise.

1.4.5 Direct properties Rental income is reflected net of direct property expenditure.

1.4.6 Other investments Dividends are brought to account on the last day of trade and interest is accrued on a daily basis. Scrip dividends

received are brought to account at the cash equivalent value of the dividend by charging the cost of the investment and crediting dividends received.

Dividend income is recognised in the statement of changes in accumulated funds when the right to receive payment is established – this is the last date to trade for equity securities. For financial assets designated at fair value through the statement of changes in accumulated funds, the dividend income forms part of the fair value adjustment.

Interest income in respect of financial assets held at amortised cost is recognised in the statement of changes in accumulated funds using the effective interest rate method.

1.4.7 Derivative instruments Changes in the market value of traded futures contracts and options are accounted for against net fair revenue

for the period during which the changes take place.

1.4.8 Scrip lending Income generated from scrip lending is recorded in the period of receipt. Contractual arrangements exist with

various scrip lending agents. Scrip lending positions are not disclosed separately but are reported as part of the underlying holdings.

1.5 Expenses 1.5.1 Administration expenses Expenses incurred in the administration of retirement funds are recognised in the statement of changes in

accumulated funds in the reporting year to which they relate.

In the event that an expense has not been paid at the end of a reporting year the liability will be reflected in the accounts payable note. If the expense was paid in advance or overpayment occurred, the applicable amount will be disclosed under the accounts receivable note.

1.5.2 Expenses incurred in managing investments Expenses in respect of the management of investments are recognised as the service is rendered.

1.6 Reserves Reserve accounts comprise particular amounts of designated income and expenses as set out in the rules of the Fund and

are recognised in the year in which such income and expenses accrue to the Fund.

1.7 Surplus Surplus apportionments are recognised on the date of approval of the surplus apportionment scheme by the Registrar.

Surplus is measured at the values contained in the approved surplus apportionment scheme, adjusted for investment return or late payment interest until date of approval of the scheme as determined by the rules of the Fund.


1. Principal accounting policies and presentation (continued) 1.8 Transfers to and from the Fund Section 14 and 15B transfers to or from the Fund are recognised on the date of approval of the scheme/arrangement of

transfer of business by the Financial Services Board, as contained in the approval certificate from the Registrar.

Individual transfers (section 13A(5) transfers) are recognised on the earlier of receipt of the written notice of transfer (Recognition of Transfer) or receipt of the actual transfer value.

All the above transfers are measured at the values as per the section 14 application or the value of the transfer at effective date of transfer adjusted for investment return or late payment interest as guided by the application.

1.9 Property, plant and equipment Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its

estimated useful life as follows: Equipment 3 years Furniture 5 years Computer software 3 years

Gains or losses on disposal of equipment, furniture and computer software are determined by comparing proceeds with the carrying amount. These are included in the revenue account.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

1.10 Retirement benefits as employer 1.10.1 Pension The Sentinel employees are employed by the Sentinel Retirement Fund. Pension contributions are made to the

Fund and are charged against administration expenditure as incurred. Employees’ benefits are determined on a pure defined-contribution pension fund structure in terms of the rules.

1.10.2 Medical aid The Fund provides post-retirement benefits to employees who retired before 1 August 1999 by funding a portion

of the medical aid contributions of retired employees. Provision is made for this estimated liability.

1.11 Housing loan guarantees The Fund provides housing loan guarantees to members which are secured by members’ withdrawal benefits, in terms of

its rules and the provisions of section 19(5) of the Pension Funds Act, No 24 of 1956.

1.12 Related-party transactions In considering each possible related-party relationship, attention is directed to the substance of the relationship and not

merely the legal form.

If there have been transactions between related parties, the Fund shall disclose the full details of the transactions in the relevant note to the financial statements as follows:

amount of the transaction; amount of outstanding balances; terms and conditions; details of guarantees; provision for doubtful debts related to the amount of outstanding balances; and the expense recognised during the year in respect of bad or doubtful debts due from related parties.



Computerequipment

andsoftware

Rm

Officeequipment

Rm

Furnitureand fittings

RmTotal

Rm

2. Furniture and equipmentCurrentCostAt beginning of period 14 1 2 17Additions 10 – – 10Disposals – – – –Adjustment 12 1 2 15Balance at 30 June 2014 36 2 4 42

Accumulated depreciationAt beginning of period 14 1 2 17Depreciation 4 – – 4Adjustments 11 1 2 14Balance at 30 June 2014 29 2 4 35Carrying value at 30 June 2014 7 – – 8

PreviousCostAt beginning of period 15 1 2 18Additions – – – –Adjustments (1) – – (1)

Balance at 30 June 2013 14 1 2 17

Accumulated depreciationAt beginning of period 14 1 2 17Depreciation – – – –Adjustments (1) – – (1)

Balance at 30 June 2013 13 1 2 16

Carrying value at 30 June 2013 1 – – 1


2014 2013Total

RmLocal

RmForeign

RmAfrica

RmTotalRm

LocalRm

ForeignRm

AfricaRm

3. Investments at fair valueCash 2 394 711 1 683 – 1 050 225 825 –Commodities 104 104 – – 21 21 – –Debt instruments 15 586 13 703 1 829 54 10 267 8 598 1 669 –Equities 22 408 21 263 973 172 12 810 12 238 502 70– Listed 22 308 21 163 973 172 12 720 12 148 502 70– Unlisted 100 100 – – 90 90 – –Insurance policies 2 989 2 989 – – 1 791 1 791 – –Collective investment schemes 21 357 4 522 13 525 3 310 13 312 3 701 7 480 2 131Hedge funds 6 459 5 475 984 – 3 521 2 845 676 –Private equity funds 4 678 3 350 – 1 328 2 726 2 137 – 589Investment in participating employers 2 915 2 915 – – 1 674 1 674 – –Derivative market instruments 502 10 492 – (17) (3) (14) –

Total investments 79 392 55 042 19 486 4 864 47 155 33 227 11 138 2 790

Exchange rateconversion at

30 June 2014 Rm % Rm %

Currency profileInvestment held in:South African rand 55 042 69 33 227 70US dollar 10,64 24 350 31 13 928 30

79 392 100 47 155 100

2014 2013



At 30 June 2014Net fair

valueRm

At 30 June 2013Net fair

valueRm

4. Derivative instrumentsOver-the-counter derivatives

Equity options (96) 7Equity forwards 276 54Currency options 28 (78)Credit linked notes 294 –

Total derivative instruments 502 (17)

Net fair valueNet fair value represents the net fair value of all outstanding derivative financial instruments at year-end. The fair value represents the market value if the rights and obligations arising from derivative instruments were closed out by the Fund in orderly market conditions at year-end. Fair values are obtained using quoted market prices, discounted cash flow models and option pricing models, where appropriate.

5. Housing loan guaranteesThe Fund has granted housing loan guarantees to IEMAS Co-operative Limited for loans granted to members. Guarantees amounting to R454,7 million were in place as at June 2014 (2013: R256,3 million) and are automatically renewed as long as the loan exists and the member remains with the Fund.

The amount of the guarantee may not exceed 50% of the Fund Credit that a member would receive if membership of the Fund was terminated for any reason, and the maximum term of 30 years may not extend beyond normal retirement date.

2014Rm

2013Rm

6. Administration expenditureLocal asset management cost 200 108International asset management cost 57 43Fund administration cost 102 57

359 208

Included under administration expenditure are Trustee costs of R4 961 701 (2013: R2 345 545).

7. Post-retirement medical aid – former employeesThe Fund provides post-retirement healthcare benefits to former employee retirees. Valuation of this obligation is carried out by independent qualified actuaries. The liability was valued at 31 December 2013. The amounts recognised as part of creditors and provisions in the balance sheet are as follows:

Present value of obligation 9 6


2014Rm

2013Rm

8. Lump sums awardedCommuted pensions 284 144Death of members and pensioners 203 121Withdrawal, retrenchment, disability and divorce benefits 2 723 1 160

3 210 1 425

9. Reconciliation of net fair value revenue to cash generated from operationsNet fair value revenue for the year 14 621 8 887Adjustments for non-cash flow items (13 459) (8 376)Depreciation 4 1Accounting for fair value of investments (13 463) (8 377)

Operating surplus before changes in working capital 1 162 511Changes in working capital 33 210(Increase)/decrease in sundry receivables and accruals (9) 206Increase in sundry payables 42 4

Cash generated from operations 1 195 721

10. Commitments and contingencies

10.1 Capital contractsNo capital commitments exist at present.

10.2 Derivative financial instrumentsOption contracts and futures contracts have been transacted.

No material losses are anticipated as a result of these transactions.

10.3 Operating lease commitmentsSentinel House (commitment for the lease of office space from Growthpoint Properties Limited. The lease expires in October 2016)

Within 1 year 6 3

Between 1 and 5 years 13 6

After 5 years – –

Omni Plus software (commitment for the lease of software from Global ASP Limited. The lease expires in June 2017)

Within 1 year 19 10

Between 1 and 5 years 39 29

After 5 years – –

77 48



11. Actuarial valuationThe statutory valuation of the Fund as at 30 June 2012 reflected that the Fund’s assets exceeded its liabilities.

12. Related-party transactions

In considering each possible related-party relationship, attention is directed to the substance of the relationship and not merely the legal form.

The following transactions between participating employers and the Fund occurred during the period: The participating employers made contributions to the Fund for members to the value of R1 655 million (2013: R1 234 million). Direct investments held in participating employers at 30 June 2014 amount to R2 915 million (2013: R1 674 million). Investments held per individual participating employer/group of companies did not exceed 5% individually as required by Regulation 28.

Trustees who are members of the Fund contribute in terms of the rules of the Fund, and upon exit will receive a benefit in terms of the rules of the Fund.

13. Subsequent eventsExposure to African Bank Investments Limited (under curatorship)During August 2014, African Bank Investments Limited was placed under curatorship by the South African Reserve Bank. The Fund had exposure to African Bank Investments Limited through various investments effected by our asset managers on our behalf. As at 30 June 2014, the market value of our investment in African Bank Investments Limited, as reflected in the annual financial statements of the Fund, was R455 million. Regardless of the outcome of this process, it is not expected to materially affect the financial position of the Fund.

14. Significant mattersOn 1 July 2013 the Sentinel Mining Industry Retirement Fund changed its name to the Sentinel Retirement Fund and converted from a type “B” umbrella fund to a type “A” umbrella fund.

On 1 July 2013 the Mine Employees Pension Fund members and pensioners were transferred via a Section 14 transfer of all the assets and liabilities to Sentinel Retirement Fund.


2014 2013 2012 2011 2010

Number of pensions paid at 30 June 38 092 22 997 23 033 23 151 23 050Total number of deaths/terminations 1 158 1 181 1 271 1 066 1 115Members 151 149 215 167 125Pensions 1 007 1 032 1 056 899 990Number of retirement benefit claims 687 364 347 398 345Number of disability benefit claims 205 75 94 96 71Number of withdrawal benefit claims 4 674 3 299 3 364 3 422 3 838Average commuted amount (R) 387 315 334 396 314 342 313 796 301 266Average monthly pension paid (R) 8 840 8 379 7 915 7 250 7 131Total annual pension payments (Rm) 3 483 2 106 2 005 1 911 1 797

2014 2013 2012 2011 2010

Membership at 1 July 34 707 35 141 35 246 35 778 33 460Contributory membership at 1 July 31 108 30 458 30 691 32 086 30 791Non-contributory membership at 1 July* 3 599 4 683 4 555 3 692 2 669Entrants 20 574 6 608 6 886 7 028 7 671Exits 9 291 7 042 6 991 7 560 5 353Membership at 30 June 45 990 34 707 35 141 35 246 35 778Contributory membership at 30 June 40 777 31 108 30 458 30 691 32 086Non-contributory membership at 30 June* 5 213 3 599 4 683 4 555 3 692Average monthly contribution (including transfers during the year) (Rm) 226 187 154 147 153Active members** 43 792 33 485 33 744 33 808 34 240Deferred members 2 198 1 222 1 397 1 438 1 538Pensioners 20 100 13 919 14 156 14 434 14 599Beneficiaries 14 723 8 303 8 111 7 948 7 719Unclaimed benefits 8 092 5 330 4 720 4 909 5 370

* Includes interim members** Contributing and interim members

Membership and contribution statistics

Benefit statistics


ParktownSentinel House, 1 Sunnyside DriveSunnyside Park, ParktownTel: 011 481 8000

CarletonvilleS Buys Office Park, Shop 10Corner Kaolin and Radium StreetsTel: 018 786 1118/9

Klerksdorp54 Buffeldoring StreetWilkoppiesTel: 018 468 7309

Fund offices

BASTION GRAPHICS

Administration

Fund SecretaryM Selinder (Mrs)

Registered officeSentinel House 1 Sunnyside DriveSunnyside ParkParktown 2193

Postal address PO Box 61172Marshalltown 2107

Fund registration number 12/8/1215

SARS approval number 18/20/4/30800

VAT number 4660164049

Consulting actuariesAlexander Forbes Financial Services (Pty) Limited115 West StreetSandown 2145

External auditorsPricewaterhouseCoopers Inc.2 Eglin RoadSunninghill 2157

Internal audit service providersKPMG Inc.KPMG Crescent85 Empire RoadParktown 2193

Investment consultantsRisCura Solutions (Pty) LimitedFifth FloorMontclare PlaceCorner Campground and Main RoadsClaremont 7708

www.sentinel.za.com

[email protected]

WelkomShop 24, The Strip314 StatewayTel: 057 352 2905/6

WitbankWCMAS BuildingCorner OR Tambo and Susanna StreetsTel: 013 656 4214

www.sentinel.za.com

Documents

Integrated Annual Report 2014 - 1.sentinel.za.com Reports/Sentinel Retirement Fund 2014.… · Scope of Fund expanded beyond mining industry ... as a type “A” umbrella pension