The status of integrated reporting in retirement funds
Integrated reporting is not a new concept. It was introduced by the King Report on Corporate Governance for South Africa (King IV)™ in 2016 and King IV even has a specific supplement for retirement funds (Principle 17). For retirement funds, Principle 5 emphasises that the board of trustees should ensure reports issued enable stakeholders to make informed assessments of the fund’s performance and its short, medium and long term prospects. Specifically recommending that a fund issues a report underpinned by integrated thinking, as well as one that includes the disclosure practices recommended in the Code for Responsible Investing (CRISA), now CRISA 2. Principle 5 in CRISA 2 deals with transparency and, amongst other things, also recommends the pursuit of integrated reporting.
It further recommends that, in addition to applying statutory directives and the King IV practices, that globally accepted reporting standards are considered as good practice in relation to disclosures. While South Africa has been a global leader in integrated reporting, with significant advancements in integrated reporting and thinking within the corporate sector over the years, the retirement fund industry regrettably lags. This sentiment is supported by research.
The above graphs from World Bank research conducted in 2021 indicates that significant progress is still required by funds in South Africa, and the broader African continent, in embedding sustainability and reporting on impact in an integrated way. This view was supported by a more recent Actuarial Society research paper, further confirming that it is more than just an African problem.
Integrated reporting and thinking
So how can trustees use integrated reporting and thinking to address these deficiencies and create a greater real world impact? Firstly, by understanding what these concepts mean and what they aim to achieve.
In simple terms, an integrated report presents information about the resources and relationships on which the fund relies, such as its strategy, governance, activities, outputs and outcomes, in an integrated way. It breaks down these silos to tell the story about how the fund will continue to create and sustain value in the short, medium and long term.
Importantly, annual financial statements, annual reports, newsletters or fact sheets are not an integrated report.
Integrated reporting requires and brings about integrated thinking, enabling a better understanding of the factors that materially affect a fund’s ability to create value for its members over time. Integrated thinking is about understanding the interconnectedness and mutual dependencies among various elements within a fund, such as the fund’s mission, its structure, its strategy, key risks and outlook, which are crucial in determining the fund’s capacity to generate sustained value for its stakeholders.
By focusing on and unpacking the data and information required to produce a proper report, one naturally begins to think differently about the fund’s value creation model, risks, operational data and the information required for proper decision making, as well as materiality and the interplay between different priorities or capitals at different times.
Additionally, it highlights the different information needs of different stakeholders, and how balancing all of these either contributes to or detracts from the fund’s ability to create value.
With the number and maturity of global regulations growing exponentially, understanding sustainability and reporting, and how it impacts a fund’s value creation model, is actually no longer a choice.
Case studies
The Cbus superannuation fund in Australia (Cbus) was one of the first retirement funds globally to produce an integrated report. As they matured in their approach to integrated reporting, they also became one of the first funds globally to have their entire integrated report externally assured. Cbus has 906 270 members from 226 728 employers and assets under management (AuM) in excess of $94 billion.
Despite King IV having recommended it as best practice almost a decade ago in South Africa, only a handful of South African retirement funds have embraced integrated reporting.
As a trustee, one is likely to believe that you have a deep knowledge and understanding of your fund, but integrated thinking and reporting invariably uncovers insights that are often not immediately evident.
Here are some of the insights that have been uncovered by retirement funds that have implemented integrated reporting:
- A deeper understanding of members, their behaviours and the impact of these behaviours on actual and projected retirement outcomes.
- Year-on-year deterioration in key (but possibly neglected) metrics highlights the need for deep dives into root causes and the identification of remedial steps earlier than would have been the case without integrated reporting.
- Insights into the positive impact of being a member of a particular fund.
- Trends in key metrics like replacement ratios.
- Improved disclosure about how the fund creates value and a better understanding of the fund’s longer term impact, through the lens of the Sustainable Development Goals – adding additional insight to guide trustees in their future decision making.
All of these give members clear information and insight into the tangible benefits of being a member of that fund and the fund’s real impact. This enables them to make informed assessments of the fund’s performance and its short, medium and long term prospects.
Lessons to be learned from early adopters
- Start early and work with the available information, then aim for progress rather than perfection. If necessary, start the process as an internal reporting initiative until you’re comfortable disclosing externally.
- Understand the fund’s stakeholders and the role the fund plays for each.
- Understand which issues are material. The best way to achieve this is through interrogating and really understanding the fund’s mission, the levers of value creation, articulating the strategy and investing in understanding the long term view of the fund’s prospects to continue creating value.
- Use the process of integrated reporting to identify silos and then use that information to improve integrated thinking. This will enable a holistic understanding of material issues and deepen the trustees’ understanding of how these issues are interconnected, and how they need to be managed and overseen.
- Do not underestimate the value of the process. Seeing a fund through an integrated lens helps to view it from different perspectives, and the insights (both positive and negative) are valuable to the fund and its stakeholders.
- Importantly, it is an iterative process. Integrate the insights identified from reporting into the fund’s culture and processes, to mature and entrench integrated thinking and understanding.
What should your fund do next?
- Start somewhere and start soon. Have a plan to mature over time; but don’t do nothing.
- Ensure the board of trustees is well educated on emerging regulations and properly understands how these may impact the fund. This should be done continuously, as the regulatory space is moving at pace and is likely to accelerate.
- Adapt your approach to resonate with different stakeholders. For example, different generations of members will require different communication strategies.
- Embrace the learnings from the early adopters and make them your own.