Unemployment Insurance Fund and Compensation Fund 2004/05 Annual Reports: briefings

Meeting report

LABOUR PORTFOLIO COMMITTEE

UIF Annual Report 2004/05 [www.labour.gov.za]
UIF PowerPoint Presentation
Compensation Fund Annual Report 2004/05 [www.labour.gov.za]
Compensation Fund PowerPoint Presentation
Compensation Fund Report for the Period January 2005 - December 2005

SUMMARY
The Unemployment Insurance Fund (UIF) presented its 2004/05 Annual Report to the Committee. The UIF had a R2 billion surplus this past financial year. It had recently launched an integrated IT system, created by the Department of Labour’s outsourcing partner. The UIF had handled over half a million claims, paying out R2, 5 billion. The UIF had registered 631 593 new domestic employers and 500 683 domestic employees. The UIF had received two qualifications in its audit report.

The Compensation Fund (CF) presented its 2004/05 Annual Report to the Committee. The CF had paid R604 million in claims during the past year. The cost of medical aid had amounted to R1, 029 billion. Pensions had been paid in the amount of R314 million. This brought the total claims expenditure to R1, 95 billion. In addition, the first Regional Medical Panel had been set up in the Western Cape. The CF had received a qualified audit during the past year relating to accuracy of contribution income and valuation of assessment of debtors. The CF had a new business plan in place and the focus was to reduce the backlog of claims. A dedicated adjudication section had been established, increasing the number of adjudicated claims from 8 000 to 20 000 per month.

Members asked questions about the UIF’s outsourcing of IT functions; its reliance on Department of Labour staff; mobile centres to reach rural areas; the advisability of running a surplus and access for the public to services. On the CF, Members asked about the unfriendly nature of the claims process; inability to contact the CF about claims and why only one medical panel was being piloted at a time.

MINUTES
Unemployment Insurance Fund (UIF) Annual Report Briefing
Mr Les Kettledas (Deputy Director General: Department of Labour (DOL)), Mr Boas Seruwe (UIF, CFO) and Mr Shadrack Mkhonto (UIF, Former Commissioner) reported to the Committee. The UIF administered the unemployment insurance contributions collected from employers and employees to pay benefits and related administrative expenses.

Mr Kettledas stated that the key objectives of the UIF were to broaden coverage of beneficiaries, improve service delivery, strengthen compliance and enforcement, sustain an affordable benefit regime and resolve legislative and administrative challenges. During the financial year 2004/05, the UIF’s accumulated financial reserves had increased by 50% to R10, 197 billion. The UIF had a net surplus of R2, 071 billion compared to R121 million for 2003/04. Investments with the Public Investment Corporation (PIC) had increased by 81% to R9, 759 billion.

Mr Kettledas added that the UIF had handled over half a million beneficiary claims and had paid out approximately R2, 5 billion. The UIF had paid R1, 8 billion on 440 000 unemployment claims. Illness claims numbering 26 000 had been paid in the amount of R135, 775 million. Maternity/Adoption claims numbering 72 000 had been paid in the amount of R289, 534 million. Finally, R217, 846 million had been paid towards 25 000 claims for dependents. Mr Kettledas announced that client satisfaction, reflected in the number of approved claims, had increased by 2.5% from 92.3% in 2004 to 94.8% in July 2005. He noted that approved claims in 2003 had been 89.5%.

Commercial employer registrations in 2004/05 had been 481 608 employers and 6 475 541 employees. The number of domestic employers registered was 631 593 and domestic employees was 500 683. Fewer domestic employees had registered than employers because some employees worked for more than one registered domestic employer.

Mr Kettledas compared the UIF’s internal target numbers for diversity in employment with the actual numbers achieved. The target for African male employees had been 39.6%, and the UIF had achieved 21.94% as of 31 March 2005. The UIF’s target for African female employees had been 33.9%, and it had reached 32.29%. The Asian male target had been 1.2%, and an actual percentage of 0.63% had been achieved. Asian females had been targeted to be 1%, and 0.94% Asian females were currently employed at the UIF. Coloured males were employed at 1.88%, where the target had been 2%. Coloured females had been targeted at 2.1%, with 3.76% actually being employed. Finally, 4.39% of UIF employees were white males, where the target had been 11.2%. White females had been targeted at 9%, and 32.6% were employed. The UIF’s target for disabled workers had been 5%, and it had employed 1.57% as of 31 March 2005.

The UIF had strengthened its management capacity, especially in the financial area. It was currently focusing on improving institutional infrastructure and capacity. This included the launching of Siyaya, an integrated operational system that had been rolled out in April 2005. The UIF had received an improved audit report for 2004/05, with two qualifications as compared to the eight qualifications received in the previous year. Matters of non-compliance had also been reduced to five from 16 in the prior year.

Mr Seruwe advised the Committee that revenue of R6, 8 billion had come from employer contributions, penalties and interest as a result of non-payments, and income from investments. The cause of the reduced staff costs, he stated, was the outsourcing of IT functions. He also reported that an asset liability study conducted by the UIF’s Actuary had concluded that the reserves required to meet future liability was estimated at R8, 7 billion as of March 2005. As of that date, the UIF had had R10, 2 billion.

Discussion
The Chairperson made a preliminary statement regarding the UIF’s important mission and Parliament’s challenge to provide sufficient resources for the UIF.

Mr L Maduma (ANC) asked why the reserves had increased. Mr Maduma and Mr S Mshudulu (ANC) asked for more information regarding the IT outsourcing. Specifically, to which company had the function been outsourced and how was its performance?

Mr Mkhonto responded to the IT outsourcing questions. He stated that the Department of Labour had entered into a 10-year partnership with Siemens Business Services to outsource all IT functions. This was done in light of difficulty in recruiting the proper skills given the lack of sufficient funding for it. The Department was currently in its third year of the contract. The contract provided for deliverables each year, to be fully performed by the 10^th year. The problem currently encountered was the competing needs of different programs within the Department, and some programs having to wait. He stated that the Department had agreed with Siemens to revise the deliverables to accommodate an integrated business strategy, so that the IT supported the business rather than driving it.

Mr Maduma asked for further explanation regarding the UIF’s reliance on the Department staff and the problems associated with respect to the line function. The Chairperson also asked for a proposal from the UIF to assist the Committee in determining what kind of help it needed to provide the UIF regarding the line function problem, since the UIF had been relying on the Department to perform certain work.

Mr Kettledas responded that the Department was in the process of reorganising the reporting structure to provide more autonomy to the UIF. Currently, the Director-General of Labour was the head accounting officer, while the Commissioner was the head of the UIF. The objective was to create direct accountability to the UIF where Department employees who performed UIF-related functions. Therefore, the UIF sought to make the Commissioner the top accounting officer to give that officer full control over UIF functions. Discussions for this "ring fencing" process were currently underway and should address the line function problem.

In response to questioning by Prince N Zulu (IFP) regarding sustainability of jobs in the domestic market, Mr Kettledas stated that in September, the UIF had had 2000 claims from the 500 000 domestic workers, which reflected sustainability of employment. The level of claims had remained static after September 2005.

Mr Mshudulu asked how the Department was assisting in the mobilisation of workers (not limited to domestic workers), such as farm workers, who had not been covered because their employers refused to register. He also asked what measures the UIF was taking to address the problem of labour centres not being located in rural areas. He asked how the UIF was dealing with unemployed workers who did not have access to a bank.

Mr Kettledas replied that the UIF had recognised the need for services in rural areas and had instituted two mobile units per province to provide services to rural areas. He stated that the mobile units used a satellite connection to its main information system that gave people information on the spot. In addition, there were satellite offices and pay points (of which there were 192 throughout the country). Finally, the UIF used TEBA (a bank card system) for the payment of benefits. Beneficiaries could take the card, onto which their benefits had been placed, and either withdraw the money from a bank or use the card at Shoprite. Similarly, the UIF was working on moving recipients to an electronic fund transfer (EFT) system, which would pay benefits directly into the person’s bank account. The UIF had targeted having 85% of contributors on EFT by the end of 2005. Currently, the UIF paid 53% of its beneficiaries in cash, but hoped to move everyone to EFT.

Mr Mkhonto added that the goal was to create 24-hour technology that would allow the UIF to reach the rural workers. He acknowledged the need for people to people contact in rural areas. He stated that the mobile units were helping. UIF planned to beef up the call centre to be accessible after work hours as well. He stated that the UIF had had good results from the IT partnership, reflected in Siyaya (the new integrated system), compared to previous years where they had had to work with different systems within the Department. However, now the technology was far ahead of the employees and the UIF was working on getting people to run the technology in the labour centres.
To address the issue of vulnerable workers not currently covered by the UIF, Mr Kettledas stated that the UIF had an ongoing advocacy campaign to get employers to make contributions. The campaign used a combination of radio and pamphlets in all the different languages. However, he believed that all vulnerable workers were covered by the UIF at present, with the exception of public servants.

Mr Mshudulu raised the problem of illiterate workers not being able to read the forms which were in English. He asked for comment on any perceived threat relating to the financial surplus, such as negativity of employers toward a large surplus accumulated by the UIF.

With respect to the surplus, Mr Kettledas stated that the UIF had had a drop in the number of benefits as a result of the new law, but that people were not entitled to continue to receive benefits forever. Each employee received a credit, which when exhausted resulted in that employee being moved to the broader social security system umbrella. He stated that there were peaks and lows as a result of the credit cycle. Also, the new law excluded employees who voluntarily resigned from UIF benefits. This also affected the amount of benefit payments.

Mr Kettledas also stated that the returned benefit cheques were small and did not constitute a substantial part of the UIF’s reserves. The increased reserves had come from the inclusion of high-income earners who were not the main claimants. Regarding the concern about any negative impact of having high reserves, Mr Kettledas stated that the UIF was looking for ways to balance having a sound financial position with keeping reserves down so that services were improved.

Mr C Lowe (DA) made several comments regarding the UIF. First, recognising that this was not the UIF’s problem, he stated that between 5 and 8 million people did not have work and had no access to unemployment insurance fund support. He noted several problems with non-compliance in the UIF’s accounting and services being rendered by the Department. He stated that only when the UIF had a clear audit report could it and the Committee pat themselves on the back. He also commented on a special investigation, which rang alarms bells, into duplicate cheques and corruption in the provinces. Finally, he noted that he had had trouble corresponding with the UIF regarding claims of his constituents. If he, as a Member of Parliament had had trouble getting through, the employees must also have had problems.

In response to this commentary, Mr Mshudulu stated that he did not think a Member of Parliament should be arrogant when it was Parliament that made the law which the Department and the UIF had to follow. Mr Mshudulu believed the Member was out of order for making such arrogant statements.

Mr Kettledas responded to Mr Lowe, stating that the UIF had a call centre that was available to the public. The call centre had recently received 26 000 calls, of which 85% were answered. In August, the call centre had received 27 000 calls of which 75% were answered. The telephone number for the call centre in Pretoria was 012 337 1680 and was also at the Members’ service.

Mr Seruwe replied to the Chairperson’s request for an explanation of the UIF’s late submission of financial statements. The financial statements were to have been submitted by 31 May 2005. Financial statements were submitted to the auditors by 30 June 2005. Material adjustments had had to be made, resulting in the revised annual financial statements being received on 5 August 2005. Mr Seruwe stated that the audit had taken longer due to differences with the Auditor-General (A-G), which had finally been resolved in October.

Next Mr Seruwe addressed the qualifications received in the Audit. First, the A-G had found that due to a lack of a control framework to perform independent checks and reconciliations, bank reconciliations were not prepared weekly in contravention of Treasury regulations. In addition, the bank reconciliations had contained current and prior year unreconciled amounts. An amount of R25, 31 million had been disclosed as trade and other receivables and R19, 96 million disclosed as trade and other payables. Mr Seruwe explained he had not been able to obtain the necessary documentation at the time, and the A-G said he had been unable to perform alternative audit procedures to determine the completeness, nature and impact of these differences. Mr Seruwe stated the UIF had since cleared 50% of these amounts.

The second Audit qualification related to benefit payments to contributors. The A-G had found internal controls around the acceptance, recording and payment of benefits at the regional offices were materially inadequate. He had opined these inadequacies may have resulted in accounting errors not being detected, and therefore it was not possible to confirm the completeness, accuracy and validity of benefits paid. Mr Seruwe responded that the UIF was not linked to the Social Development Department, but that it had put control measures in place by talking to the other Ministers. It had not been within the UIF’s power to do this on its own. The A-G had also found that sundry receivables had included an amount of R25, 64 million that had been the result of overpayment of benefits made to contributors. Due to lack of information, the UIF had not provided an amount that would not be recoverable, and that the total amount had been written off. Mr Seruwe advised that the UIF had put measures in place for recovering the overpayments.

Mr Kettledas added that overpayments resulted when a recipient was receiving unemployment payments and thereafter found a job without advising the UIF of the new job. The UIF could not know of the overpayments (or new job) until the recipient returned to claim benefits (including other types of benefits such as illness or maternity) at a later date. At that point, the system would pull up the payment information and the UIF would then know of the overpayments and would provide for recovery. He stated the UIF would report on amounts recovered each year.

The Chairperson asked what happened where a worker had received full payment from an employer for maternity leave. Mr Kettledas stated that where the employer compensated the employee 100%, the UIF would not pay maternity benefits. The UIF would be informed of the amount paid by an employer through the required forms reflecting such payments. He stated that the UIF had a cooperative relationship with employers with respect to this.

Mr Zulu asked what measures the UIF had in place to detect corruption in the case of returned cheques where a recipient had moved. Mr Seruwe replied that the controls were watertight in the form of segregation of duties. The claims were made at the labour centres and approved at the process centres after confirmation through employer-provided information. The approved claim then went to the financial department for issuance of vouchers, which were verified by the bank.

Mr M Mzondeki (ANC) asked if the UIF monitored the performance of the mobile units and how they were doing. He also asked whether the UIF was inspecting compliance by employers. Third, he asked for further explanation of the under-expenditure in staff costs.

Mr Mkhonto advised the UIF was monitoring the mobile unit performance. There was an issue with the units not receiving a signal while in a peak or valley, but that since the units did not perform services while driving that had not made a significant negative impact. Mr Mkhonto added that the mobile unit workers carried laptops.

Mr Kettledas stated that the UIF had found compliance in wage payments and the 1% employer contributions. Regarding the decline in staff costs, Mr Seruwe explained that this had been a result of outsourcing the IT functions. There had also been a typist post, which was no longer needed.

Mr G Anthony (ANC) asked for explanation regarding the resignation of a high-level officer. Mr Kettledas replied that the person who had resigned was from the Audit Committee and had found it necessary to resign in order to continue to run his own business.

The Chairperson expressed her desire for the Committee to have a presentation from the IT partner. Likewise, she said it might be helpful for the internal auditors to brief the Committee on their findings. She stated that the Committee had been perturbed by the UIF’s qualified audit report for the third consecutive year, but now wanted to know more about the A-G’s capacity due to outsourcing. Finally, she stated that the government needed to contribute to the UIF.

Compensation Fund (CF) Annual Report Briefing
Ms Nerine Kahn (CF, Acting Commissioner), Mr Garvie Dreyer (CF, CFO) Ms Kefilwe Tselane (CF, Executive Manager: Claims) and Mr Vikash Sirksson (CF, Executive Manager: ICT) reported to the Committee. The CF’s main tasks were registration of employers, collection of return of earnings, assessments and collection of moneys, processing and payment of claims, payment for medical treatment, administration of pension accounts, and investment of excess funds.

Ms Kahn stated that the CF had paid R604 million in claims during the past annual year. The cost of medical aid had amounted to R1, 029 billion. Pensions had been paid in the amount of R314 million. This brought the total claims expenditure to R1, 95 billion. In addition, the first Regional Medical Panel had been set up in the Western Cape.

Mr Dreyer said the CF had received a qualified audit during the past year relating to accuracy of contribution income and valuation of assessment of debtors. The accuracy of contributions related to the CF’s over-assessments. It had been determined that there had been a system problem in which the staff had been allowed to override a 30% warning signal for increased earnings. In response, the CF had changed the procedures so that the staff would have to request a system amendment in the event of the warning signal and such request had to be approved by a supervisor. Management now reviewed monthly exception reports. The valuation of assessment debtors had been a consequence of over-assessments. There had been a clean-up of the debtors book, with additional outsourcing to ITC, restructuring of the debt collection section, and additional appointment of contract workers to address this problem.

Mr Dreyer advised that the matters of emphasis in the audit were material adjustments, general computer controls, non-compliance with Treasury regulations, and processing of claims. With respect to material adjustments, all adjustments had been effected in the agreement between management and the A-G. No further action was required. The Department’s IT partner, Siemens Business Services, had appointed a resource to manage the general computer controls. IT policies had been drafted and input from stakeholders was being awaited. To address non-compliance with Treasury regulations, the accounting authority had approved an investment strategy and policy.

Ms Kahn stated that the CF management team had spent significant time assessing where the CF was, quantifying problems and considering refocus of resources. It had then prepared a business plan framework. The main area of focus was the claims processing backlogs. An independent "millennium" team had been appointed to deal with backlogs from 2000 and before. There were also two dedicated teams for backlogs between 2001 and 2003. The CF had moved to an automated process in August 2005 and had improved capacity for information and compliance. However, she stated that they needed to develop a system that worked for the CF. Notably, the medical section was not yet on an automated system, and the CF was looking at an "off-the-shelf" system for this section.

Ms Kahn reported that a dedicated adjudication section had been established, increasing the number of adjudicated claims from 8 000 to 20 000 per month. As a result of re-engineering of work flow, awards and compensation payments had increased by 43%. Pilot projects were to cover workflow re-engineering and integration of processes in the following areas of paper and electronic document management systems, processing claims, assessing employers and other reporting and evaluation procedures.

Discussion
Mr Anthony pointed out that the drafting of policies had been discussed in last year’s report and asked what timeframe governed it. He also asked how the CF monitored the employers’ policies to ensure that such policies did not penalise employees for accessing the CF’s benefits.

Ms Kahn responded that with the tripartite process, it took some time for policies to be finalised. However, she said they were trying to push the process to go faster.

Mr Lowe expressed problems with the inability to contact and get responses from the CF regarding particular claims of his constituents. He also asked what could be done about pharmacies and doctors not being paid, especially in the Eastern Cape. However, he said he was impressed by the way in which the backlog problem was being addressed.

Ms Kahn answered that they were trying to address the backlog in medical payments to doctors, but that truthfully it was a three to five year (rather than a one year) project. She advised that the CF had tried to ensure that all payments in the Eastern Cape had been paid, and expected that all late payments would be paid by the middle of next year. Regarding contacting the CF, she stated that a mini-call centre was being put in place. In addition to the call centre, she stated that she could not promise she would be the particular person to respond, but that she did see the letters regarding claims that came in. She stated that this was also an available avenue for Members of Parliament with questions.

Mr Mshudulu said the claims procedure was not user friendly to the people. He suggested that the Committee needed to visit the CF and asked how Members of Parliament could best approach the labour centres to ask developmental questions. He suggested that drafting a questionnaire could be very helpful in this process.

Ms Kahn agreed that the claims process was not user friendly and that it was something that needed to be considered and addressed by the CF. She invited the Committee to visit the CF.

The Chairperson asked why claims were paid within 90 days instead of a shorter time period. Ms Kahn replied that 90 days was the time period required by the legislation.

Ms N Ngcengwane stated there seemed to be a problem with outreach and asked how the CF was addressing it. She also asked if the CF had a risk management team.

Ms Kahn replied that the labour centres were setting up e-claims, and that the ideal would be for every labour centre to have IT access to the necessary information to deal with an issue immediately. She stated, in response to the second question, that the CF did have a risk management team, but that it was an area that would be addressed and improved next.

Mr Maduma queried whether Ms Kahn could give assurances that the CF would have achieved certain goals by next year. Ms Kahn responded that although they were working diligently on the problems, she could not give any guarantees. She could not guarantee that the CF would receive an unqualified audit the next year.

Ms Tselane explained that with respect to medical panels, the first one had been piloted in the Western Cape. Once that first pilot had been successfully implemented, the CF had gone to the Board and had been told that the next one should be done in KwaZulu-Natal. Then the Board had instructed the third medical panel to be set up in the Eastern Cape. The CF had been opening them year-by-year, but the Board had told them where to go.

Mr Mzondeki asked if it was really necessary to perform one pilot panel at a time. Why not just implement them in all the provinces once the first was successful? Ms Kahn responded that this was a valid point.

Ms Tselane also stated that the medical panels were available to employees suffering from diseases where the employer had closed down. The employees could go straight to the panel without having to go to the employer first. Mr Kettledas added, for example, in the case of occupational diseases like asbestosis, the employer was obligated to tell the workers the hazards. He stated that there was now monitoring of the workplace by the Occupational Health and Safety inspectors who had the power to stop unsafe work practices. However, the people needed to be told about occupational hazards and what to do to prevent them.

In response to questions from Mr Mshudulu regarding the qualification relating to general computer controls, Mr Sirksson explained that because the entire IT function had been outsourced, there were no funds at CF to address this issue. However, he was managing the relationship with the IT partner as Executive Manager ITC. The situation had been improved by the new integrated IT system. Security controls were to be addressed by bringing in the audit team from the beginning to look at those issues.

The meeting was adjourned.