Operational Hours Mon - Fri: 8:00AM - 4:30PM
Information information@medicalschemes.co.za
+27 86 112 3267 +27 12 431 0500

Circular 34 of 2022: General concerns noted during the analysis of the 2021 Annual Financial Statements (AFS) and Annual Statutory returns (ASR)

1. INTRODUCTION

1.1 Purpose

The Council for Medical Schemes (CMS) would like to express its appreciation to medical schemes, administrators and auditors for the cooperation provided in submitting the 2021 Annual Financial Statements (AFS) and Annual Statutory Returns (ASR) within the period, as required by Circular 16 of 2022.

The purpose of this circular is to bring to your attention common problems and issues identified during the analysis of the AFS and ASR to:

  • enhance the quality of data submitted in the AFS and ASR;
  • achieve standardisation and uniformity regarding proper disclosure;
  • reduce or minimise errors; and
  • establish good financial reporting for the industry.

1.2 Background

A review of the data collected by the CMS has highlighted a few discrepancies in the information currently being furnished by medical schemes in their statutory returns. The users responsible for preparing the statutory returns and scheme management are requested to address these matters in future submissions.

1.3 Statistics

In 2021 there were 75 schemes in operation. A total of 75 schemes provided a full submission for 2021.

 

2021

Number of scheme submissions 75
Number of schemes unlocked for correction 5
Number of schemes rejected 0

Schemes were only unlocked in instances where several corrections were necessary or material.

2. KEY AREAS OF CONCERN

2.1 Part 1.4 – Report of the Board of Trustees (BoT Report): Several questions were not correctly answered in part 1.4. We urge schemes to pay specific attention to this area since it represents the governance section of the annual statutory return.

Schemes should ensure that each question is answered correctly and that the necessary details are provided. It should also be noted that the scheme, in answering the questions, should provide complete information and not refer to the financial statements.

Non-compliance should be fully disclosed in this part. Corrective courses of action should be included in the answers provided; this would consist of any exemptions granted.

2.2 Part 8 – Statement of Cash Flows: A total of seven (7) medical schemes reported their cashflows from investment income under operating activities in the scheme AFS’ Statement of Cash Flows. Circular 18 of 2022 postponed the implementation of the investment income under investing activities classification. Three (3) of the medical schemes indicated upon further engagement that they will be reclassifying their investment income to investment activities in future submissions. We will engage further with the remaining four (4) schemes to ascertain the reasons for their classification under operating activities.

2.3 Part 9(a) – Investments: Part 9(a) of the return was not correctly completed. Issues identified include:

    • General misclassification;
    • Drop-downs provided were not always utilised;
    • Full disclosure of entity names not provided (only instrument codes were provided);
    • Instrument codes not provided (only entity names were provided);
    • Only equity unit trusts, pooled equity managed funds and policies of insurance-linked to the performance of underlying equities or equity indices should be included in Category 4 to Annexure B read in conjunction with Regulation 30 of the Medical Schemes Act (131 of 1998) (Annexure B). Kindly refer to the ASISA’s Collective Investment Schemes list as of 30 September 2021, as indicated in Circular 6 of 2022.
    • Certain funds are not being broken down into the underlying assets as per Explanatory Note 8 of Annexure B; and
    • Insufficient documentation supporting reclassification of investments to other categories as required in Circulars 6 and 16 of 2022.

Please ensure that the investments are classified correctly to assist with compliance monitoring. The Guidelines on the categorisation of assets in terms of Regulation 30 of the Act, read in conjunction with Annexure B to the Regulations, are published on our website for further guidance in this regard.

 2.4 Annexure B compliance monitoring: It was noted that many schemes incorrectly use investable assets as a denominator in the Annexure B percentage calculation instead of the assets calculated in Regulation 30(2) and Regulation 30(3A). The denominator should be calculated as follows:

  • Where the scheme’s solvency exceeds 25%: the fair value of the liabilities plus the Regulation 29 funds; or
  • Where the scheme’s solvency is below 25%: the fair value of the liabilities plus the minimum required Regulation 29 funds (25% of the annualised contributions).

2.5  Reporting of non-compliance matters: In Circular 11 of 2006, Circular 30 of 2007 and Circular 14 of 2008, the CMS has directed schemes that all non-compliance matters should be disclosed in both the BoT Report and the scheme’s AFS.

Schemes are required to disclose the following information relating to all non-compliance issues (regardless of whether the scheme has addressed the non-compliance or not):

  • Nature and impact;
  • Causes of the failure; and
  • The corrective course of action (including the timeframe, where applicable).

Corrective courses of action implemented would include exemptions obtained, suspension and termination of benefits in respect of outstanding contributions, and any other actions taken.

The following matter was specifically of concern during our 2021 analysis:

  • Section 33(2)(b) non-compliance was not disclosed: benefit options need to be self-supporting in terms of financial performance at a net healthcare level.

The CMS is looking forward to improved AFS and ASR submissions in future and highly appreciates your cooperation.

Download the Circular here.