Currents: Editorials: Edition: April / June 2019

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Sparks for King from Kingman

Revamp of codes initiated in UK. Radical changes foreseen to
prevent ‘boilerplate’ compliance by fund managers on such matters
as ESG in company engagements.

SA’s pride and joy on corporate governance is the King code. From its original iteration 17 years ago, it’s pretty much marched in lockstep for philosophy and intent with the UK stewardship code. If this happy parallel is to continue, King looks due for a jolt.

As with King, the UK code defines how fund managers hold to account the companies in which they invest. As in SA, fund managers frequently act on behalf of pension funds (and other indirect shareholders) under mandates. Unlike SA, at least for the present, the UK code may be scrapped if planned reforms aren’t sufficiently radical.

The re-think has been provoked by a government-sanctioned report of Sir John Kingman, chairman of the Legal & General insurance group. It produced scathing criticisms of the Financial Reporting Council, the regulator of auditors and actuaries.

Kingman wrote: “The government should also consider whether further powers are needed to assess and promote compliance with the (stewardship) code. If the code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition.”

Specifically on auditors, Kingman’s view is that they no longer be proposed by the company’s board and approved by shareholders. Instead, they should be appointed by an independent body (a new regulator) representing the public interest.

The FRC has begun an overhaul of the stewardship code. The head of responsible investment at the UK’s largest private-sector retirement fund, the Universities Superannuation Scheme, believes that it should include a stronger emphasis on engagement over environmental and social issues, corporate ethics and reputational matters.

Andrew Ninian, director of stewardship and corporate governance at the Investment Association which represents managers overseeing £7,7tr, is also quoted in the FT: “It’s an opportune time for the code to be fully refreshed and refocused on best practice and the activity that goes on between companies and investors day to day.”

The FRC consultation is being held simultaneously with discussions on the European Union’s shareholder rights directive II. Paul Lee, an advisor to the International Corporate Governance Network, says: “It’s an opportunity for the stewardship code to set a higher hurdle that not everyone will be able to leap over.”

R40m appeal

Lila . . . reasons on ice

SA actuaries will be waiting with bated breath – perhaps anxiety, more likely – for the outcome of the appeal by actuary Viv Cohen against the R40m in damages awarded against him by the Pension Funds Adjudicator for the Amplats Group Provident Fund (TT Nov ’18-Jan ’19).

The Financial Services Tribunal has set down the appeal for hearing on April 16. No actuaries can be more anxious than Cohen himself.

EPPF’s big loss

Sitting down for coffee in Lonehill on a sunny Friday morning, the relaxed demeanour of Nopasika Lila contrasts starkly with the enthusiastic determination evident only a few months earlier on her widely-lauded promotion to principal officer and chief executive of the Eskom Pension & Provident Fund (TT Nov ’18-Jan ’19). Something serious must have happened, seemingly as a bolt from the blue, to have provoked her sudden resignation after less than a year in the hot seat.

One doesn’t give up such a powerful position, at SA’s second-largest retirement fund which she’d served for nine years, without good reasons. Lila won’t pinpoint them. But perhaps there’ll be clues in the EPPF annual report due for publication within the next few months.

In the previous annual report, the message from then chief executive was from Sbu Luthuli who’d signed it on March 29 2018. The next day, Lila took over. Watch for what she signs, if anything, at end-March this year. It might be difficult because, although it’s formally her departure date, she’ll be ice-racing in Finland.

Watch nonetheless for such items in the annual report under substantial or significant matters. There might be clues.

Lila feels that she’s left the EPPF in good shape, right down to scenario planning for different levels of reductions in the size of the Eskom workforce. Yet she remains mystified by why the fund has almost R0,5bn in unpaid benefits – “there should be proper records” – and is concerned for sustainability by the propensity of younger members to take all their benefits in cash on withdrawal, leaving annuities for the older to be funded.

Whatever the problems at Eskom, even if the employer can no longer afford to pay contributions, she leaves on the note that all member benefits in the fund are fully protected.

Whatever prompted Lila’s resignation, it can be safely assumed that the reasons were hers and hers alone. The best that can happen for the fund is that a successor of similar competence is found, and for the broader industry it’s that her presence will continue.

Consensus? What consensus?

In his SONA address, President Cyril Ramaphosa made a statement so dramatic in its implications that it’s all the more remarkable for having passed virtually unnoticed.

“We have made significant progress in devising a comprehensive social-security strategy though Nedlac,” he said. “The reforms focus on achieving comprehensive social security and retirement reform that is affordable, sustainable and appropriate for all South Africans.”

Then he added: “With the assistance of the National Planning Commission, we reached consensus on reforms that include the National Social Security Fund, institutional arrangements, regulatory reforms, improved unemployment benefits, improved social-assistance coverage….We will now incorporate this consensus into a policy framework to guide implementation.”

It’s fantastic that such consensus has been achieved. Unannounced is how it will be paid for by whom, and whether private-sector representatives at Nedlac are aware that they’re committed to this consensus.

In the absence of detail, Ramaphosa could have been jumping the gun. Elections have this sort of effect on politicians.

Or maybe it’s because nobody had told him about the 2019 Budget Review which appears to contradict him: “Government, business, labour and civil society have engaged extensively on the first draft of the comprehensive social-security paper through Nedlac. The process should come to a close in 2019, after which the paper will be revised and released for broader public consultation.”

There could be a way to go before consensus is achieved, let alone a guide to implementation.

Subsidised savers

Also revealed in the Budget Review is the increasing extent to which the fiscus is sacrificing revenue in the form of tax deductions for contributions to pension and provident funds and to retirement annuities (see table). What this means, Fasken partner Rosemary Hunter told the annual conference of the Pension Lawyers Association:

  • While taxpayers may have funded social grants to approximately 17,6m people in the year to end-March 2018 at a cost of some R170bn (on average R9 659 per person),
  • In 2016-17 at least 3,17m taxpayers also received the benefit of almost R73bn in tax revenue foregone by the deductibility of retirement-fund contributions (on average R21 470 per person).

“We should therefore not think of our retirement savings as our alone,” Hunter urged. “We should recognise that the state is our co-investor.”

So stop complaining. In a society of marked inequalities, it’s worth comparing the costs to fiscus of social grants for people who couldn’t otherwise afford to eat against tax deductions for those who can.

Mob justice

What social media say can be less important than what binding agreements say. This was discovered by Momentum at reputational cost in the furore over non-payment, then payment, of a death benefit to the widow of murdered policyholder Nathan Gamas.

Eventually the benefit was paid by Momentum, from shareholder funds rather than policy premiums, in response to the public outcry and not in terms of the contract. The emotion focused on the circumstances of Ganas’ death, shot while protecting his wife.

Overshadowed has been the crisp issue of fraud. It would have arisen had Ganas been aware, on entering the contract, of serious health problems that he decided not to disclose. But in course of the outrage, details of his situation at time of signature have been withheld from the public discourse.

They could have put a different spin onto the debate that might otherwise have centred less on Ganas’ heroism and the insurer’s heartlessness than on whether a dishonest intent, if that’s what it was, should be rewarded.

The industry had better face this new reality that contractual agreements are no match for social media.

About turn

Whereas previously the FSCA seemed not terribly happy about the cancelled registrations of ‘dormant’ funds being overturned on applications to court (see Cover Story), it’s now switched in the opposite direction for the reinstatement of funds that the FSCA (actually, its FSB predecessor) had deregistered.

Makhubela . . . getting tough

Where a fund or administrator becomes aware that a cancellation was made in error – as the fund still has members, assets or liabilities – it must immediately:

  • Inform the FSCA accordingly;
  • Disclose particulars of the error and explain why it had occurred;
  • Apply to court for the cancelled registration to be reviewed and set aside. The applications must be made “without delay” and served on the FSCA.

These instructions pertain to cancellations prior to April 1 2018. For cancellations of ‘dormant’ after this date, the FSCA must immediately be informed of those which have members, assets or liabilities.

The FSCA may undertake supervisory on-site inspections to invoke any legal measures to verify whether funds or administrators are implementing the appropriate process. They must also be “doing the necessary reporting and approaches to the courts where the information justifies such action”, warns FSCA divisional executive Olano Makhubela.

Spirit of the TCF

Lukhaimane . . . duty to disclose

National Treasury has pushed the ‘Treating Customers Fairly’ principles. They apply to pension funds whose members must be kept appropriately informed before, during and after entering contracts.

The point is emphasised in a determination, following a complaint against the Municipal Employees Pension Fund, by Pension Funds Adjudicator Muvhango Lukhaimane: “TCF requires entities to measure themselves as to whether or not in doing business they are dealing fairly with the consumer by…providing them with sufficient and clear information that will enable them to make informed choices when acquiring financial products.”

The complainant, C J Modiba, had disputed the computation of his withdrawal benefit. The critical issue, said the Adjudicator, was that the MEPF had failed to inform Modiba that the transfer value had been used to purchase additional pensionable service from the Government Employees Pension Fund.

This issue should have been disclosed to the member when he joined the MEPF so that he’d understand at the point of exit that the amount wouldn’t simply be added to his withdrawal benefit. That the information hadn’t been disclosed to him, Lukhaimane believed, “has been ruinous to say the least”.

On receiving details of the computation from the MEPF, she dismissed the complaint but nonetheless noted that the fund had contravened TCF principles by its disclosure failure.