FINANCIAL SECTOR CODE: Editorials: Edition: July / September 2019


Compulsion on the way


In the name of transformation, it seems inevitable that

retirement funds will be whipped into line.

Please pause to consider whether it’s really necessary.

For an otherwise excellent Batseta winter conference, the start was frustrating. Its opening panel discussion, on transformation in the retirement-fund industry, was marked by a harangue about slowness and shoddiness in retirement funds’ compliance with the amended Financial Sector Code.

Horror of horrors that merely a handful of the top funds had reported to the Financial Sector Transformation Council on the FSC’s implementation. The message drawn by the panel – facilitated by a moralistic Andile Kumalo with a hardline Jan Mahlangu of Cosatu and an elegant Asief Mohamed of ABSIP amongst the participants — is that the funds are generally and unacceptably unenthusiastic about transformation.

A consequence of the poor report-back is almost certainly that the FSC, in keeping with Mahlangu’s argument, will soon become mandatory for retirement funds. In its first year of operation, for them the code was voluntary but subject to review thereafter (TT April-June).

Unrevealed is how mandatory compliance will be enforced. By fines on funds, and thus effectively on their members? By disbarment of trustees, and thus effectively exacerbating their scarcity? Unclear then is how mandatory compliance will make a difference.

More significant than the rounds of clichés were what wasn’t said: no definition of transformation; no clarity on the desired end-game; no presentation of facts and figures; no analysis of progress to date; no suggestions for improvement; no mention of member outcomes; no larger institutions to air contra views.

This is a great pity for the opportunity lost. Fairly new in its gazetting, the FSC deserved better. The majority of funds, implicitly the industry itself, were pummelled by sweeping platitudes.

Meanwhile, in the background is the Department of Trade & Industry’s amendments to the generic B-BBEE codes of good practice which in turn could presage a movement in the FSC’s goalposts. Procurement remains the heaviest weighting on the overall B-BBEE scorecard. Now its weighting is to increase. There’s also a refocus on skills development to include higher education.

As the FSC stands for retirement funds, preferential procurement gets more points than black participation on funds’ boards (made rather complex when half of the trustees can be elected by members) and executive management (which presumes an availability of qualified principal officers).

Reporting requirements are detailed and onerous in a good and necessary cause. However, what’s aspirational shouldn’t be confused with what’s practical.

Funds can burnish their credentials, for example, by heftier allocations to black-owned asset managers. The idea is to encourage the younger and smaller, since most of the established and larger are usually at a minimum of Level 2.

For a little illustration on transformation’s present state of play, contrast the hubbub at the conference with performance from the larger asset managers who’d remain contenders in retirement funds’ procurement stakes. Compliance with the FSC’s seven pillars – enterprise and supplier development, empowerment financing and the like – falls substantially on them or the financial-sector groups of which they form part.

The illustration can be made by analogy. Of SA’s 20 largest unit trusts, 10 out of 44 (23%) of portfolio managers are black and six out of the 44 (14%) are women. More significant, there’s a promising pipeline (see chart on page 10).

Thabo Khojane, chief executive of Investec Asset Management and recently appointed chairman of ASISA, points out that trustees typically support both big and boutique asset managers: “They aren’t mutually exclusive. But a fund can get a low score if the manager lacks the critical mass to apply such B-BBEE elements as training. Perhaps the smaller managers should not be scored on the same basis as the larger, and instead be allowed to apply for exemption until they’ve reached a size when they can choose to opt in.”

He notes that IAM annually recruits for training five to 10 young black professionals that it doesn’t need: “We recognise that we’d eventually have to let some of them go and are happy for our competitors to benefit from the training we’ve provided.”

Khojane . . . industry perspective

Pillay . . . risk management

Msibi . . . clients first

Big isn’t bad, argues Coronation chief executive Anton Pillay. Given the seven pillars for FSC measurement, he believes it critical to ask who is actually doing what work: “Different clients have different requirements. The first step is to look after portfolios in terms of risk management.”

The point is similarly emphasised by Stanlib chief executive Derrick Msibi: “We impact more people by caring for clients’ assets than any other aspect of transformation. When there are millions of beneficiaries in retirement funds, collective investment schemes and insurance policies, financial wellness depends much more on looking after them than on changing the industry’s ownership structures.”

And all this at a time when retirement funds are under exceptional pressures from diminished investment returns and retrenchment-driven member withdrawals in a persistently low-growth economy.

Also, bound by fiduciary duties (merely as a reminder) and regulatory layers (which come at a cost), trustees’ heads must spin. For the FSC to become mandatory on retirement funds will make the job of the trustee no easier.