Just SA: Expert Opinion: Edition: April / June 2019

Offer members what they can afford

Vital element in default strategies, urges Just SA chief executive Deane Moore.

From 1 March 2019, the board of trustees of every pension and retirement-annuity fund must be able to demonstrate to the Registrar of Pension Funds that it has in place an annuity strategy that is appropriate and suitable for its members, taking account of:

  • their level of income;
  • inflation and investment risks; and
  • income protection for beneficiaries on death of the main member.

A member reaching retirement has two categories of needs:

  • basic lifetime needs: a monthly income for life for the member and his/her spouse, which grows with inflation, to pay for essential expenses such as food, medical, accommodation, water, electricity, telephone, transport and insurance;
  • lifetime aspirations: flexible income for other expenses, tax planning, or to leave as a legacy for beneficiaries.

In South Africa, most people reaching retirement have insufficient savings to consider aspirations. Their priority is to focus on maximising their incomes for life to cover their basic lifetime needs.

There are two retirement options for providing members with a sustainable income for life, where this is expected to grow with inflation: a living annuity or a guaranteed life annuity.

In a living annuity, members need to decide how to invest their retirement savings and how much income to draw from these savings each year. Income is not guaranteed, but the Financial Sector Conduct Authority has published a table to show what proportion of his/her assets a member can draw at each age to have a 90% probability of sustaining their income for life and increasing this with inflation each year. This table was developed by industry professionals and is currently under consultation.

A with-profit annuity is a type of guaranteed life annuity that provides members with a guaranteed income for life that is targeted to grow with inflation each year.

This table compares the income from a guaranteed life annuity and a living annuity on a consistent set of assumptions.

  1. The guaranteed life annuity rates are for the Just Lifetime Income with- profit annuity.
  2. The maximum sustainable living annuity drawdown rates published forconsultation by the Financial Sector Conduct Authority on 7/11/2018 in their Draft Conduct Standard for Living Annuities in a Default Annuity Strategy. If individuals withdraw income at these rates, they have a 90% chance of being able to sustain their income for at least as long as their average life expectancy i.e. their income will keep up with inflation until their expected death.

In a living annuity, when the main member passes away, his/her beneficiaries will receive any capital that is left in the living annuity.

In a guaranteed life annuity, members can opt for income to continue for the remainder of their spouse’s lifetime and until beneficiaries are no longer dependent. This is a death benefit that is specifically focused on the ongoing needs of beneficiaries to meet essential expenses.

In surveys carried out by Just in 2015 and 2018, over 85% of retired people said they would prefer a secure, guaranteed income for life against investing a pool of assets and deciding how much to draw each year.

Ashburton Investments: Expert Opinion: Edition: April / June 2019

Search for yield in private markets

Isabella Mnisi, the Ashburton Investments chief investment officer for private markets,
discusses how SA lags when it shouldn’t. Take a close look at where potential
advantage lies for the investor and for the country.

Increasing concerns around the global economy — the United States/China trade conflict, uncertainty around Brexit and emerging-market risks — are pushing investors to look for other sources of return. Global growth also seems to have peaked, creating downside risk.

On the domestic front, constrained economic growth projections (albeit in the right direction) – as well as disappointing stock market performance, lack of business confidence and political uncertainty — are leading investors to look for other sources of return. The market is also not expected to improve substantially in the short term.

Therefore, international factors coupled with local factors have led investors to start looking beyond traditional assets for other sources of returns. Alternative markets still provide attractive valuations and offer the potential for alpha while also offering diversification benefits to traditional assets.

However, SA institutional investors allocate only about 2% of their assets to alternatives. This is extremely low when compared to the developed world (US and Europe) where allocations are generally over 20%.

Below we look at the different alternative-investment options available. Please note that the industry data on alternative assets is not as readily available because this market is not as developed and standardised as for traditional assets.

Unlisted credit

In SA, more than 80% of companies fund themselves through the banking system (private markets). This means that fewer than 20% of companies use the public-debt capital markets for their funding requirements.

More developed countries have many more companies accessing the debt-capital markets for their debt funding; for example, the US represents the opposite of the SA scenario. The SA phenomenon has resulted in banks having very well-diversified balance sheet portfolios, whereas capital-market investors only have access to limited investment opportunities through the debt-capital markets.

Unlisted credit offerings give investors the opportunity to access diversified pools of assets that are currently not readily available to investors in funds regulated as collective investment schemes.

Yet, in the past few years, we have seen increased interest and demand for unlisted credit from SA institutional investors. Regulation 28 allows for 15% of a pension fund’s assets to be invested in unlisted debt instruments. Most pension funds are below this limit.

Private equity

Southern Africa’s private equity industry had R158,6bn funds under management as at December 2017. Of funds raised during 2017, 49,9% were from SA sources according to the Southern Africa Venture Capital & Private Equity Association (SAVCA) 2018 Private Equity Industry Survey.

SA institutional investors have been increasing their participation in the private equity market for many years, as can be seen from the above chart. Investors may include mezzanine debt under the private-equity category depending on the way in which the instrument is structured.

Real assets

Mnisi . . . strengthen alternatives

Investor participation in real assets will either be through a debt or equity structure. Institutional investor participation in real assets is key, especially for a country like SA with huge infrastructure funding needs.

Real assets offer a great source of inflation hedge for long-term liabilities, particularly for pension funds. These real assets’ long duration, predictable cash flow and inherent inflation hedge characteristics are also highly attractive.

Investors have previously participated in toll road and renewable energy infrastructure funding. Some have preferred to participate in the post-construction phase of the transaction due to it being more de-risked. This is mainly because of a lack of understanding of the construction risk phase.

Policy and pricing uncertainty, due to political meddling, have seen investors scaling back from these assets in the SA market. But energy minister Jeff Radebe has moved swiftly to provide some certainty on the funding of renewable energy projects.

We hope that this will lead to increased confidence and funding from institutional investors. Our country’s fiscal constraints will require institutional investors to plug the infrastructure-funding gap.

Be meaningful

We believe that any portfolio asset allocation needs to have a meaningful allocation to alternative assets. Alternative investments, when used as part of a multi-asset portfolio to complement traditional investments, can lead to improved long-term risk-adjusted returns.

First-time investors in the alternative markets should focus on the overall benefits that alternative investments could bring to a portfolio.

Sanlam Corporate: Expert Opinion: Edition: April / June 2019

Ride smoothly into defaults and Reg 37

Vital checklist for trustees offered by Danie van Zyl, head of Sanlam
Smoothed-Bonus Centre of Excellence.

In August 2017, the Minister of Finance signed an amendment to s36 of the Pension Funds Act. This amendment contained the addition of regulations governing conditions for defaults.

Regulation 37, which covers default investment portfolios, applies to pension and provident funds. It excludes retirement annuity funds, beneficiary funds, preservation funds and funds in voluntary liquidation.

The amendments, effective from 1 March 2019, require retirement funds to ensure that they have a suitable default investment portfolio in place for pre-retirement savings. These portfolios must be appropriate, not excessively complex or unreasonably expensive.

Importantly, the board of trustees must be able to demonstrate to the Registrar that its chosen default investment portfolio is appropriate.

Most retirement funds already have a default investment portfolio in place. For the Sanlam 2018 benchmark survey, 62% of funds indicated that they have a default portfolio where members have the option to choose an alternative portfolio should they wish.

The survey also found that a lifestage solution, followed by balanced funds and smoothed-bonus portfolios, are the most popular. Many funds also use a smoothed-bonus portfolio towards the end stage of their lifestage solutions.

As there are many retirement funds that use smoothed-bonus portfolios in their default investment strategy, let’s unpack what these funds need to consider and do to demonstrate that they meet the requirements set out in Reg 37.

Demonstrating compliance

Van Zyl . . . comply with defaults


The board of trustees should consider adding some or all of the following points as agenda items for their trustee meetings and then include the main points in their minutes. They can then be provided at a later stage if requested by the FSCA.

Default investment portfolio(s) are appropriate for the members who will be automatically enrolled into them.

  • Many retirement funds appreciate that smoothed-bonus portfolios provide smooth returns to members, preventing them from experiencing the roller-coaster that members may experience from market-linked portfolios. The guarantees are also valuable to members in a default portfolio as they protect members from potentially losing some of their capital in a portfolio they did not choose. This is particularly relevant to blue-collar members who are risk-averse as well as members close to retirement.

What is a default investment portfolio?
As defined in Regulation 37, a “default investment portfolio means an investment portfolio in which the retirement funding contributions of a member must be invested unless the fund has been instructed by the member in writing to invest them in another investment portfolio provided in terms of the investment policy statement of the fund or options available to members of the fund”.

The composition of assets and performance of the default investment portfolio are adequately communicated to members.

  • Can members access the latest fund factsheets and quarterly reports? Sanlam provides various forms of communication which contain the asset composition and performance of funds e.g. monthly fund factsheets and quarterly reports for our smoothed-bonus portfolios.

Default investment portfolios are reasonably priced and competitive.

  • How do the fees compare to other similar portfolios? Sanlam’s smoothed-bonus portfolios have competitive investment management fees that reduce as the size of invested assets increases. The guarantee premiums charged are favourable compared to competitor products that provide similar levels of guarantees.

All fees and charges are disclosed.

  • Sanlam discloses the fees and charges on all portfolios and provides the portfolio’s Total Expense Ratio and Total Investment Costs to clients on request.

No loyalty bonuses or other complex fee structures.

  • Do trustees and members understand the underlying fees? The fees charged on the Sanlam smoothed-bonus portfolios are easy to understand and calculate. The portfolios have no loyalty bonuses.

Members are not locked into the default investment portfolio.

  • Are there any unreasonable barriers to exiting the portfolio? Members can switch out of the Sanlam smoothed-bonus portfolios at any time. However, should this occur when the portfolios are underfunded, members will receive the lower of book value and market value. Members who leave the portfolio for benefit-payment events (death, disability, retrenchment, retirement, resignation) will always receive book value.

Funds are further required to record their default investment portfolio in their Investment Policy Statements. They are also required to record that the above conditions were considered when the portfolio was chosen. Additionally, trustees are encouraged to include the following:

  • Set out in writing how and when the board will review (on a regular basis) the default investment portfolio to ensure it is still compliant with Reg 37;
  • The merits of both passive and active investment and reasons for the decision to use either (or a combination of both).

The FSCA released a further standard with conditions that smoothed-bonus portfolios need to meet in order for them to be used as a default investment portfolio. This standard is currently in draft form.

Sanlam, as a leading provider of smoothed-bonus solutions, is engaging with the regulator and is fully supportive of the regulations’ aims. Sanlam will keep clients updated with any new developments.

Gravy: Editorials: Edition: April / June 2019

Naheem Essop, analyst at the FSCA, breathed fire and brimstone at the annual conference of the Pension Lawyers Association. This new body, different from the old, would put a stop to the corruption that he considers prevalent in the retirement-fund industry. But a few observations:

  • By not identifying the funds and service providers in the examples he cited, they couldn’t defend themselves and the entire industry was tarnished;
  • Hammering away on fund costs, nobody dared challenge him over the effect of government performance on investment returns that have a greater impact on member benefits;
  • High time that the industry began to question whether the mounting levies paid by retirement funds (a component of their costs) provided value for money from the FSCA, just as it should have (but rarely did) from the FSB;
  • It’s a little rich to have a go at the private sector when revelations about the state-owned Public Investment Corporation, the largest service provider of all, are pouring from a sewer.

Neither does it pass unnoticed that, much as the FSCA doesn’t like the sponsorship by service providers of retirement-fund events, it itself isn’t too averse to the practice.

See the FSCA’s three-episode ‘Insurance Apprentice’ series. The episodes have been sponsored respectively by Emerald Africa, Aon and Marsh Africa.

And back to the PIC, perhaps asleep at the wheel.

Each day, titles of Independent News & Media SA continue to be produced. Each day, therefore, the group’s exposure to the PIC must compound.

Difficult as it is to imagine a SA without The Star, Cape Times, Daily News etc, more difficult is to imagine why the PIC allows publication to continue.

George Herald, Jan 10

Only a Van could have produced something so multi-purpose.

CalPers, the largest retirement fund in the world, is disinvesting from tobacco stocks. But it is climbing heavily into shares of companies that produce cannabis.

They’re for buying, not for smoking. Or if for smoking, then not for inhaling.

Onto the board of Sygnia has arrived former deputy finance minister Mcebisi Jonas, as an independent non-executive director, for annual remuneration of R1m. Also on the board is Prof Haroon Bhorat, non-exec chair, for R500k.

Well worth it, considering that Jonas also has experience as former PIC board chair.

In his SONA address, President Cyril Ramaphosa announced a significant gas find off the Mossel Bay coast.

Funny that, before elections, the National Party government also used to announce a significant gas find off the Mossel Bay coast.

A golfing buddy of Donald Trump told him of a fantastic dream he’d had. In it there was a huge parade, the biggest ever in Washington DC, with millions of people cheering along the route as Donald passed.

“That’s really great!” said Donald. “The best! But tell me, how did I look? Was my hair okay?”

“Couldn’t tell,” replied the buddy. “The casket was closed.”

Shareholder Activism: Editorials: Edition: April / June 2019

A fine line

To what extent is collaboration permitted between asset managers,
representing such asset owners as pension funds, without
contravening the companies and competition regulations?
Financial journalist Ann Crotty attempts to find out.

If you set out to design a system that would allow inept corporate executives to function unchecked by the owners of those companies, it would look a lot like the system we have. It wasn’t intended to be this way.

On paper, major legislative changes over the past 20 years looked certain to enhance oversight and ensure better governance in the corporate sector. Those changes included the fundamental rewrite of the Companies Act, improved disclosures and a tougher competition regime. They pointed to a much more vigorous investment environment.

Yet practice has fallen short of promise. Powerful institutional shareholders appear to have sat on their hands while generously-paid executives weren’t up their jobs at such erstwhile JSE stars as Barloworld and Edcon, Ellerines and JD Group. Even the once-great Woolworths is these days looking less great.

There are recent occasions when institutional shareholders acted to stop the slides, for example at PPC and Group 5. And a chastened Allan Gray moved adroitly to rein in the feral management at Net1 when things got really out of hand.

But by-and-large the institutions tend to prefer private one-on-one engagements to public confrontations. They’re also nervous of being seen to assert their cumulative authority because of competition constraints. A block of like-minded shareholders with say 30% of a company, when knocking at the door of its board, would carry more clout acting together than each having small percentages acting individually.

A vigorous approach is all the more necessary given that the lack of liquidity in many companies’ shares makes it difficult for institutions to offload large parcels when they’re unhappy with the business or its management. They’re essentially trapped. Of course, at a price, they could dump the shares and run as Coronation did quite spectacularly from African Bank in 2014.

The 2008 Companies Act of 2008, effective from 2011, appeared set to shake things up. It states as part of its mission that “the law should protect shareholder rights, advance shareholder activism and provide enhanced protections for minority shareholders”. These bolstered rights were supposed to introduce a fundamental shift in power to shareholders.

Unfortunately, exercising these rights requires the consent of the board. Ask activists such as Albie Cilliers or Chris Logan how easy that is. Even powerful institutional investors struggled against recalcitrant boards at PPC and Group 5.

And there certainly wasn’t much sign of the enhanced rights’ effectiveness when a group of shareholders got together in 2018 to try and appoint directors in a bid to halt the sharp decline at Grand Parade Investments. After a remarkably hostile shareholders’ meeting in October, which was unilaterally abandoned by the board, the GPI activists had to await the annual general meeting to secure appointments of their two candidates.

Also last year, a group of powerful institutional shareholders was reduced to pleading with various boards of the Resilient group, urging them to resolve the allegations that had prevailed for several months. In the fourth letter, sent eight months after the initial allegations had already wiped out billions of rand in value, the shareholders said they believed “that the boards need to act more decisively in order to unambiguously address these concerns”.

The tone was more ‘Sunday school ma’am’ than financial hitman. But this was evidently as far as asset-manager signatories (including the PIC, Allan Gray, Prudential, Sanlam, Stanlib, Investec, Old Mutual and Coronation) felt they could go. Even then, one signatory admitted to being extremely nervous about dispatching the letter.

The tone was more ‘Sunday school ma’am’ than financial hitman. But this was evidently as far as asset-manager signatories felt they could go.

Notwithstanding the new Companies Act, after 16 years the ‘Comparex case’ still haunts many institutional investors. Back in 2003 the Securities Regulation Panel (forerunner to the Takeover Regulation Panel) had to rule on whether three asset managers – which together owned more than 35% of voting shares in JSE-listed Comparex – had acted in concert to reconstitute the Comparex board.

A shareholding of 35% being considered to represent control, the issue was whether the shareholders’ joint action represented a change in Comparex control and so triggered an offer to minorities.

The SRP found that the three firms – Allan Gray, Coronation and Sanlam, joined by RMB group, bringing their total to almost 46% in various portfolios – had not initiated an “affected transaction”. They therefore did not have to make a mandatory offer for the buyout of Comparex minorities.

“We won the legal battle but we lost the war,” recalls one. The institutions were unable trade their shares for the two years that the case dragged on. It was a public fight that absorbed substantial resources for minimal return, and for the two years the institutions faced the chilling prospect of making an offer for 100% of Comparex. This was a nightmarish set of circumstances for shareholder activism.

Now move on to March 2012 when, in an attempt to encourage activism, the UN-backed Principles for Responsible Investment body sought guidance from the Takeover Regulation Panel on the circumstances that would trigger a mandatory offer by institutions acting cooperatively.

The response from the TRP was vague. It indicated that there’d be no problems if the investors simply discuss matters of mutual interest or share their views relating to concerns about particular companies. “A concert party is only formed where shareholders agree a common plan under which to work together,” said the PRI.

However, its guidance note elaborated that acting in concert doesn’t automatically trigger a mandatory offer even if investors hold more than 35% ahead of any agreement. The critical issue is whether any additional shares were bought after agreeing to the action.

TRP deputy executive director Basil Mashabane says he can’t recall, subsequent to promulgation of the new Companies Act, when any institutions acting in concert were forced to make a mandatory offer: “The panel would have to consider an allegation. Every case is different.”

But it’s no longer just the JSE-related regulators watching out. The institutions must also ensure their cross-shareholdings don’t run afoul of the competition regulations.

Remarkably, the Competition Commission wasn’t dragged into the Group 5 battle launched by Allan Gray which had significant stakes in other construction-sector stocks. The battle saw the Group 5 board being restructured in a move that could have flagged a change in control.

In the US, where the three biggest index funds (BlackRock, Vanguard and State Street) together constitute the largest shareholder in 88% of S&P 500 firms, authorities are concerned that firms are less likely to compete vigorously with each other if they have common owners. This is notable in the US banking and the airline industries.

In SA the trend might be in the opposite direction. Certainly, the number of major players has increased significantly since the 1980s when Old Mutual, Sanlam and Liberty dominated the investment landscape. In addition, the opening up of the economy has seen international investors holding upwards of 30% in several JSE-listed companies.

Despite this, amendments to the Competition Act require the Commission and Tribunal to consider the extent of cross-holdings in any merger. And, as in the battle over Sovereign Food, a board under siege from shareholders cooperating can always scuttle off to the commission with claims there’s been a change in control.

Old Mutual Investment Group’s governance and engagement manager Rob Lewenson says the PRI is seeking clarity on the scope for collaborative engagement within SA’s competition law. Taking the Resilient matter, he’s pleased with the outcome of engagement with the group companies and describes a complex cooperative process designed not to contravene regulations or antagonize the targeted boards.

It might need more than PRI guidance notes to persuade institutions to set aside their seemingly instinctive aversion to publicity and to risk relationships sustained behind closed doors. There’s also an aversion to disclosing their hands to competitors, which is a precondition for cooperation.

Many SA asset managers are signatories to the PRI, as they are to the Code for Responsible Investing in SA. Both seek to promote shareholder activism. How better than if asset managers and asset owners, such as pension funds, cooperate (“collude” being such an ugly word) in the interests of their clients and beneficiaries without fear of consequence?

Roll on a test case.

Impact Investment: Editorials: Edition: April / June 2019

Capitalist manifesto

There’s a revolution to be embraced. Sir Ronald Cohen* urges that the
marriage of financial goals and social good be hastened.

The existing social contract has expired: we need to draw up a new one. Following the summer G20 summit in Hamburg, it is worth asking again how to address our most pressing global challenges.

Racked by rising inequality and human and environmental crises, capitalism as it exists today isn’t delivering on its promises to increase prosperity and social progress for all. The gap between rich and poor grows every day. Meanwhile, the toll on our environment continues to rise – from climate change to deforestation and the pollution of our oceans.

The dominant model of capitalism practised today is more than two centuries old. Our problems have changed and so too must our response.

This moment calls for nothing short of a revolution, for a new approach that asks the question: how can we reach our financial goals while also doing measurable good? Cue the impact revolution.

Capitalism as we practise it is deeply flawed but not hopeless. When it comes to how we invest there is an exciting shift under way, one that takes current thinking about financial risk and return and adds a third dimension, impact, that measures positive outcomes for society and the environment.

Using this new financial model, social impact matters just as much as company earnings. This inspires us to maximise both profit and impact as normal levels of risk, to create the kind of world that everyone wants to live in. Together, we are reinventing modern finance and reshaping modern business.

The private sector is the cause of any number of social and environmental ills but it also fundamental to solving them.

Innovation, risk-taking, achieving scale and the dogged pursuit of measurable results – these are hallmarks of entrepreneurs and the private sector. They are also key to solving complex problems and enacting changes quickly and efficiently.

The tech revolution showed us what happens when private capital meets scrappy and disruptive entrepreneurs. It’s time we took a page out of its book. By introducing impact, the risk-return-impact model brings out the best in entrepreneurs and the private sector in addressing our urgent social and environmental problems, which governments and philanthropists are unable to handle by themselves.

Valuing impact does not have to mean sacrificing profit. On the contrary, we can deliver high rates of return because of impact, rather than in spite of it.

Cohen . . . world authority

The millennial generation is different from its forebears. Millennials want to do more than collect their pay. They genuinely care about doing good. They want to shop, work, launch companies and invest in ways that express their values. And investors, including large asset managers and pension funds, are moving in the same direction. Businesses are taking note. There isn’t a boardroom on the planet where the subject of social impact hasn’t come up.

If impact investing is our rocket-ship to social change, impact investing is our navigation system. We need to rethink it. For too long we have measured social impact in ways that are imprecise, inconsistent and incomparable.

Many people dismiss impact measurement as impossible. The truth is, we can measure social impact with greater accuracy and vigour than we do financial risk. We just need to be serious about doing it. The absence of measurement leads to a huge failure of our system to deliver social and environmental improvement, at great cost to the world.

Over the past 20 years, we have seen numerous initiatives to establish a standard for impact measurement. One of the most promising, advanced by the Global Steering Group for Impact Investment and the Impact Management Project, is to weight conventional financial accounts for impact. It involves applying coefficients to sales, employment costs, costs of goods sold – all the way down to the profit line – and doing the same for the balance sheet.

Impact-weighted financial accounts will allow for financial measurement and comparison by investors. When every company publishes impact-weighted accounts alongside financial ones, impact will have assumed its place in investment and business decision-making.

We are seeing promising changes. Investors and businesses are becoming socially and environmentally conscious; impact entrepreneurs are gaining access to capital they need to bring brilliant, life-improving ideas to scale; governments are seeing the value in harnessing the innovation of the private sector, channelling its talent and capital to find better solutions to society’s challenges; philanthropists are beginning to fund the delivery of measured outcomes.

It is time to accelerate these changes, and demand more.

The G20 leaders committed in their declaration to “endeavour to further create enabling conditions for resource mobilisation from public, private and multilateral resources, including innovative financial mechanisms and partnerships, such as impact investment”.

Impact investing means evolving capitalist systems to build a better world, one that values social impact just as highly as profits. It means exposing the myth that social good comes at the expense of profit, and the accompanying myth that impact cannot be reliably measured and compared.

Ending the plight of billions of lives and the decline of our planet depends on our urgent, collective action. There is a way. There has never been a greater need or a better time than now.

* Cohen, a venture capitalist and first chairman of independent social-investment bank ‘Big Society Capital’, is widely published abroad. A prominent philanthropist, he is author of ‘On Impact: A Guide for the Impact Revolution’ and has advised the UK government.


Comments from Mabatho Seeiso, a professional trustee:

I heard Sir Ronald Cohen speak at a forum of the Industrial Development Corporation last November. In my opinion, he was the most powerful speaker of the day.

He gave me hope that we can fix the challenges we face in the SA economy, and the continent in general, if we integrate impact investing into our decision-making. On pension funds’ boards the argument is too often heard that, as fiduciaries, we cannot expose our members to the risks of impact investing.

Seeiso . . . highly

It helps to hear from someone like Sir Ronald, who has decades of experience across different continents, attest to impact investing not necessarily meaning lower returns. In fact, it can generate enhanced returns. Let us do the real work to understand impact investments rather than rely on generalisations that are often uninformed.

Innovation is required in our financial-engineering solutions. Many of our pension-fund members have given us a clear message that they want us to engage in impact investing in the interests of themselves and their children. We must invest in the real economy to stimulate growth, to develop an economy based on social justice.

I entirely agree that the new model of investment should be based on three pillars: risk, return and impact.

Transformation: Editorials: Edition: April / June 2019

Action stations

Retirement funds must get to grips with a new set of disclosure requirements.
Here’s help for trustees.

The amended Financial Sector Code (FSC), gazetted and now effective, is at present a voluntary dispensation for compliance by retirement funds. This is because many aspects of the B-B BEE requirements cannot be relevant to them.

For example, the funds have little or no influence over their membership demographics. Neither do they usually have a large number of employees. But they do make decisions, amongst other things, on the appointments of private-sector service providers.

Nonetheless, because the funds hold over R4 trillion in members’ savings, the Financial Sector Transformation Council (FSTC) points out that they play a vital role in transformation itself. Accordingly, funds will be measured against particular metrics such as procurement and member education.

Says the Codes of Good Practice at s9(1): “The B-B BEE annual reporting by retirement funds should include a narrative on the B-B BEE score achieved and future plans for improving the score. The (FSTC) will measure transformation on an annual basis. This may include relying on surveys that are available in the public domain. If sufficient disclosure by pension funds does not materialise, then consideration will be given to revising this dispensation.”

The FSC document is not the easiest of reads and the schedule on retirement funds isn’t either. To help trustees through the detail, TT requested that certain terminologies be clarified. Trevor Chandler, special advisor to the Association of Savings & Investment SA (ASISA) and the FSTC, was happy to oblige.

TT: For compliance, what is the approximate dividing line between “large retirement funds” and funds not considered sufficiently large?

Chandler: We include the top 100 funds measured by assets. The definition includes all types of funds including umbrellas but excluding retirement annuities.

Where does “management control” reside in a fund? Presuming it to be in a fund’s board, then how does it reconcile with the right of members to elect up to 50% of board members e.g. if no trustees elected by members are black, or if there are no black candidates for election? Will the fund be penalised for not being adequately transformed and, if so, how will it be penalised?

Management control vests mainly with the board, but also with the principal officer and other employed executives in the few instances that this exists. Funds are penalised only through the allocation of fewer points on the management-control scorecard. You’re correct that the fund does not have control of the people that either the member or the employer puts forward. Principal officers will need to sensitise trade unions, employers and others to this dynamic.

Chandler . . . key terms explained

Is the fund’s principal officer included or excluded under the definition of “management control”?

The principal officer would be seen as equivalent to the chief executive officer in a corporate.

When it comes to amounts spent on “approved training” and “member education”, what if no amounts are spent by the fund itself for these purposes e.g. where trustees and/or members attend courses offered by service providers who pay for them? Will the fund be expected to report on these and be credited/penalised accordingly?

Funds are not scored on their skills-development spend for staff or financial education of members. They simply need to disclose information on training that was provided. This could include sponsored training.

They are not penalised in any way if they do not spend. Of course, rules of the Financial Sector Conduct Authority around gratuitous support must be considered. But this is beyond the scope of the Code.

Do funds usually record the racial profiles of their members? If not, any advice on how they might cost-effectively go about creating records that separate black from non-black members and men from women?

No, funds don’t usually record such profiles. But the data is often available from employers. Again, this is merely a disclosure requirement and not something that’s scored.

On “preferential procurement”, specifically on funds’ allocations of assets for management, would only the 48 asset managers listed in the latest 27four BEE.conomics survey qualify as “black-owned”? For reference, which other surveys are available in the public domain?

There are no other surveys of which I’m aware. However, the FSC rules are based on the FSC level and not only on ownership. There are many asset managers with good broad-based statuses e.g. Level 2 or Level 3. B-B BEE is about a wide range of balanced scorecard measures.

The FSTC says that, if “sufficient disclosure” by pension funds does not materialise, then a revision of the voluntary dispensation will be considered. Some guidelines of “sufficient”? Some indications of possible revisions?

It’s too early to comment. Now that the Batseta Council of Retirement Funds is a formal part of the FSTC, it would have to agree on compulsion. Decision-making at the FSTC is by consensus.


Previous TT editions have dealt with the FSC scorecard for trustee and consumer financial education.

For practical detail, retirement funds and service providers are referred specifically to the guidance note for criteria and measurement of this aspect. The note GN500 is available on the FSTC website.

Economic Empowerment: Editorials: Edition: April / June 2019

Leading companies are adding new talent to support a digital operating model. To develop sharp insights using digital tools, procurement teams will need data science and analytics expertise.

Cover Story: Editorials: Edition: April / June 2019

Leading companies are adding new talent to support a digital operating model. To develop sharp insights using digital tools, procurement teams will need data science and analytics expertise.

PAIA Application: Editorials: Edition: April / June 2019

In search of truths

Contradictions and clarities revealed in public servants’
unhappiness with R5bn loan from PIC to Eskom.

Yet another confrontation has befallen the beleaguered Public Investment Corporation. This time it’s been to explain the inner workings of its relationship with the Government Employees Pension Fund, the PIC’s major client, specifically over the grant of a R5bn bridging loan from the PIC to Eskom.

The purpose of the loan was to allow Eskom time, through a short-term operational liquidity crunch, to arrange longer-term borrowings from financial institutions. Fundamentally at issue were whether or not:

  • The loan, granted in February 2018, was guaranteed by government. (If it wasn’t, which is denied, there are at least explanations of how government considers the guarantees take effect.).
  • The GEPF was consulted. (The PIC, represented by thenchief executive Dan Matjila, said that it was consulted. The GEPF, represented by principal executive officer Abel Sithole, said that it wasn’t.)
  • The GEPF board ever discussed the loan either prior or subsequent to it having been granted. (Because the investment mandate of the GEPF to the PIC is kept confidential, respective obligations aren’t in the public domain.)

This latest dispute came about because the Public Servants Association, a 230 000-member strong trade union with a seat on the GEPF board, has applied to the North Gauteng High Court under the Promotion of Access to Information Act for disclosures that relate not only to the loan but also to the ministerial appointment of PIC directors.

What happens next? Will witnesses be called, either to the PIC commission of inquiry or to give evidence in court? Both options are debatable.

No date for the PSA hearing has been scheduled. It could be that a hearing is unnecessary because much of the requested information is already revealed in a series of voluminous affidavits. So it would be over to the commission, should it want, for a deeper dig into how the PIC operates.

The affidavits have been deposed by PSA general manager Ivan Fredericks in launching the notice of motion, then by the various respondents: Stadi Mngomezulu of National Treasury for the Minister of Finance, Matjila for the PIC and Sithole for the GEPF. (Incidentally, Mngomezulu is also a GEPF trustee and Sithole is also acting commissioner of the Financial Sector Conduct Authority.)

Sithole . . . no consultation

In essence, the PSA wanted to know how the PIC directors were appointed; for example, whether the Minister had exercised “due regard” to nominations submitted to him by depositors. It turned out that there were none. The PSA additionally wanted to see documents in support of the PIC’s contention that the loan had in fact been guaranteed by government.

On February 5 last year the PIC issued what purported to be a joint announcement by itself and the GEPF. It stated that the PIC, on behalf of the GEPF, had agreed to advance Eskom the bridging loan for the purpose of funding Eskom’s operations for the month of February; that the PIC had obtained approval in line with its investment mandate and corporate governance requirements; that the GEPF and PIC board took comfort from the fact that the bridging loan was fully backed by a government guarantee; and that the PIC and GEPF were encouraged by the recent changes in Eskom governance.

A few days later, on February 13, the PIC issued a statement expressing its concern about the “false, misleading information” in the media about the decision by the PIC and GEPF to provide Eskom with the short-term R5bn loan facility. “The decision to advance the bridging loan facility to Eskom was taken in consultation with the GEPF,” it said.

In replying to the respondents’ answering affidavits, however, Fredericks contends that this PIC statement is directly contradicted by Sithole. Under oath, Sithole now said that the PIC had not submitted an application for the bridging loan to the GEPF; that the application had not been considered by the GEPF, and that the GEPF “did not participate in taking any decisions relevant to the Eskom bridging loan”.

Fredericks further insists that National Treasury did not have any records relating to the PIC board request and that, on the Minister’s version, there was clearly no valid government guarantee for the loan. Whereas the PIC claimed that the Minister had considered and approved the guarantee, the Minister said “that he did not and that it was not necessary for him to have done so”.

In his affidavit for the Minister, Mngomezulu addressed the PSA’s concern that the PIC board’s media statements – to the effect that there is a guarantee – are untrue: “I can confirm that a guarantee does indeed exist. Part of the guarantee is used towards a Domestic Medium Term Note (DMTN) Programme, which Eskom is proceeding with, under the oversight of the JSE.”

He explained that Eskom does not have to request government approval prior to issuing notes under the DMTN programme. Instead, for monitoring purposes, Eskom needs only to notify National Treasury of issuances made against the loan’s amount.

“There is thus no loan agreement entered into or discussed with the lenders,” the affidavit continues. “There is furthermore no individual guarantee documentation for note holders which is prepared for individual issuances, such as in the case of the R5bn in notes bought by the PIC…I (therefore) submit that the DMTN programme presents no cause for alarm.”

The DMTN programme provides for government to issue guarantees, in respect of notes issued by Eskom, so that Eskom is enabled to raise finance for its capital-expenditure programme. No note has been disclosed in relation to the short-term R5bn bridging facility and neither has a guarantee related to this facility been produced.

So far as the GEPF is concerned, Sithole pointed out that it was not a party to the loan agreement and that the PIC had not submitted to it an application for the bridging loan. The GEPF is a defined-benefit fund and the members’ entitlements to benefits “are not in any way affected by any of the investments which it makes,” he added.

In any event, said Sithole, the GEPF denied that it had failed to exercise its fiduciary duties. The PSA’s allegations had ignored the facts that the so-called bail-out – fully backed by a government guarantee — was not free because Eskom was obliged to repay the full R5bn plus interest and had done so.

On affidavit for the PIC, Matjila stated that the PSA was aware from the outset that the PIC had not only complied with its requests but also that the documents requested could be obtained from the Minister and/or National Treasury. Unfortunately, he added, the PSA had adopted an unreasonable approach by subjecting the PIC “to this frivolous and unnecessary litigation”.

Should the PSA persist with this approach, he warned, the PIC’s answering affidavit “serves as a notice to PSA that…the PIC will seek a punitive costs order against the PSA”.

Since the PSA now has much of the information it sought, unclear is what’s to be done with it. For the contradictions exposed, there’s at least clarity on how the guarantees are seen to be valid and on how the PIC works in relation to the GEPF.

Most usefully, the request for information on how the Minister appoints PIC directors appears to have borne fruit. Indications are that in future the PIC board, as with the GEPF board, will include representatives of stakeholders; in other words, presumably, trade unions such as the PSA.

Lawyers in this PAIA application were Fasken Inc (for the PSA), State Attorney (for the Minister), Werksmans Attorneys (for the PIC) and Ndobela Lamola Inc (for the GEPF).