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GRAVY: Editorials: Edition: June / August 2020

GRAVY

To “rebuild and repurpose the economy”, Cyril Ramaphosa is back to this “radical economic transformation” thing. Covid-19 had

made it easy for him by taking these steps:

1. Use lockdown to smash the economy;

2. Extend loans to businesses smashed;

3. Keep on with lockdown restrictions from which the businesses cannot recover;

4. Once businesses cannot repay the loans, convert the loans to equity;

5. Then, with myriad businesses nationalised, we have a socialist nirvana;

6. Alternatively, revert to capitalism. Put the equity in the nationalised businesses out to tender for BEE consortia;

7. And hey presto, radical economic transformation is achieved.

Government is scrambling for money to pay social grants. Maybe the R50bn-plus in unpaid pension benefits is too small, relatively speaking, to have crossed its mind. But since most of it belongs to beneficiaries who’ll never be found, this time of disaster rekindles the argument that a bulk be put to appropriate use for the most needy.

Just a reminder….

So far as money still means anything, fired PIC chief executive Dan Matjila had been paid R15m a year.

By contrast, for the year to end-March his PIC successor – Abel Sithole – was paid R5,9m as principal executive officer of the Government Employees Pension Fund and R407 000 as non-executive acting commissioner of the Financial Sector Conduct Authority.

It therefore seems that Sithole’s annual remuneration will more than double. The point, however, is what benchmarks are used for determination of these levels. The variances across senior executives in the financial sector, private and public including retirement funds and the civil service, are vast.

Guys in National Treasury must turn green when the numbers are compared. After 25 years, the biggest single shareholder in the world’s biggest asset manager is selling its entire 22% stake. This stake of American bank PNC in BlackRock is valued at $17bn.

“As we entered this (Covid) crisis, it became clear that everything we thought we knew has proved incorrect,” explained PNC chief executive Bill Demchak. “We’re in this economy where everybody bases their models predicting the future on the past.”

Everybody? Yes, probably in SA too. Even owners of shopping malls and office blocks that, under Reg 28, can take up to 25% of a retirement fund’s assets.

Methinks rethinks is merely beginning.

And yet, two notable trends from abroad:

There’s been a flight to the largest asset managers – mainly BlackRock, Vanguard, State Street and Fidelity – that have used their scale to cut fees. In the US the largest 1% of investment groups now manage 61% of total industry assets;

In the UK, according to FT Adviser, asset managers are moving away from traditional classes when considering product launches. “Responsible investing, alternatives and multi-asset funds (which embrace passives) top the list,” it reports. There as here?

Cannot understand the worry over empty stadiums at sports events. When I played rugby, nobody came to watch then either.

ECONOMICS 101: Editorials: Edition: June / August 2020

Money galore

So many billions of rand are suddenly appearing, in response to Covid-19,
that the phenomenon begs understanding. STANLIB chief economist
Kevin Lings obliges with answers to questions that TT wasn’t too shy to ask.

TT: How does a government “print” money?

Lings: In general, the government is not responsible for printing money. This is normally determined by the country’s central bank (CB). In some countries, it’s possible for the government simply to instruct the CB to print more money. But then the CB would not be considered independent and monetary policy will most likely be conducted irresponsibly.

The CB prints a certain amount of physical cash in order to allow the economy to function. This is normally determined by the size and performance of the economy, as well as the extent to which the society has moved to a cashless economy.

The CB can also “print” money in order to manage the liquidity in the financial system. This is now referred to as “quantitative easing” (QE). In this instance the CB simply creates a positive balance in its own “bank account”, sometimes referred to as a Reserve Account. It then uses this account to buy financial instruments (e.g. government bonds) in the market.

By the process of buying government bonds, money is transferred from the CB into the economy. In return the CB receives government bonds, which it then owns. In this way money (liquidity) is injected into the economy.

The CB is buying these bonds from private-sector investors who already own the bonds (referred to as the “secondary bond market”). In SA it is illegal for the CB to buy bonds directly from the government.

When the CB buys government bonds in the secondary market, it is also indirectly assisting the government in its efforts to issue more bonds. However, this is not the primary motive when the CB undertakes QE.

Is SA (govt or SA Reserve Bank) now printing money or not printing money?

Recently the SARB (SA’s central bank) acknowledged that it had decided to buy government bonds in the secondary market and to fund these purchases through the “printing” of money. It has not indicated the value of the bonds purchased or what total value of bonds it is willing to buy. SARB undertook these purchases to improve liquidity in the bond market, which is its responsibility.

Then how is all this new money being created for disaster relief?

Finding the disaster-relief money is the responsibility of government, not the CB. In this instance government is using a combination of sources to fund the programme. This includes re-directing money from existing government budgets, asking the International Monetary Fund for money, as well as borrowing money from the New Development Bank.

Government will also raise additional funds in the domestic bond markets. It has not asked SARB to help through the direct buying of government bonds. That would be illegal, and the SARB would be unwilling to get involved.

Since it appears so easy to create new money, why have we been worrying for so long about the debts of Eskom, SA Airways, SABC etc? Could new money not simply have been created to pay off these debts?

While this appears to be a possible solution, there are a number of problems with it. Firstly, SARB is only allowed to buy bonds in the secondary market. It means the government would become significantly more indebted as it tried to undertake this funding. It would also increase the cost of servicing debt — already the fastest-growing component of the government budget — leading to a debt trap.

Secondly, with SARB buying a large amount of government bonds and injecting more and more liquidity (money) into the economy, it is highly likely that the rand would start to weaken very dramatically, resulting is a substantial increase in inflation.

By contrast, the US Federal Reserve can “get away” with printing a huge amount of money since global investors are more than willing to own a large amount of US dollars although the Fed is printing trillions more. This psychology is unlikely to hold when it comes to the SA rand.

Massively increasing the supply of rand would most likely substantially weaken the rand. There would be other implications including a further negative impact on SA’s credit rating.

So why can the US do it and not SA? In this sense the world is unfair. It trusts the US dollar way more than it trusts the SA rand despite the Fed printing significantly more dollars.

Is high or hyperinflation likely to be a consequence from the way(s) that new money is now being created? If not, how can rising inflation be averted?

Yes, hyperinflation is entirely possible if you simply keep printing more money. The SARB has made is clear that in time it will withdraw the liquidity it recently injected into the economy. This is to avoid it becoming inflationary.

It would appear, however, that under exceptional circumstances a CB could support the economy/ markets more directly through QE, especially if the CB has a fairly high level of credibility (which the SARB has). This is especially so if market participants understand and trust that SARB will withdraw the additional liquidity over time. The idea is gaining support amongst some emerging markets, but remains largely untested.

When monies are allocated by government for various projects (e.g. food parcels, social grants that produce no financial returns) from various investments by agencies under government influence (e.g. Unemployment Insurance Fund, Public Investment Corporation), will these monies eventually require replenishment? If so, by taxpayers?

Yes, they will have to be replenished. In effect the government is borrowing from the future. Many governments do this. But clearly there are risks. When the good times return there is a tendency not to replenish these funds. The hope is that, once SA is past the crisis and the economy is growing again, tax revenue will increase and so making is possible to replenish the funds. It is important that society holds government accountable for this replenishment, otherwise future generations will pay the price. Politically, this is not always easy to achieve.

SA pension funds buy SA government bonds. Who or what backs the interest payments and capital redemptions on these bonds? Since the ratings agencies have downgraded SA debt, isn’t junk status indicative of a real risk that the SA government might default on its loan obligations?

Yes, the risks are rising that government could default. That is what the downgrade of the credit rating is telling investors. The government promises to pay the interest and capital redemptions on money it borrows. But clearly, if tax revenue continues to weaken due to rising unemployment and low growth, the risk of default rises — especially if at the same time the level of government debt continues to increase. This is exactly what is happening in SA. Hence the credit rating downgrades.

Government would always have options to avoid default. The question is whether it is willing to make hard choices. For example, in SA the options would include selling state assets, reducing the number of people government employs, asking the IMF for financial assistance etc.

All of these decisions can help government avoid a debt default. But there are political costs associated with all these hard choices. Many governments default because they are unwilling to make a hard choice. Or they make the choice too late and default anyway.

How might SA pension funds assist government to reduce its borrowing costs? Are there alternatives to prescribed assets?

SA pension funds already own a significant portion of SA government bonds. Increasing their holdings would indirectly support government and most likely result in a lower yield. But this is not solving the problem. It is just delaying an even bigger problem.

Government could introduce prescribed assets. While this would also provide short-term support for government bonds — as investors (pension funds) are forced to buy more government debt — it would have many unintended consequences that would most likely inflict even greater damage on the SA economy and government finances. They’d include discouragement of foreign investors and a further increase in local residents wishing to externalise their assets.

What alternatives are there?

The best answer is higher economic growth which leads to job creation. There is no alternative to this simple imperative. Without economic growth and job creation, all economies will stagnate and struggle to raise citizens’ standard of living.

We must fully understand why SA is struggling to generate higher economic growth and employment, and then be willing to implement the structural reforms needed to remove these obstacles. Unfortunately, yet again this would involve hard political decisions.

Strangely, if making the hard political choices leads to higher economic growth and job creation, then they become good political decisions.

LITIGATION: Editorials: Edition: June / August 2020

Liberty

vindicated

Court clears it to use status of ‘Vitality’ members for its

own offers of cash-back bonuses.

Discovery is a sore loser. Its application for an interdict against Liberty Life having been dismissed by the Gauteng High Court, to prevent Liberty from using ‘Vitality’ information for computing its own ‘wellness bonus’ (TT Oct ’19-Jan ’20), Discovery has circularised consultants with a retort that contradicts both itself and the judgment.

Graciously, according to the circular, Discovery respects the court’s decision and won’t appeal against it. At the same time, however, it sticks to the belief that “what they (Liberty) are doing is morally questionable in that it is using our intellectual property without our consent or paying anything for its use and benefits”.

For good measure, the circular adds that the litigation “revolved around the complex legal framework of unlawful competition”. It turned on the judge’s view of Discovery Vitality and Discovery Life being separate legal entities, whereby Liberty competes only with the latter.

This summary is a disservice to the lucidity of Judge Raylene Keightley. In fact, she expressly held that Liberty’s use of the Discovery trademarks “is bona fide and in accordance with fair practice”. Liberty did not use the ‘Vitality’ trademark in a manner that would give the customer an impression of Liberty being the proprietor of the ‘Vitality’ programme or having a material trade association with Discovery.

There had to be a three-way consideration, said the judge: Discovery’s interests in protecting “what they say are their property rights”; Liberty’s interest “in what it says is its legitimate right to trade”, and the public interest in ensuring that in balancing the other two interests the benefit of competition in trade is not lost.

Members of the public paid for their ‘Vitality’ membership and status, so they should have the choice  in how they wanted to use that status (for example, to disclose their status to maximise cash-back under a Liberty policy offer). Were they prevented from doing so, it would limit competition in the insurance industry.

Discovery had contended that Liberty should require a licence from Discovery Vitality to use the ‘Vitality’ status. The “inevitable consequence” of accepting this “group wrong” approach, the judge held, would be that the non-legal entity of the Discovery group would be given wide powers to control even indirect competition.

Liberty has used an aspect of Discovery’s innovations – the ‘Vitality’ status of its members – to develop and market a cash-back bonus for members of the Liberty Life Plan. “There is nothing obviously unlawful in what it has done,” said Judge Keightley. “The insurance industry uses risk proxies as a matter of course.”

Liberty had not infringed Discovery trademarks. It has not misappropriated Discovery Vitality’s confidential information. It had neither acted dishonestly nor with an underhand motive, the judge continued: “It has been open in its advertising and has not falsely claimed any proprietorship of the Discovery programme.” Richard Jewell, head of retail solutions at Liberty, celebrates the judgment as a victory for the freedom of customers to use their own information as they want and as an affirmation of healthy competition.

ANNUITY SELECTION: Editorials: Edition: June / August 2020

Lifestaging tested

by Covid-19

Surprise findings by Rowan Burger, head of client strategy at Momentum

Investments. Some clients could have benefited by the market crack.

The SA retirement-savings market moved to defined-contribution arrangements well ahead of many of even its developed-country counterparts. It is therefore more sophisticated in terms of helping its members manage the investment risk they now must bear. The fall in the investment market due to health and economic concerns over the effect of Covid-19 have shown that retirees in this treacherous time could actually have benefitted.

We adopt an outcome-based investing philosophy, where we construct portfolios aiming to achieve the investment goal a member is targeting. A key component in building an investment strategy is the trade-off between risk and return. The longer the investment horizon, the greater risk one is generally able to take. As our clients and members of retirement funds approach retirement, funds slowly start to derisk their investments to make sure the asset classes at retirement look like the income profile (annuity solutions) clients will buy.

The failing of many in the market is the focus on the capital at retirement, but the key question is what income that capital could buy. The annuities are priced on the expected returns of those assets available. Aligning the investment strategies to those assets ensures protection from the investment risk.

As an example, we used 1 January 2020 as the point before the COVID-19 crisis, and 31 March 2020 as the point after there was a significant drop in the market (April has recovered) for comparison purposes

The Momentum Investments Enhanced Factor 7 Portfolio was not spared in this three-month period and lost 19,7% in this short period. A reduction of this magnitude would be calamitous to any retiree. Even the Momentum Investments Enhanced Factor 3 Portfolio, which is the most conservative in the range, designed to deliver its outcome in the shortest term, lost 9.5%. However, in this same period, with the fall in the market came a significant increase in long-term interest rates (due to the extra return required by investors for taking on this risk).

This means that, for a typical retiree*, annuity prices also fell by a significant amount as they are priced on long-term interest rates. A level annuity cost 15% less, an inflation-linked annuity 14%, and an annuity increasing at 6% yearly dropped 24% in these three months. A with-profit annuity, which is aimed at providing smoothed equity growth participation for its duration, dropped 12%. The consequence of this is that the majority of retirees were actually able to buy higher levels of income at the lowest point in the crisis than before it.

The change in income, three months later, depending on the portfolio, is set out in the table below:

*The annuitant above is assumed to be 65 years old, his spouse is 60 and receives half his pension should he predecease her.

Being in the most conservative multiasset class factor 3 portfolio would have enabled a client with a fixed lump sum to buy a 6% increasing income, which was 12% higher than at the start of the year. The effect of the change in the asset and the liability (annuity) price is more intuitively represented in the charts below:

With-profit annuity

Typically, in a retirement fund or in an investment plan devised by a financial adviser, a client would switch from factor 7 (the most-aggressive construct possible in terms of the prudential pension fund investment guidelines), through a typical balanced fund (factor 6) every two years to end in factor 3. This eightyear transition then potentially misses out on returns on growth asset classes.

The following table assesses the outcome of four different investment strategies for the eight years before retirement.

Strategy 1 Remain in the most aggressive portfolio (factor 7)

Strategy 2 Lifestage systematically from factor 7 to factor 3 every two years

Strategy 3 Switch eight years ago into the factor 4 portfolio (more conservative – normally a living annuity strategy proxy)

Despite a reasonably subdued investment market up to December 2019, strategy 1 delivers retirement capital eight years later that is 3% higher than strategy 2 and 20% higher than strategy 3. This changes significantly by end-March 2020 where the lifestaging gives protection over the fall and delivers an 8% higher benefit, and the conservative portfolio halves the deficit to 10%.

Continuing to work for three months and retiring on 31 March 2020 as well as immediately buying an annuity would have resulted in the following different outcomes:

It is clear that being invested in growth asset classes meant the client was worse off (or the same, buying an annuity increasing by 6%). A typical lifestage solution presented a better outcome on all three life annuity options, as did the factor 4 portfolio, but with less protection (than factor 3, which is the end point of the lifestaging).

There are clients who, in March 2020, may have elected to remain in their growth portfolio and select a living annuity. These individuals would only experience a loss should the market not recover to previous levels. They will need to select an annuity draw-down level that sustains their living expenses as well as an investment strategy that delivers future returns sufficient to provide that income stream for the client’s life.

There are many who are critical of defined contribution funds and the investment risk passed to individual members. We have just experienced one of the most significant market disruptions in the last 50 years. Yet defined-contribution retirees, due to considered benefit design and investment portfolio construction, have weathered this storm and may in fact have benefited.

Other than the fixed-increase annuity, all other annuity purchase prices largely tracked the change in the underlying annuity purchase price change.

If there is anything we can learn from this exercise it’s that the previous assumption — that the SA market is highly volatile and therefore requires a longer lifestaging transition — probably needs to be shortened. Investing in a growth portfolio (factor 7) until retirement is not a good match for the annuity decision and some element of derisking is required, unless the intention is to continue with this strategy in a living annuity.

ASSET MANAGEMENT: Editorials: Edition: June / August 2020

Peek into

the future

From the changes wrought by Covid-19, several will have long-term
impacts on the operations of investment firms.
They’re re-evaluating strategies for a different client environment.

It’s obvious that this is a period of profound change. Less obvious is the change from what to what. Like any other business, the firms which manage clients’ money have had to re-evaluate their operational models for post-lockdown relevance and competition.

As the savings pool reduces, which is likely for the foreseeable future, competition for assets to manage will sharpen. TT asked a selection of asset managers to indicate what, to them, was top of mind. A quilt of views and priorities has emerged, perhaps indicative of an industry going through something of a rebirth.

Thabo Khojane of NinetyOne:

The Covid-19 crisis will result in a shrinking economy, retrenchments and therefore an increased number of sub-scale retirement funds. Commercial umbrella funds will continue to acquire and absorb these smaller funds. In the individual retirement-fund segment (retirement annuities and preservation funds), growth might temporarily pause but long-term fundamentals are positive because default regulations require preservation.

Default preservation will make illiquid investments – including infrastructure, direct property and private credit – far more accessible for fund members. While historically the institutional investors have made attractive returns from these assets classes, retail investors couldn’t access them. Going forward, it wouldn’t be surprising to see investment managers coming to market with closed-end mutual funds.

Jon Duncan of Old Mutual Investment Group:

As an external market-systems shock, Covid-19 has laid bare the very real interconnectivity between our social, environmental and market systems. In consequence, the investment industry will become a lot more focused on how the businesses in which they invest their client’s capital are generating profits. Do they support or erode future resilience? There’ll be increasing appetite for long-term green-economy outcomes.

The investment industry will become a lot more focused on ESG (environmental, social and governance criteria), to develop proprietary products supported by growing client demand, that can be signalled in both up and down market cycles.

Paul Rackstraw of Futuregrowth:

The investment world has changed dramatically. There is another whole level of investment business risk/sector risk that has just been brought into decision-making. To consider is how managers have adjusted their investment processes to take into account that some investment models or quant processes might have become irrelevant or inaccurate overnight. And, with uncertainty running high, what seems a cheap investment at the current price might actually be expensive.

The ability to perform due-diligences and monitor certain investments on site has now been curtailed for a lengthy period. The different types of industries and how they are ranked in importance in terms of order of opening under various lockdown scenarios has suddenly become extremely relevant. Consumers’ historical buying trends and the way they shop might change significantly.

Extreme daily volatility in market prices becomes the norm. Whether the firm’s investment process can operate in this type of environment is the question.

Moeli Lesibe of 27four:

The traditional model for asset-management fees has been built for scale, not performance. With increased scrutiny on fees, managers without scale may have to tilt their offerings towards products that can generate higher margins or they might face decline.

Covid-19 has also exposed weakness in the industry’s social contract with investors. It could propel greater interest in products designed to contribute towards the realisation of UN Sustainable Developmental Goals. In our indebted economy, it will become critical.

Positively, the pandemic provided the industry with an opportunity to test the robustness of its operational models. Companies must be sufficiently agile effectively to respond to such disruptive events as Covid-19.

Janina Slawski of Alexander Forbes:

There’ll be fundamental changes in the outlooks for various sectors and companies. This will require active managers to determine whether they should still hold or need to review particular investments against other opportunities. The differences in impact per sector can be dramatic.

Another stark impact can be seen where investments have a narrow focus, e.g. where equity managers have analysts experienced in certain industries focused on companies in specific sectors. These funds could show dramatically different return profiles against competitors.

In this environment, smaller asset managers could be badly hit. Where managers are struggling to break even, and have a high level of fixed costs, a significant decrease in asset-based revenues (after a market fall) will cause significant strain that many may not survive.

Clients may want to invest with active rather than passive managers when markets are as extreme as these. It is hair-raising to be at the mercy of passive index allocations as opposed to know that there is an asset manager trying to navigate through the challenges.

Steven Nathan of 10X:

The asset-management industry was under extreme pressure before Covid-19. There’ll be increasing trends to passive products that generally perform better and have lower costs; fee pressure from clients that will result in lower margins including the removal of performance fees; negative cash flows in the pensions industry, and lower savings flows in discretionary products.

Also to be expected are consolidations of fund managers and administrators. There are too many boutique investment companies with too little differentiation and too many administrators with too little revenue.

Derrick Msibi of STANLIB:

Individuals put aside funds for retirement in a taxincentivised model that they can access when they retire. But in SA we have created a special dispensation where individuals can borrow against or access their nest eggs for housing. Are there other needs equally essential? This raises the question of whether the retirement fund is really a pot solely for retirement or merely for deferred emergencies. Why is retirement seen as a higher need than others?

The way investment mandates and portfolios are structured, some re-thinking is required. There is a great deal of slicing and dicing of the major asset classes in portfolios. It requires ongoing rebalancing and multiple mandates with different asset managers.

Maybe we should be looking at more strategies in a single portfolio, but allowing managers to use multiple asset classes within an agreed outcome or a target and risk budget; for instance, we could slice fixed-interest mandates between duration, unlisted credit, listed credit and inflation linkers all allocated to different asset managers. Maybe we should allow asset managers the full package of options where they can mix and match all these buckets to deliver an outcome.

Kathy Davey of Ashburton:

Interaction with clients is likely to become increasingly electronic. It could also mean that interaction will be more regular as the logistics to set up remote meetings entails significantly less planning. Keeping clients abreast of how managers are tackling the crisis, and encouraging investors to stay the course, will be key to retaining and strengthening relationships.

Benefits of active management are likely to become more obvious, especially with equity funds that have a quality bias. The bear market has revealed underlying weaknesses of certain companies during stressful times. Investors would automatically own these companies when using passive strategies.

The mindset of investors may change in terms of seeing the value of investing in a select group of companies exhibiting strong balance sheets, strong market positions, a good level of defensiveness, or even flexibility within their supply chains.

Delphine Govender of Perpetua:

Many shifts already started within the industry are likely to accelerate, and we should expect new shifts. These include a more evolved assessment of investment and overall portfolio risk management; greater allocation to uncorrelated asset classes (such as alternative investments), and the inclusion of portfolio insurance strategies.

The investment industry should expect casualties. There is likely to be attrition, rationalisation and some general consolidation of firms. We should also expect a marked reduction of the launch of new firms, except where opportunities present themselves in uncorrelated asset classes. And expect that investment firms, whose offering is centred mainly around tracking error-cognisant domestic equity mandates, will have limited runway for asset growth.

Some positives could be that both clients and managers will now embrace technology far more in terms of more frequent and efficient engagement. Industry professionals will be taking fewer flights, so reducing the carbon footprint, and engagement of fund managers with managers of investee companies now has the potential to become significantly more frequent; for instance, by participation in virtual company presentations and shareholder meetings.

Adrian Saville of Cannon: It is likely that there will be more news of investment firms closing or consolidating. Pressure on fees has been in place for some time, and the impact of fees on total returns becomes even more evident in an environment of low inflation and low return. What cannot be compromised in any fee or cost consideration is the quality of investment solutions. If a drive for low fees compromises investment quality, it’s a potentially dangerous false economy. That said, scale and efficiencies are important avenues to remove costs and fees from investment solutions without compromising quality.

There is a strong case to be made for substantially greater allocation to passive investments, not because of Covid-19 but because of the evidence that tips in favour of passive. But the outcome should be “passive and active”, not “passive or active”. With SA portfolios heavily weighted to active, the task in asset allocation is to get the balance right.

Asief Mohamed of Aeon:

Digital communication will be the accepted norm with significant savings in time and travel costs. The biggest disadvantages will be the loss of relationships and loss of signals from body language. If we cannot look managers and service providers in the eye, we might be fed propaganda.

The downside risk of remote results presentations and analyst site visits is that managements can sanitise, to show only positive information. The loss of ‘corridor talk’ before and after results presentations, and public questions not answered, are other big drawbacks. The playing field for larger and smaller asset managers will be more level but still unequal.

In the long term the asset-management industry will probably come out more efficient and profitable for those firms that survive the short-term difficulties of the pandemic. But unfortunately the pandemic will also expose the firms that are less financially prudent and have unlikely prospects for recovery, leading to job losses in the industry.

When it comes to smaller firms that have proved themselves resilient to the Covid-19 impact, it remains to be seen whether larger firms will trust them with more assets to manage.

COVER STORY: Editorials: Edition: June / August 2020

Blessing in disguise

IMF ‘conditionalities’ include enhanced privatisation, labour flexibility
and a clean-out at state enterprises. They’re what SA urgently needs as this
crossroad for the economy and, in fact, the country as a whole.

Call in the International Monetary Fund for the economic restructure that a factious ANC government cannot launch. Increasingly, the call seems inevitable. This proposition derives from the hallowed proverb, of which cabinet members might be unaware, that beggars can’t be choosers.

In mind here is not the IMF’s short-term cushy little “rapid financing instrument” quickly to smack an aberration. Over and above there lingers, for use in a full-blown payments crisis, the long-term biggie known as the “extended credit facility”.

Conditionalities

It will come, if it comes, with “conditionalities” (see box) unlikely to meet with widespread applause in councils of the ruling party. This alone offers comfort that a possible180-degree change in direction will be good for SA; a chance ultimately to escape from the economy’s hole that, even before Covid-19, was dangerously deep.

That much has long been evident. In his 2020 Budget speech, finance minister Tito Mboweni mentioned that the increase in government spending was “mainly due to debt-servicing cost”. The amount was then estimated at R229bn for 2020-21. For context, it’s less than half the R500bn aid package being created to fight Covid-19.

The numbers are overwhelming, whether in the billions of rand to be thrown by SA at Covid-19 or millions of people to be thrown onto the unemployment heap. Further for context, consider that the size of the envisaged R500bn package is roughly double the R255bn in total contributions to all SA retirement funds for 2018.

Hypothetically then, wholesale expropriation of all employer and employee contributions into public and private funds for the past two years would barely cover the R500bn. Put differently, R500bn (10% of gdp) equates to over 11% of the R4,4 trillion in SA pension funds at end-2018 valuations.

The point is made to illustrate that a skim from the top of all pension funds, for investment in assets that government will prescribe, would hardly touch sides relative to the magnitude of need. In a regime of prescribed assets, funds will be forced to buy mountains of government bonds and bills at whatever rates government prescribes.

This will be a subsidy of government by funds, to the detriment of members, leaving them with proportionately less to invest for market returns. It will also contradict government policy that has hitherto encouraged, via tax breaks, the purpose of pension funds to provide for pensions.

Basic arithmetic intrudes onto the dream that SA has the domestic resources to pay its way. To judge by the absurdities in lockdown restrictions, as if devoid of economic consequence, the dream has currency. As such, it’s all the more dangerous when employers small and big are forced to face collapse. They include JSElisted companies that only months ago were amongst pension funds’ favourites for the reliability of their dividend streams, now foregone.

Race against time

Perish the thought that Covid-19 outlasts the R500bn. The pair are in a race against time when the odds are unknown and the finish is unsighted. A dream, that there’ll be a rapid V-shaped recovery for buoyant tax revenues to kick in, contrasts with a nightmare, that there won’t be. Shock treatment is the SA Revenue Service estimate of a R285bn loss in tax collections for the year.

And yet, even in the gloom of economic devastation, human nature looks for a light. SA after the coronavirus cannot be the same as the SA before. For better or worse? It depends on whether rare opportunities are grasped; so rare but also so momentous that they can be transformative.

This is the chance for SA to step from the ideological quicksand that has stalled prosperity and exacerbated poverty. It’s the only chance because, once the treasury is denuded by borrowings and loans have devastated capital accumulation, the consequence of no money is no food. Mass starvation worked for Lenin but won’t work for occupants of Luthuli House.

Denialists, who opportunistically persist with populist rhetoric, are delusional. It’s equally delusional, when deep in a pit, to dismiss an IMF lifeline.

Money cannot be created from thin air. Taxation cannot be extracted, or new jobs created, from a shredded economy. Loans concluded must be repaid. Coffers raided (e.g. Unemployment Insurance Fund) must be replenished. With the billions of rand signaled for raising from every conceivable source, for relief from hardship and stimulus for growth, policy direction should no longer be obfuscated in nebulous phrases.

President Cyril Ramaphosa is guilty of them. Early in the lockdown, he was earning high praise for his statesmanship. Then he was talking of his resolve “to

forge a new economy in a new global reality”. But a few weeks later into the lockdown, he was telling a Durban audience that “radical economic transformation must be central to plans to rebuild and repurpose”. Are they one and the same? If not, which does Ramaphosa favour?

Poles apart

Vague pronouncements play to all galleries but also frustrate them. There’s nothing to indicate whether this putative restructure will be weighted more to a market than a statist economy. They’re poles apart. The former is sensitive to investment and the latter is insensitive to incompetence.

The sanguine indication is that Ramaphosa is so far letting finance minister Tito Mboweni have his head, despite embarrassing blips in midnight tweets. Complemented by Reserve Bank governor Lesetja Kganyago, at their elbows are former finance minister Trevor Manuel, appointed as African

Union special envoy to international aid institutions, and his Rothschild colleague Martin Kingston as representative of organised business. Between them there’s a meeting of minds that diverges from the Zuma leftovers. Yet they linger, even in cabinet, serving no purpose encouraging to business confidence. Like the trade unions, constrained by the surge of joblessness, they’re marginalized by an absence of choices. Much as they might rail against the IMF as an imperialist dog, it’s not the IMF’s cupboard that’s bare.

The risk

Government is going to the IMF for emergency Covid-19 assistance. Available at a nominal interest rate, it has to be repaid in dollars. The risk is therefore in further weakening of the rand. Additional longterm assistance, however, would come with conditions usually enunciated by the IMF in granting loans.

The IMF isn’t a philanthropic entity. When approached as lender of last resort, by a country whose fiscal deficit is unmanageable, it insists on structural reforms to ensure that the loan can be repaid. It means that the impediments. which caused the borrower to request the loan in the first place, be remedied.

Done by SA, off its own bat, there’s no “loss of sovereignty”. Done at insistence of the IMF, or agencies which rate government debt, it will be so criticized. Beyond argument is that the restructure path be pursued whilst there’s still a tax base capable of resuscitation.

That much was recognized last year in the National Treasury growth plan, released by Mboweni for discussion and endorsed by Ramaphosa, when prospects for public-private partnerships generated enthusiasm. There wouldn’t be much daylight between the growth-plan principles and the anticipated IMF “conditionalities”.

Through the current environment – the perfect storm of corporate shrinkage, tax evaporation and jobs massacre — there can be no sacred cows in a credible review of obstacles to investment. They’re sufficiently apparent from the downwards slide of the past decade. Neither can there be infrastructure projects, on the scale envisaged, without participation of a private sector untrammeled by objectives of the ‘national democratic revolution’.

There will be disruption. Such is the likely proliferation of insolvencies and job losses to follow the lockdowns that the extent of severity is impossible to foretell. Better believe that the military hasn’t been called up, to revive memories of the 1980s-type repression, unless a serious need for crowd control is envisaged.

The Disaster Management Act falls short of the State of Emergency legislation. But it does give the minister designated by the president – in this instance, Nkosazana Dlamini Zuma – wide-ranging discretionary powers; for example, to make regulations for “preventing or combatting disruption”. It sounds authoritarian because it is.

That’s part of the trade-off between hungerinvoked civil disobedience and relative stability for economic revival. It’s the ungracious alternative to a social compact proven elusive during the best of times, and no less today. Headlines reflect the doings of politicians, not the individual generosities by which more fortunate households support the less fortunate. It’s at this level that empathy and goodwill prevail over racist polarisations.

Through the lockdowns, out-of-the-box thinking has focused on raising and distributing money for immediate exigencies. More thinking should be applied for its use beyond rapid consumption, so that at least part of it can be used for sustainable activity. To be avoided is a total either/or between humanitarian relief and economic stimulus.

For example, there are ways to restructure social grants so that they aren’t only handouts. At present, they endorse dependency. Rethought, they can be multipliers that assist recipients to generate their own incomes. Reports on ways to do this have been gathering dust in the Social Development ministry. (See TT July-Sept ’19 and also article by Sipho Shezi elsewhere in this TT edition.)

And then there are the respectively frightening spectres of unemployment at record highs and the exchange value of the rand at a record lows. But rethought in combination, they’re the elements for an upsurge in local manufacture and forex earnings against the likes of China and India.

What’s the catch? Nothing other than an environment seen to stimulate and reward honest endeavour. In the corrupted SA of recent years, this would be a big ask. But given present circumstances, of indefinite duration, it’s a priority task for an inspirational leader. South Africans of all hues and creeds are forced by the dynamics of short-term survival and long-term prosperity to stand together now.

Covid-19 wouldn’t have been advocated as an opportunity. Having arrived however, it can become one.

SOCIAL SECURITY: Editorials: Edition: June / August 2020

Transformation
at the grassroots

The extended grants to poor communities have potential far
beyond handouts, Sipho Shezi* argues. Properly handled,
they can spark widescale reconstruction.

The relief interventions currently spearheaded by various actors, including government, are excellent in demonstrating the indelible goodwill deeply entrenched both in the psyche and social fabric of SA society.

Our social security system, now ranked amongst the most successful in the developing world, has a single agenda as its underpinning element. It is the fundamental socio-economic re-engineering of our society in which the conditions of underdevelopment — characterized by mass poverty, inequality and unemployment — are eradicated. This is what the system aims to achieve.

The litmus test of all we do during the Covid-19 crisis period and its aftermath will be the degree to which all our interventions enable us to gravitate towards the attainment of this strategic objective. It is in this context that I believe the irony of the Covid-19 crisis and its aftermath could once more usher SA’s reputational emergence at the top of the world; paralleled with our achievements in recognizing human rights undergirded by the constitutional order.

We need to make sure that every layer of social relief that we put in place during this challenging period, in its own right yet inter-dependent with other interventions, is a contribution to social investment.

It must have a headstrong, straitjacket approach and deliberate intention to rig the SA economy from the state of peril in which the Covid-19 crisis found it. Depending on how we manage, sequence and execute the myriad interventions, both at state and civil-society level inclusive of the private sector, we could blow or advance this opportunity. It’s our greatest opportunity since President Nelson Mandela laid the foundations in 1994 for irreversibility of democratic gains and national reconciliation. Yet we still have the highest socio-economic inequalities in the world, framed along racial privilege. Unless we get them to belong to our past, we face a scenario that constitutes humongous risk to peaceful co-existence and social harmony.

At present we have 30% of the population practically dependent for their livelihood, food security and nutrition on the social assistance system. This does not include those that are reliant on other statutory social support mechanisms such as the Unemployment Insurance Fund and Road Accident Fund. It does not need rocket-science or super-intelligence to conclude that the direct and indirect impact of the Covid-19 crisis will quadruple the level and extent of dependence on the social assistance system for a considerable period of years, if not decades. This is not about painting a gloomy picture. It is about facing a graphic reality.

The solution, as during the struggle against apartheid, will have to be rooted in SA’s apartheid legacy of economic exploitation, social stratification and political repression. Given that we disburse R220 billion (US$12 billion) per year in transfers to poor/low income communities or households facing destitution of one form or another, we have an outstanding opportunity to demonstrate how the building of a strong, dynamic social economy can serve as a bedrock for economic reconstruction.

The quantum of our social transfer disbursement could be the catalyst not only for social engineering in favour of accelerated socio-economic development and empowerment of the low-income communities, but equally it could serve as a springboard for the long-sought financial inclusion of these communities (TT July-Sept ’19).

More than this, it provides the impetus to revamp the developmental role of the financial sector as well as the invention of appropriate financial management systems and practices that truly satisfy and meet the needs of these low-income communities.

*Sipho Shezi, a retired director-general of public works (then the youngest DG appointed by Nelson Mandela), resigned some years ago as special advisor to Social Development minister Bathabile Dlamini. He has long warned that the social security system, as practised, is unsustainable.

CURRENTS: Editorials: Edition: June / August 2020

Social compact
ahoy

Retirement funds the glue for massive infrastructure proposals.

Forget prescribed assets. They’re a diversion from the potentially solid proposal now on the table that seeks a social compact through retirement funds, representing millions of South Africans’ long-term interests, for investment in growth and employment-generating infrastructure projects.

Introduction of prescribed assets would have been government’s blunt instrument to force a proportion of retirement-fund assets into the dark holes of virtually unaccountable state expenditures. The state would have been raiding pension assets in contradiction to simultaneously urging retirement provision.

Instead, what seems now to be emerging is the opposite. If the state isn’t to force the markets, it must be friendly to them. At least the latest proposal has sparked formal discussion, previously conducted inelegantly, to resolve longstanding contentions around deployment of retirement-fund assets.

On the one hand, there’s a state desperate for investment. On the other, there’re retirement funds screaming for a broader range of investable opportunities. The crisis over Covid-19 brings them to a head:

How to fund SA’s huge infrastructure requirements when the fiscus has no money:

How the mega-billions of rand in retirement funds can be put to more productive use in SA’s real economy. There’d be alternatives to hedging against the rand (by investing offshore or piling into the JSE’s large-cap giants whose revenues are earned primarily outside SA), and trapped into the ever-shrinking pool of domestic mid-cap JSE-listed equities (especially when the post-Covid scenarios for many old favourites range from speculative to sombre).

To dispense with the political wrap, the ground is being prepared for retirement funds to invest much more heavily in the unlisted space than the sparse limits presently allowed under the Regulation 28 prudential guidelines. The principle is well and good so long as long-established rights, enshrined by the Pension Funds Act for the protection of fund members, remain inviolate.

Unclear is the origin of this new proposal, quickly generating heat, and suspicion over its intentions. ANC transformation head Enoch Godongwana, in the role of spokesperson, happens also to chair the board of the Development Bank that’s centrally involved. His comments follow an address in London at end-May by ANC treasurer general Paul Mashatile.

At the same time, with detail yet to be hammered, none of the dribs and drabs to have emerged look contradictory to the laments in the 2020 Budget Review that finance minister Tito Mboweni tabled in February.

Neither is it clear whether sweeping amendments to Reg 28 are required. However, they would need a shift in the emphasis from listed securities so that funds will be able to invest in designated “development finance institutions” such as the Development Bank. These will in turn create and offer proposals, mindful of targeted take-up, for retirement funds’ direct investment in identifiable projects rather than generic instruments.

Their acceptance or rejection by retirement funds could depend, amongst other things, on whether government will guarantee the returns forecast. Another is the interest rate applied for feasibility projections. Retirement funds might divert from their traditional role as lenders or holders of liquid assets to become co-owners of bridges, dams or whatever. Their illiquidity would need to be reflected in the risk/reward ratio.

Who then will negotiate and evaluate the projected yields? Few funds have the in-house capability even to decide their asset allocations. They engage asset consultants and managers under mandate.

But these are precisely the adviser categories that the draft proposal wants excluded from involvement, ostensibly in order that the costs of intermediation are reduced. Yet it can be argued that retirement funds will either have to absorb the cost or fly blind in breach their fiduciary duties, inclusive of governance oversight.

Moreover, independently of government, a number of asset managers have significantly cut their teeth in infrastructure projects (TT March-May). They have experience to share. Additionally, they’re fiduciary stewards for retirement funds.

As such, in the absence of the funds themselves having a single collective voice, they are positioned to play a representative role in negotiations with government and assessment of feasibilities. They’d also guard the henhouse from the fox.

Unlike prescribed assets, on a benign interpretation this latest proposal looks encouragingly market-attuned. Part of the conversation must be about sharing in the costs of social infrastructure, as much in the interests of the state as of retirement funds. Both have putative commitments to the UN Sustainable Development Goals.

Numbers involved are hard to define. Mashatile has mentioned a $20,5bn infrastructure programme “after talks with the private sector and multilateral lenders as part of an attempt to recover from the coronavirus epidemic”. It may be assumed that the “private sector” is partially a euphemism for retirement funds.

Prior to Covid-19 the Budget Review noted that government had committed R100bn to the Infrastructure Fund mainly from the “private sector”. The fund’s implementation unit, housed within the Development Bank, “aims to build a pipeline of potential projects worth over R700bn over the next 10 years”.

There follows in the Review a list of 30 major projects, only one being ready for implementation. National Treasury admitted that the value of government’s infrastructure budget “is eroded by insufficient capacity and skills” so it is introducing reforms “expected to improve the effectiveness of infrastructure spending and develop a project pipeline for funding by government and the private sector”.

Maybe this time it’s serious. It must be serious because time isn’t on its side.

 

PIC’s newish broom

The appointment of Abel Sithole as Public Investment Corporation chief executive has credibility because it was made by a PIC interim board under Reuel Khosa. However, it followed a closed process. Nobody will know the questions put to him, let alone the answers he provided, for the board to have concluded he was the best candidate.

He might well be. But on the basis of his overlapping roles – principal executive officer of the Government Employees Pension Fund and acting commissioner of the Financial Sector Conduct Authority – he might not. It gets a little more complex in that the GEPF is the major client of the Public Investment Corporation which in turn is supervised by the FSCA.

Suffice to say that the Mpati commission made no findings for or against Sithole. From his evidence, however, a number of questions could have arisen for purposes of his PIC job interview. It remains strange, for instance, that the GEPF remained silent through the years of highly-publicised controversy over the PIC’s predictably loss-making investment into Independent News & Media SA.

Be that as it may, a broad policy issue for the future is whether interviews for such critical jobs in the public sector should be behind closed doors. The principle of open interviews is established at the National Prosecuting Authority, the Judicial Services Commission and the Public Protector.

The argument is for consistency, especially since the appointment of Sithole to the PIC will leave vacancies for his positions at the GEPF and FSCA that equally deserve open interviews. This is particularly so because the FSCA, if it wants to be seen as more than a continuation of the old Financial Services Board (who board Sithole chaired), should have an injection of fresh blood into its head.

Had there been productive conversations between the FSCA/FSB, PIC and GEPF – Sithole being the official common to all three – it might have changed the course of recent SA financial history over shenanigans at the PIC that the Mpati commission have revealed.

However, there’s no line of accountability or authority between the GEPF and FSCA (previously the FSB). This is although they’re joined at the hip by

the PIC:

• The GEPF is SA’s largest pension fund. Governed by its own statute, and not by the Pension Funds Act, it is not supervised by the FSCA;

The PIC is SA’s largest asset manager because it manages the bulk of GEPF assets. The PIC is supervised by the FSCA;

Former FSB boards and present FSCA management committees are essentially unchanged. PIC operations are under supervision of this body, irrespective of being styled the FSB or FSCA at any particular time.

Where then was the FSCA during the 2017-18 period that the Mpati commission was investigating? Pretty much missing in action, it would seem.

After increasingly strident media reports, several concerning suspected irregularities at the PIC over companies related to Iqbal Surve, the FSCA conducted an onsite visit at the PIC in February 2018. The scope of the visit was limited to mandate compliance, governance framework and processes followed to make investments of behalf of clients.

“Based on the information provided by the PIC, the Authority did not identify areas of noncompliance with the focus areas prescribed in the scope of the onsite visit,” said the FSCA in a letter to the commission. It was signed by FSCA executive head Dube Tshidi on behalf of Sithole.

Contrast this with findings in the Mpati commission report. References to accusations by Sithole in his GEPF capacity are frequently made against the PIC. Examples are “a breach of faith and trust”, “material misrepresentation” and only responding about an investment “when the GEPF began asking questions”.

So, to repeat, where was the FSCA? Now there lies an opportunity to freshen the FSCA, by the appointment of a new commissioner, just as the Mpati commission paved the way for a new PIC chief executive and as the Nugent commission did for Edward Kieswetter on his appointment to head the SA Revenue Service.

What the Mpati and Nugent commissions have shown is the advantages of competent fora in gathering testimony from witnesses unafraid of losing their jobs. There might be more than a few past and present employees at the FSCA/FSB and GEPF wanting the opportunity to be heard on applicants for the positions Sithole will vacate.

Let them. So much the better for clean slates all round. Had open hearings accompanied job interviews for a new chief executive at the Independent Regulatory Board for Auditors, the subsequent blow-up over the appointment of Jenitha John could easily have been avoided.

Ethics properly examined

On the SA playing field, is “business ethics” an oxymoron? Using research tools developed at Harvard Business School, the Gordon Institute of Business Science sought to find out. It’s produced the GIBS Ethics Barometer “at the intersection of academia and action”. That’s how Gideon Pogrund, director of the GIBS Ethics & Governance Think Tank, justifiably positions a piece of work that challenges the easy comfort of platitudes.

“In the absence of a clear metric, conversations about ethics run the risk of becoming vague, amorphous and fuzzy,” Pogrund explains. “Through a combination of quantitative and qualitative datadriven insights, the Ethics Barometer opens the door to a more meaningful assessment of the ethical performance of SA corporations.”

In its inaugural phase, the Ethics Barometer engaged with over 8 000 employees of 15 leading SA companies from diverse sectors. The processing of data enabled organisations to compare their ethical performance against peers, Pogrund says: “Since the conversations which the instrument enables are rooted in empirical evidence, they have more credibility and hence the potential for greater influence and impact.”

There are seven ‘standout insights’:

Widespread agreement about ethics. If people generally agree on what’s ethically important, even without necessarily behaving that way, corporate ethics-related interventions are more likely to resonate and be effective;

Discrepancy between the behaviours employees expect and the perceived realities. If stakeholders including employees are treated with ethical values such as fairness and respect, they may well reciprocate. If they perceive that they are being treated badly, it may well boomerang;

Speaking up against ethical failures. Companies need to work on cultivating a ‘culture of dissent’, building trust and giving employees the psychological and institutional safety to speak out;

Diversity and inclusion. An inclusive organization harnesses the advantages that come from diverse people working together in a way that enables multiple perspectives to be respected and considered;

Correcting historical wrongs. Ignoring voices of the ‘vocal minority’ may well result in growing and dangerous discontentment;

Business as a force for good. To be recognized as a ‘national asset’, business needs to engage more vigorously with societal stakeholders, defining its purpose beyond profits and articulating its social impact;

Leadership behaviours. As leaders become more powerful, they risk getting increasingly out of touch. To counter this ‘altitude effect’, the Ethics Barometer aims to facilitate a process of selfreflection.

A huge amount of work has gone into this project. Additional to the data analysis, there were focus groups with stakeholders from outside the companies to gauge their perceptions and expectations of business in society. The more that this project gains traction, the better for SA society and business itself.

 

Fedgroup stands firm

Back in October 2018 Fedgroup launched an application for the FSCA to review and set aside a rule for the administration of collective investment schemes in participation bonds. It contends that the rule is inconsistent with the Constitution, unlawful and invalid.

The FSCA is opposing the application. However, following engagements with Fedgroup to address some parts of the application, the FSCA is still considering it and the matter has yet to be set down on the court roll.

Basically, explains Fedgroup chief financial officer Sheldon Fredericksen, the rule as it stands is restrictive and limits the powers of Fedgroup to manage its collective investment scheme in participation bonds: “In the commercial credit-granting industry, it is common practice to secure one’s interest not only with collateral but also by taking a position on a company’s board.” Being on the board of the property-owning company, and using Fedgroup’s 30 years of property experience, Fredericksen believes that the performance of the company and value of the property can be enhanced.

He adds: “Through the processes put in place already, Fedgroup is able to manage the part-bond scheme, taking the necessary action to actively manage the mortgage bonds for the benefit of the investors and protecting their interests in the underlying properties.”

Citadel’s deal

To gather scale in the post-Covid world, numerous consolidations are expected in the asset-management industry. But the purchase by Citadel wealth manager of a 49% interest in Seshego Benefit Consulting isn’t one of them.

Seshego, notes director Andrew Crawford, has been working in a cooperative agreement with  Citadel since 2017. This latest transaction, negotiated in the weeks before Covid, takes the process further. It brings individual and corporate advice into a single entity.

Citadel is a subsidiary of JSE-listed Peregrine. According to its website, Peregrine has R124bn in assets under management.

STRUCTURAL CHANGE: Editorials: Edition: June / August 2020

Hard times,
hard choices

Adaptations from the old and familiar to the new and
unpredictable will produce contradictions.

The ground has shifted for SA retirement funds. It must be so when their structural premise of long-termism is undermined by exigencies of the short. Two examples suffice. Nobody, but nobody, has a clue of where the coronavirus will lead. Neither can the impact of ratings agencies’ downgrades of SA investment to junk be fully quantified, perhaps less for the downgrades themselves than for the severe anti-growth analyses that motivated them.

The one factor compounds the other. They combine to defy predictions except that the consequences won’t be good and the period won’t be brief.

In such circumstances, where globalisation itself has gone into reverse, conventional investment advice is turned on its head. To get through the period of lockdown, just to hang in while demand collapses, is one thing. But to anticipate a return to conditions that resemble days gone by, not least for rand exchange rates, is quite another.

Contraction of economic activity spells job losses; the worse the contraction, the worse the job losses. And the worse for job losses, the worse for retirement funds. Membership numbers will shrink, as will the size of the savings pool on which the economy relies, and as will the adequacy of pensions provision. Survival today displaces sustainability tomorrow.

For increasingly desperate individuals, this invites temptation to cash in contractual savings (even to accept the punitive terms); or not to save at all (simply because they lack the discretionary income). For taxpaying corporates, to the extent that they still produce earnings, survival might require that they rein in dividends (needed by investors, especially retirement funds). In the quest for cash, a vicious downward spiral is perpetuated. Fund members had better start preparing for disappointments, and trustees for hostile questions, when the next sets of benefit statements are presented.

The second act in this unfolding drama is the possibility that the coronavirus has applied a brake to retirement funds’ stakeholder activism. Where they’ve been scrupulously driven to save the planet, uplift societies and broaden the purpose of profits – all for the benefit of older and coming generations – moralism will collide with futurism.

Priority in corporate reviews turns to the optimal extraction of here-and-now money, as in policies that range from employee remuneration to social responsibility. Diminished returns and reduced scale will compromise the noble intentions that retirement funds once, such as yesterday, used to propound. Society as a whole, financially and otherwise, will be the poorer.

It needn’t be so. But there are some critical debates left to hang:

• Is the first responsibility of a fund manager to optimise the investment returns for fund members?

If so, on what time horizons and in terms of what trade-offs, such as weightings towards offshore and domestic markets (affecting job creation) or as between green and growth (affecting pollution, for instance)?

From where will ‘bankable’ infrastructure projects come?

How to stimulate client demand for ESG (environmental, social and governance) investment products and processes?

Jennifer Wu, global head of sustainable investment at J P Morgan Asset Management, has succinctly expressed the paradox that Covid-19 presents: “It has rightly diverted boardroom and policymaker attention to crisis management, slowing ESG agendas. Yet it has tragically underscored how connected humans and societies are to nature. If one part of the ecosystem falls ill, the immunity of the system is compromised.”

CONSULTANTS: Editorials: Edition: June / August 2020

Individualisation
to the fore

Clear trends emerge in employee benefits.
Impacts of Covid-19 still to come through.

Since 1981, presentation of the Sanlam Benchmark research has been an annual highlight on the calendar of the retirement-fund industry. Partly a networking jamboree and partly a brand promotion, it’s primarily an event never to be missed for the solid research that analyses trends and stimulates thought for the benefit of the industry as a whole.

This year is different, thanks (if ever the word is wrongly used) to Covid-19. First, research for Benchmark 2020 was concluded prior to the crisis so couldn’t cover it. Second, depending on when recipients of the report are released from detention,

Sanlam presenters are likely to be seen only on small screens. Third, the catering extravaganzas in Cape Town and Johannesburg will be replaced by virtual eating. It’s a sign of the times that Sanlam corporate distribution executive Viresh Maharaj has now extended questionnaires to employee-benefit consultants for them to share experiences and expectations as the crisis took hold. Because the impact is so profound, it is more necessary than ever that they participate. Insights will be released in July. Meanwhile, Benchmark 2020 will obviously be available for website download.

Valuable as always, the latest pre-Covid findings from responses by a representative sample of 106 professional employee-benefits consultants must be at least as relevant during and after Covid. What emerges most strongly, the survey reports, is that “the focus of institutional retirement funding will shift towards engaging members themselves”.

In the traditional consulting framework, boards of fund trustees were primarily the recipients of consultants’ services. Now the switch into member engagement is marked. It represents the opportunity to individualise the member’s experience of retirement funding “enabling better decisions informed by data and engagement”.

It’s thought that the increased consolidation of standalone funds into umbrella arrangements has influenced this shift to individualisation. Employers expect consultants to be involved at the various layers of their employees. It’s a consequence of the reduced complexity, relative to stand alones, for employees to understand their participation in umbrellas.

Moreover, according to the survey, last year’s implementation of the ‘default regulations’ would have played a key role in informing this shift. This is because, in the nature of paid-up members, retirement-benefits counselling and trustee-endorsed annuity strategies all lend themselves to a greater focus on individualisation.

Asked to identify key megatrends anticipated by consultants over the next five years, top is technological innovation. Next comes member focus with moves towards provision of integrated product suites and flexibility of benefits.

All speak to unlocking value for members by enabling greater individualisation. Amongst the lowest-ranked items was investment-related issues. The survey also found that “a significant proportion” of employers and funds still point their members to engage with their own advisors. If so, it represents a missed opportunity to enable financial inclusion for the majority of affected members who do not have their own advisors. This is equivalent to not having a strategy in place.

Alongside advice, there was “significant support” for members to be trained in financial literacy. More than 75% of respondents believe that it adds value to members. Individual fund members should be empowered by “relevant education”.

When it comes to group insurance, a number of concerns are identified. Amongst them:

Policyholder protection rules (PPRs) have made moderate to no impact on advice processes;

In advising clients on the selection of service providers, price ranks first. However, while it is necessary for consultants to ensure that pricing remains competitive and relevant, marginal differences in price “do not meaningfully improve retirement outcomes”. Ranking poorly, relative to other criteria, are financial strength and service levels;

• Insufficient attention is paid to material risks in cybersecurity;

Little interest in enabling transformation.

• The survey states the obvious but let it be repeated for emphasis: “The convergence of changes in regulation, member behaviour patterns, technological innovation and industry consolidation means that the need for high-quality advice has never been greater.”