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GRAVY: Editorials: Edition: March / May 2020

The way the Zondo commission is going, testimony from the accountants is making even the lawyers look good.

It was back in 1920 that US columnist H L Mencken famously observed: As democracy is perfected, the office of the president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart’s desire at last and the White House will be occupied by a downright fool and a complete narcissistic moron. A century later, it’s proven.

Like a comment attributed to Winston Churchill that democracy is a wonderful system of government until one speaks with the average voter. That’s proven too, perhaps rather close to home.

There are occasions that loadshedding would be really welcome, as during the fracas which preceded the Sona of President Cyril Ramaphosa. When we need load-shedding, we don’t get it. Yet another Eskom failure.

There’re few things more feel-good than making money from promoting social responsibility. Check the Principles for Responsible Investment, the non-non profit organisation backed by the United Nations. In its most recent financial year, fees from some 2 400 signatories (of whom fewer than 500 are asset owners) amounted to £11,4m (an average of £4 750 per signatory). Total income, inclusive of grants, was £13,2m against costs of £12,5m. The hardship for SA signatories, notwithstanding emergingmarket discounts, is to pay in hard currency. As the rand goes down, their fees go up. At least they get a logo for their letterheads to show they’re committed, as the UN PRI says, to “drive real change” for the world to become a “better place for all”. The test isn’t in the logo.

At the Mpati inquiry into the Public Investment Corporation, commissioner Gill Marcus asked about possible conflicts of interest on the part of Abel Sithole (TT July-Sept’19). He’s chief executive of the Government Employees Pension Fund (the PIC’s largest client) and commissioner (or still the acting commissioner) of the Financial Sector Conduct Authority which regulates the PIC. Let’s wait to see what the report of the Mpathi inquiry, completed but yet to be released, has to say about it. Unsaid, except in whispers after the inquiry, is Sithole’s employment in a previous life. It was at Metropolitan, now part of Momentum Metropolitan. The FSCA has effectively fined it a severe R100m for contravention of laws by a Metropolitan Collective Investments unit trust. To be sure, such are the checks and balances at the FSCA, that the one cannot have anything to do with the other. Sithole is now remote from his former employer, and perceptions of interest conflicts can be taken too far.

Not much happiness in the retail trade these days. Asked how he was finding business activity, a Sandton storekeeper replied: “In the morning it’s dead and in the afternoon it quietens down.”

The meaning of ‘opaque’ is obscure.

UNPAID BENEFITS: Editorials: Edition: March / May 2020

No end in sight

Workers are afflicted, not only by administrators but also by their own funds. Lack of contact information hampers progress. But there could also be a lack of will. There isn’t a lack of costs ultimately for someone to bear.

It’s iniquitous that millions of rand owed to millions of past and present retirement-fund members, many in poverty, are left unclaimed or unpaid. That goes without saying. Worse is that the numbers appear to be mounting. The latest annual report of the Financial Sector Conduct Authority (previously the Financial Services Board) shows for the year to end-March 2019 that there were 1 275 retirement funds owing an aggregate of R42,8m in unclaimed monies to over 4,7m beneficiaries. Add to them the funds that the FSCA does not regulate, notably the mammoth Government Employee Pension Fund and Transnet funds, for the quantum to become yet heavier. What’s to be done? No longer is it a matter to be resolved by leisurely interaction between funds, administrators and the FSCA. Impatience is piqued by the Unpaid Benefits Campaign, an unaffiliated community organisation which has been gaining traction from new branches nationwide. It’s supported by Open Secrets, a donor-funded entity which last November produced a research report lambasting the financial sector. The more that UBC supporters take to the streets – an activist strategy planned to intensify – the more that public awareness will foment. This in itself is no bad thing, serving as it should to dissipate lethargy in assets being reunited with their owners. The flip side is in the reputational risk for the financial sector, including the FSCA as regulator, taken as a whole without nuance. Intending to lobby parliament, UBC steeringcommittee member Thomas Malakotse is reported to have said: “We will also be calling for a boycott of finance companies involved in the withholding of benefits. The fund administrators have been making secret profits for decades by charging fees on these unclaimed assets, and they are accountable to no-one.” That’s a broad sweep which overshoots on context. Much of the problem arose because of surplusapportionment legislation retrospective to 1980.

Funds and administrators simply had too little contact information on long-departed members, often lacking even their ID numbers. This made it inordinately difficult for funds to ascertain former members’ whereabouts for payment of top-ups by the time that apportionment of surpluses had to be distributed by 2008. Surpluses arose, for example, by former members becoming entitled to share in the contributions of employers to their old defined-benefit funds.

Clearly, there’s a lot of explaining still to be done; not only by fund administrators but also by large funds whose boards comprise nominees of trade unions.

Clearly, there’s a lot of explaining still to be done; not only by fund administrators but also by large funds whose boards comprise nominees of trade unions. In fact, the Metal Industries Provident Fund and the Engineering Industries Pension Fund – both run by Metal Industries Benefit Fund Administrators (MIBFA) – are together liable for nearly 45% of all unpaid benefits (see table as at end-December 2016, broadly consistent with the report of the Pension Funds Registrar for the year to end-December 2017). After the MIBFA funds comes the Mineworkers Provident Fund whose board includes trustees appointed by the National Union of Mineworkers and the Association of Mineworkers & Construction Union. Then there are three standalone funds in the motor industry whose boards similarly boast tradeunion representation. Being self-administered standalones, none can blame outsiders for unpaid benefits. Neither would they have anybody other than themselves to pick up the costs for tracing and processing former members to whom payments are due. Nor is there an explanation for the union-related standalones being responsible for such a high proportion of unclaimed benefits. Asked to comment, spokesperson for MIBFA replies: “It is the policy of the funds not to respond to media inquiries about the confidential matters of the funds. However, we confirm that the funds report the unclaimed-benefit member details to the FSCA on a regular basis as required. Further, members and beneficiaries of these unclaimed funds are also traced through MIBFA’s internal processes as well as advertisements in the press.” For its part, the FSCA has set up a search engine to help members of the public establish whether there are possible unclaimed benefits due to them. At the least, the facility would require basic ID information. Nonetheless, much as the Open Secrets research is so comprehensive and plausible for its wellarticulated allegations to demand response, its report is deficient by omission. It prefers to focus primarily on Liberty, presumably because it administers more retirement funds than any other (1 107 out of a 5 140 total, according to the FSCA), as a prime example of “how financial service companies make money from administering pension funds”. The irony is that Liberty, amongst all the institutions involved with fund administration, has led the pack in setting right to wrongs. Having become numerically the largest administrator through the unholy mess it inherited through taking over the old Capital Alliance funds in the 1990s, it was the first in applying to court for reinstatement of various “dormant” funds whose registrations the Financial Services Board had allowed improperly to be cancelled. These funds still had assets and liabilities. Liberty’s successful court application in 2018 paved the way for members to be recompensed. It subsequently caused the FSCA to issue a directive that other administrators similarly move to reverse irregular cancellations. Liberty has also appointed three external individuals, relied upon to act independently, as trustees of its unclaimed benefit funds. None of which absolves Liberty from past controversies: for one, through the interest conflicts that arose from using employees as trustees of the supposedly dormant funds to pursue their cancellations; for another, on whether the start it made a few years back to revise the cancellations was motivated coincidentally or autonomously by the contention of Rosemary Hunter that the so-called “cancellations project” of the Financial Services Board was illegal. At the time, in 2014, Hunter was the FSB deputy executive officer in charge of retirement funds. Up against her was her boss, then FSB executive officer Dube Tshidi. Their ugly confrontation eventually landed in the Constitutional Court where, by majority judgment in 2018, Hunter was defeated in her attempts to have prejudice from the cancellations fully explored.

Hunter’s role

Who has the last laugh? Unsurprisingly, the latest FSCA annual report mentions not a word of gratitude to Hunter. At huge personal sacrifice, she’d brought the inequity of unpaid benefits into the public consciousness as the regulator never did. It does mention that Tshidi, who’d moved heaven and earth to choke her, still sits on the FSCA interim management committee. As its executive head, his remuneration for the year to end-March 2019 was R7,6m. But the show isn’t over while the Unpaid Benefits Campaign, with Hunter in the wings, sings ever louder.

AT LIBERTY: HOW FEES WORK
 
Despite the high quality of its research, and sometimes emotive presentation, the Open Secrets report does contain errors on cost computations. Since it has singled out Liberty to illustrate from the particular to the general, the group has sought to answer some of the more serious misunderstandings. For its side of the story, Liberty Corporate chief executive Tiaan Kotze has entered this Q&A.
Q: Administration fees are deducted from unclaimed benefits. Are these fees eroding members’ benefits?
A: The Liberty Unclaimed Benefits Funds charge administration fees for the monthly maintenance of members’ records. These fees are significantly lower than those of commercially active retirement funds.
The fees are charged against each member’s fund value and paid by the funds to Liberty in respect of the funds’ operational requirements. These requirements include administration maintenance, production of the funds’ audited annual financials, statutory levies, professional advisory fees and remuneration of the independent trustees.
Other than members with a fund value of less than R800, who are automatically exempted, the fee charged for these services is R9,90 per member per month. The capital benefit is not reduced by the monthly admin fee where investment growth exceeds this fee.
The funds have contracted ICTS as their tracing agent. It charges around R350 for each record successfully traced. This fee is deducted from the benefit before it is paid.
What is Liberty doing to trace members with lower benefit balances who’re exempted from administration fees?
We have now processed all members in our Unclaimed Benefit Funds, where each member has a fund value of over R1 000, through traditional tracing methods. About a third of members have values below R1 000. For these members we’re running sms campaigns, with some success, and also looking at ways to enhance membership data for those remaining members. These actions are at Liberty’s own cost.
How are assets of the Unclaimed Benefit Funds invested?
Selected by the trustees is a combination of money-market and predominantly the Liberty Stable Growth Portfolio. The annual fee Liberty charges is 0,6% of assets invested. There are no further fees.

LITIGATION: Editorials: Edition: March / May 2020

Rare win for Mkhwebane

Punitive costs order against prominent curator of pension funds. Court indicates disapproval of Mostert’s behavior.

Public Protector Busisi Mkhwebane desperately needed a victory. In the North Gauteng High Court, she recently had one. Unfortunately for Mkhwebane, however, it had little to do with her legal brilliance. Instead, supported by the Economic Freedom Fighters, it had much to do with the litigious gamesmanship of attorney Tony Mostert.

For a series of court applications launched and later withdrawn by Mostert, to prevent publication of a Public Protector report scathing of him and the head of what was then the Financial Services Board, Acting Justice Wanless ordered that costs be paid by Mostert in his personal capacity on the punitive attorney-andclient scale.

Through the series of actions, where two counsel were engaged by the respective sides, the award against Mostert is to include their costs. This is so that neither the Public Protector nor the EFF, joined as respondent, should be left out of pocket. The EFF was the original complainant to the Public Protector. While the bill to be paid personally by Mostert should be substantial, it’s unlikely to dent significantly the hundreds of millions of rand that he and his law firm have made from curatorship of the numerous pension funds involving alleged “surplus stripping” by one Simon Nash. The criminal trial of Nash, the individual who features in each of these funds, was interspersed by several civil actions and is about to enter its second decade. In her report, to be taken on review by the Financial Sector Conduct Authority (successor to the FSB), Mkhwebane contended that by 2011 the fees earned by Mostert and his law firm had amounted to R240m over the previous six years. The amount of fees earned subsequent 2011, she said, is not known because both Mostert and (Dube) Tshidi “steadfastly refused to make any disclosure whatsoever” (TT July – Sept ’19). Tshidi, at all material times the FSB executive officer and still a member of the FSCA interim management committee, was accused by Mkhwebane of “improprieties and/or irregularities” in his nomination of curators. Further, he had failed to discharge his regulatory duty “to properly manage the possible or perceived conflict of interest between Mr Mostert’s role as curator and the appointment of his own law firm”.

How was it that the fees of Mostert and his law firm could have run into the mega-millions of rand? The answer is indicated in the judgment. In making the order against Mostert, the court had to consider whether the nature of his “voluminous” application in this instance was “spurious and/ or vexatious”. Not only did it have no prospect for success, the court held, but the urgency had been selfcreated by Mostert. Wanless noted that the latest application by Mostert, for an award of costs against the Public Protector and the EFF amongst others, was “just one more in a long line of litigation” which had ensued between Mostert and the pension funds involving Nash: “This litigation has been arduous, particularly mean-spirited and, most importantly, expensive. It has burdened not only this court but many other courts before it.” He wanted to make an order that reflected his disapproval of Mostert’s application both in nature and manner. And since Mostert had elected to join the EFF as respondent with the Public Protector, the EFF had incurred costs for which “it is thus entitled to be compensated”. Mostert had launched the application both in his personal capacity and in his capacity as curator or co-curator of Nash-related pension funds. The court found it “difficult to understand” why these funds were joined as applicants because they had “no real interest in it” and had not filed affidavits.

The notice that the Public Protector would be carrying out an inquiry, and publishing a report, applied to Mostert only. In taking a view on whether the other applicants should share in the award against Mostert, the court agreed with the Public Protector and EFF that “the pension funds and members thereof should not be mulcted in costs”. It was in January last year that Mostert first attempted to interdict the Public Protector from publishing her findings on Julius Malema’s EFF complaint. A few months later, Mkhwebane published her report anyway.

CORPORATE GOVERNANCE: Editorials: Edition: March / May 2020

An idea whose time has come

At least for due consideration. Germany extends an offer to SA for adaptation its co-determination model.

In SA from time to time, the prospect of worker representation on company boards rears its contentious head. What does this have to do with pension funds? Everything, because it goes to the heart of their role in a stakeholder democracy on whose functioning their fortunes rely. Two years ago, rather diplomatically, President Cyril Ramaphosa asked the Cosatu national congress to think about workers on boards. Whether it thought or didn’t – it’s a difficult think for the union federation – the response was apparently mute. In the UK, when Jeremy Corbyn put it into the UK Labour Party election manifesto, it was broadly dismissed as leftist lunacy for its prescriptive quotas. Also in the UK, when Teresa May suggested a moderate version on becoming leader of the Conservative Party, she rapidly withdrew under pressure from organised business. When Elizabeth Warren recommends the principle, in her candidature for the Democratic Party’s presidential nomination in the US, support is obtained from at least one large institutional shareholder. It had tabled a resolution at the Microsoft meeting where the motion was defeated. But the shareholder seemingly intends to table similar resolutions at other high-profile companies for the controversy to become an election issue that will challenge the standpoints of rival candidates.

One way or another, it’s a debate more likely to gain than lose traction. And no less in SA where Germany has become active in promoting for discussion its highly successful model of co-determination in corporate governance. After a state visit by Ramaphosa to Germany two years ago, last November a powerful German delegation of senior officials from employer and trade union confederations visited SA. They held a series of workshops with their SA counterparts to discuss the potential and limits of the German model for local adaptation. To the ears of South Africans, the concept should be far from revolutionary. Rather, it invites a refinement of the workplace forums for which the Labour Relations Act provides. These forums, the Act states, are “entitled” to be consulted by the employer “with a view to reaching consensus” on a wide range of workplace matters. This aspect of the legislation, still operative, was enacted in 1995 during the halcyon Mandela era. Back then, in line with the new Constitution, there was a discernible aspiration to build consensus. Since then, there’s been regression into confrontation. Even with the Companies Act allowing pension funds – including those in which trade unions are persuasive – to nominate main-board directors of companies where they’re shareholders, there’s reluctance to walk through the open door. The topic of the German model could be addressed at the next meeting, due to be held later this year, of the Germany-SA binational commission. SA can only benefit, for it has much to test against the “partnership in conflict” concept that underlays one of the world’s most successful growth economies. The essential element is trust between employers and employees, respectively recognising their interdependence as “social partners”. Such trust is built in Germany through a legal framework of supervisory boards and works councils for joint representation to enable joint decision-making. Martin Schaefer, Germany’s ambassador to SA, is under no illusions about rapid adaptation of his country’s complex model. For one thing, he points out, German policy counters rent-seeking oligopolies. For another, there’s the attitude in government that the social-market economy understands capital as a means to generate growth equally. By contrast, he observes that in SA there are ongoing ideological battles where capital and labour continue to see themselves as class enemies: “There’s a lack of trust.”

For the German experience to help SA, he’d like to see “better competition policies that make more room for new entrepreneurs from where growth will come”. Obviously too, trust would have to be developed between government, the private business sector and labour “for which we need success stories”. He points, for example, to the “magic triangle” that helped Germany avert the worst consequences of the 2008-09 global financial crisis: “Drastic decisions were taken together. Government financed short-term work to help affected companies. Business promised to avoid large-scale retrenchments. Labour agreed to renounce real and nominal salary increases. A few years later, we emerged stronger from the crisis with less unemployment and real salary increases.” The message is that everybody benefits from everybody’s participation. It’s from this “credible desire for dialogue”, as Schaefer puts it, that Germany can boast hugely profitable companies, the highest salaries for industrial workers and the lowest ratio between executive and employee remuneration: “Without economic growth there can be no social transformation, and without social transformation there can be no constitutional stability.” SA, beset by instabilities, can take note. It has much to learn from the German konflikpartnerschaft, including the way in which it encourages vocational training. To be hoped is that the learnings won’t be entirely academic; rather that efforts through the binational commission will help to make them usefully catalytic.

CO-DETERMINATION STRUCTURES
In Germany there are basically three “communication vessels”:
* Works councils, at workplaces where there are
at least five employees, for sharing of workplace information, facilitating consultation and exercising co-determination rights;
* Supervisory boards, where companies with more 
than 500 employees have one-third of board seats for employee representatives and where companies with over 2 000 employees have 50% of employee representation, for co-determination at supervisory board level;
* Trade unions for participating in negotiation of 
collective agreements. The unions cooperate with works councils and have seats on the supervisory board.
Source: Hans Bockler Stiftung

RETIREMENT REFORM: Editorials: Edition: March / May 2020

Defects in the system

Rowan Burger, head of client strategy at Momentum Investment, calls for them

to be addressed so that funding can be improved across the board.

It’s time for the legislators to reassess the state of SA retirement savings. They should change their focus from one of cost saving to look more broadly at financial inclusion and quality of outcome. Much has been done over recent years to simplify the tax system and push for greater efficiencies. This can be demonstrated by the fact that, over the last decade, the number of active retirement funds has reduced from more than 13 000 to just over 2000. A streamlining of pension and provident funds may bring even further reduction. The level of governance and reporting has increased significantly, as evidenced by the increase in the size of the levies from the FSCA regulator. It means a cost-only outcome of the reductions drive is not the sole benefit. Take a step back to consider what the unintended consequences of this focus have been so far. Ours is a voluntary tax-incentivised savings system. Employers have a choice to enrol their employees in the system. With greater member choice, employees decide their level of savings. Measures of the system’s success would also be the extent to which the working population is covered and whether the benefits delivered are adequate. From the 2018 National Treasury tax statistics, we can observe that in the system there are only some 4,7m of an estimated 16,5m workers. We also see that contribution levels average 11% of taxable remuneration dropping down to only 2% for the top earnings category. This clearly indicates that the current system misses its mark in terms of coverage and delivery of outcomes.

(It is broadly accepted that a 15%-of-salary retirement savings level, appropriately invested for 40 years, will deliver an adequate retirement income.) Instead of further focus on incremental cost savings which could be achieved by funds, it is time to take a broader view of how to solve these other problems:

•  The old-age grant is generous by international standards. As it is means tested, it forms a disincentive for low-income workers to participate and preserve savings;

Much of our workforce is informal or part-time. It means that the pre-determined regular contributions required by the Pension Funds Act excludes them from meaningful participation, since SA has only around 9m permanent full-time employees;

While there is a tax incentive for higher-paid workers, those below the threshold have no incentive to tie up their savings until they are aged 55;

Threats of prescribed assets and other investment restrictions have higher-paid workers preferring to save outside the system where they can control their savings;

The ability to encash benefits in full when changing jobs leads to over 90% of these members doing so. This results in savings terms being nowhere near the 40 years, and therefore in insufficient benefits;

With the current poor savings levels, lack of skills in the economy and improvements in old-age life expectancy, on international experience there should be increases in retirement ages to at least age 65;

Contribution reconciliations and death-benefit distributions remain administratively-intense activities. Their benefit to members should be better interrogated and debated;

Disclosures of costs have been important but need to be balanced by an assessment of value created. Over recent years, the advantage of a significant pool of assets to support the economy and transform the lives of ordinary South Africans has become clearer than ever. Support for this savings pool is essential. Much has been achieved over the last decade to achieve better retirement outcomes. However, our system will remain sub-optimal without a broader focus and a few more bold reforms.

CURRENTS: Editorials: Edition: March / May 2020

Tough to follow

US lead in ESG disclosures

Compared to the gentle guidance of the Financial Sector Conduct Authority for retirement funds to consider environmental, social and governance (ESG) factors in making their investments decisions, the approach of the Securities & Exchange Commission has adopted an entirely different and ruthless approach that regulates the ESG disclosures of public companies. Similarly applied in SA, retirement funds would know a whole lot better what they need to consider.

Public companies under SEC jurisdiction must disclose, for instance:

Compensation terms and conditions for executive management and board members;

Ratio of the chief executive’s compensation to the median of the total cost compensation of all other employees.

There are also regulations that require disclosures in company-specific ESG matters. Amongst these are for miners on mine safety, payments made to governments for extraction of natural resources, and even on the source of certain minerals where the Democratic Republic of Congo gets special mention under the supply-chain rule intended to prevent mining from funding domestic conflicts. Moreover, all ESG disclosures are subject to antifraud rules. These include lying directly or by omission. A fact is “material” if there is a “substantial likelihood” that it would have been viewed by “the reasonable investor as having significantly altered the ‘total mix’ of information available”. Companies can still publish sustainability reports that burnish their image as responsible corporate citizens, like in SA. But these reports would nonetheless be subject to the anti-securities fraud rules, unlike in SA. The SEC has raised the bar for ESG disclosures. A prod from SA investors could get the FSCA and JSE to begin thinking as kindred spirits.

Strange exception

According to its latest annual report, one of the FSCA values is transparency. But this value apparently doesn’t extend to the R70m claim brought against it by the Pepkor retirement fund. The claim was for losses allegedly suffered by the fund as a result of the regulator’s negligence in the Trilinear debacle, due for trial in the high court last November (TT Oct ’19-Jan ’20). The outcome? The court case has been withdrawn and the Pepkor fund is bound not to disclose whether a settlement has been reached.

ARC as anchor

In the global portfolio of multinational employeebenefits consulting firm Mercer, the 34,4% it held in Alexander Forbes would hardly have amounted to a rounding number. Wanting to offload, as part of its routine investment review, it found a willing buyer in African Rainbow Capital.

Certainly preferable to piecemeal disposals through the market, in a R1bn “shareholder reorganisation” ARC will replace Mercer as the largest

single shareholder in Forbes. ARC will hold 33,9%

and Mercer 4,5%, Forbes and Mercer agreeing that

their “strategic alliance” remains unaffected.

A strong motivation of ARC is broadening access

to financial services. Substantial investments are

TymeBank in banking, Rand Mutual Assurance and

African Rainbow Life in insurance, and Afrocentric in healthcare. “Regulatory reform, on the management of pension funds, will deliver positive outcomes for SA and Forbes is well placed to benefit from them,” believes ARC co-chief executive Johan van Zyl. “In particular, new regulation introduces lower fees as pension-fund members are able to save inside their pension funds and thus have significant savings over the period of their working lives.” At present, he adds, ARC has no intention to hold more than 50%. But the transaction does give Forbes a new anchor shareholder, and a black-empowerment one at that. He also notes that ARC’s investment strategy is to acquire “strategic shareholdings”, not to operate businesses. It leaves this to capable leadership and management teams. Such a leader, as Van Zyl well knows from their Sanlam years, is Forbes chief executive Dawie de Villiers. He’s happy that ARC “fully supports our advice-led strategy”. As the empowerment shareholder in Sanlam also, ARC isn’t short of strategies to support.

DIRECTORS’ ROLE: Editorials: Edition: March / May 2020

Sage as spoiler

Buffett pours cold water onto new-found ESG orthodoxy. He begs to differ on companies’ priority.

For almost half a century, one view on the responsibility of business has stood supreme. It was narrowly defined by Chicago University economist and Nobel Prize laureate Milton Friedman as to “increase its profits”. His view is being rapidly overtaken (see Cover Story).  But not without prominent dissenters from the “profits with purpose” theme. Most prominent Friedman adherent is Berkshire Hathaway chairman Warren Buffett, known as the Sage of Omaha, whose exceptional investment performance over many years has earned him armies of devoted followers. Even if Berkshire did know what was right for the world, Buffett has told the Financial Times, it would be wrong for companies to invest on this basis because they were simply agents for shareholders: “Many corporate managers deplore governmental allocation of the taxpayer’s dollar but embrace enthusiastically their own allocation of the shareholder’s dollar.”

At Berkshire, charitable contributions are ruled out on principle. And yet, in contrast by personal example, Buffett is one of the world’s most generous philanthropists from his private fortune by having helped set up the $50bn Bill & Melinda Gates Foundation.

Buffett separates shareholders’ money in the company he runs from his own. In the company, he seeks (most successfully) to maximise profits for shareholders’ benefit. From the rich stream of dividends then accruing to him as a shareholder, he does with it as he wishes.

It was wrong, he said in the interview, that companies attempt to impose on society their views of “doing good”. What made companies think they knew better than individual shareholders? “If you give me the 20 largest companies, I don’t know which of the 20 behaves the best. It’s very hard to evaluate. I like to eat candy. Is candy good for me or not? I don’t know.” Last year Berkshire, through one of its many businesses, invested $30bn into wind turbines and infrastructure in the US state of Iowa. The goal is to turn Iowa into the “wind capital of the world, the Saudi Arabia of wind”. Proponents of the revised capitalist consensus would applaud the investment as socially responsible, illustrative of Berkshire’s support at heart for moves from fossil fuels to renewable energy, and thus to do well by doing good for society.

Buffett puts it differently. Berkshire was investing in wind only because the US government paid it todo so: “We wouldn’t do it without the production tax credit we get.” He isn’t alone. Hardly had the ink dried on the declaration of the US Business Roundtable than the chairman of the $1bn industrial group Cognex argued in its annual report that asset managers were out of line in using their proxy-voting powers — loaned to them by investors in mutual funds – to “pressure ‘their’ companies to include ESG (environmental, social and governance) factors when making business decisions”.

Ok then, let’s see how Cognex chairman Robert Shillman will respond when confronted at a shareholders’ meeting by the sheer weight of ESG-driven investment funds. Guess who’ll buckle first. Incidentally, it’s worth noting that Berkshire wouldn’t pass the basic test of SA’s King code on corporate governance for the separation in roles of chairman and chief executive. Buffett occupies both positions. He is deputised in both by founder colleague Charlie Munger. What bothers investment managers is less that this governance contravention continues, but that at some stage on the passing of these octogenarians it cannot continue. What’s good for Berkshire….

COVER STORY: Editorials: Edition: March / May 2020

A wildfire is lit

Climate change has sparked unprecedented stakeholder attention on ESG. Pension funds will burn or be burned.

The timebomb of environmental degradation has visibly exploded across the planet, not least in SA suddenly beset by droughts and floods at extremes and frequencies previously unseen. Add to this disastrous evidence of climate change such other life-changing threats as the plastics’ poisoning of the oceans, frequently demonstrated off Durban beaches, and the deepening scale of social inequalities, volatile in their fuel for populism, to identify core motivations that “responsible investment” must shift from the slow lane to the fast.

Retirement funds had better realise it because:

Their asset allocations demand a focus on longterm liabilities that shape the societal fabric for ultimate pensioners;

Their stewardship of fund assets entitles, in fact obliges, them to sway corporate behaviour in terms of environmental, social and governance (ESG) criteria;

They need to attract millennials reportedly less inspired by conventional calls to save (warnings for old age) than by a propensity to stimulate positive consequences for their communities (welcome “sustainable”, “ethical” and “impact” investment to the accumulating lexicon).

Around the world, movement in the tectonic plates gathers intensity. There’s the UN programme of Sustainable Development Goals, integrated in SA’s National Development Plan, for actions to protect the planet and address poverty. There are also fund managers, with trillions of dollars under administration, climbing aboard a theme which has moved from moralistic to mainstream.

US Business Roundtable

Notably too, last year the US Business Roundtable abandoned the concept of shareholder primacy for profits alone. Redefining the purpose of a corporation, nearly 200 chief executives of leading American companies signed a commitment to serve all stakeholders – customers, employees, suppliers and communities and shareholders – to “promote an economy that serves all”.

The roundtable is underpinned by the world’s largest asset managers. BlackRock, Vanguard and State Street intend to prioritise ESG risk as rigorously as they evaluate liquidity and credit risk; so much so that, on all three ESG pillars including an urgent preoccupation with climate change, investee companies will need to impress. There’s a spin of capitalism itself being reinvented. The promise sounds disquietingly familiar, perhaps a glossy splash of over records of malfeasance as if the 2008-09 financial crisis never happened. The newborns are to be treated with scepticism until monitored for implementation. But this time, through the various mutations over the years of corporate social responsibility variously applied, the mantra of “profits with purpose” should be taken seriously. That’s without thanks to a mea culpa on the part of recalcitrant corporates. Forced by stakeholder pressure for commitment to a future lacking double-speak and reputational trade-offs, principles of transparency and accountability will be tested for real meaning.

Harsh view Larry Fink, chief executive of BlackRock – the world’s largest asset manager with $7 trillion under administration – has warned that his firm will take a “harsh view” of companies that don’t provide hard data on the risks they face from climate change. By the end of this year he wants all companies to report on the risks and opportunities they face from global warming. His endorsements of industry-specific guidelines set out by the Sustainability Accounting Standards Board and the Task Force on Climate-Related Disclosures go beyond the firm’s plans to divest from companies that generate 25% of revenues from thermal coal. It will additionally increase the number of exchange-traded funds that invest sustainably. As competitive managers follow, many public companies will face mounting insistence from their biggest shareholders for disclosures that comply with these standards. Banks, globally connected into SA, might expect their lending policies to be similarly scrutinised.

Inevitably, there’ll be collisions between green and growth. Companies will still need to optimise earnings, for survival of themselves and the tax base, and they’d still be faced with retrenchment challenges when profits shrink.

Neither is there an escape from fossil fuels, to be around for years to come, nor from aviation pollution as emission reductions are offset by increases in jet travel which burgeoning middle classes can afford. Consumerism and environmentalism are uneasy bedfellows. Bluntly, nonetheless, behavioural redirection is evident from the millions of people mobilised internationally around climate change as a key element of now-broadened activism. In SA, it’s amongst myriad factors that the Financial Sector Conduct Authority attempts to address under Regulation 28 of the Pension Funds Act. It centres on the requirement that the boards of retirement funds “consider ESG factors before investing in an asset”. As such, compliance is a simple agenda item. Tick a few boxes and, hey presto, ESG has been considered. Switch from a few hedge funds to a couple of green or blue bonds, to promote wind farms or protect water sources, and bask in a job well done. Hardly is there an asset manager who won’t claim to have ESG embedded in its investment processes. Some take it more seriously than others, and some have deeper resources than others; just as some trustees have the wherewithal to query their asset managers and consultants, while others leave decisions to them.

Comfort zones

On top of this, practical effect requires that they apply their minds to measurement for compliance through the multi-faceted ESG matrix. One size cannot fit a coal miner as it would a food retailer, let alone down their respective supply chains. Comfort zones become more complex with the issue by the FSCA of a draft directive followed by a guidance note which set out “the FSCA’s expectations regarding certain disclosure and reporting requirements relating to sustainability”. Kobus Hanekom, principal officer of the mammoth Sanlam umbrella fund, is in a tizz. He points out that most defined-contribution funds participate in pooled portfolios, several umbrellas offering more than 40 pooled portfolios. Here the asset manager, not the trustee board, determines the strategy and prepares the mandate. To take ESG into account, research would have to be done and a report provided for consideration on the ESG status of each share in which the asset manager has invested.

Workshops

Compared to the FSCA guidance, such reports would be the better solution for funds’ compliance. At a series of workshops, it was noted that many managers already do this research but don’t consistently report their findings in a formal way to clients. To require every board of trustees to do this kind of investigation, as the FSCA suggests, is impractical. They do not necessarily have the training or skills. Where they do, it would effectively duplicate the investigation already done by the asset manager. Peculiar is the admission that few asset managers formally report their findings. It would seemingly be a strong point for client sales. Equally peculiar is the implication that clients don’t insist. It speaks poorly of skills or awareness, or of a lazy inclination not to navigate through EGS’s variety of components.

For ESG to be jacked up, as integral to trustees’ financial duty, who’ll pay? At bottom is this vexed Reg 28, desperately in need of revision (TT Oct ’19-Jan ’20). Funds are generally heavily weighted into JSElisted equities, despite the top rankers being mainly offshore revenue earners with little need to bother about such SA sensitivities as job creation and black economic empowerment.

By contrast, they’re seriously underweight in the allowance for alternatives such as private equity. This is where the opportunities are greatest for SA entrepreneurship and excitement in the risk/reward relationship, as well as infrastructure development targeted on communal impacts. The imbalance is due, at least partly, to the theme of Reg 28 being stuck in the philosophy of a putative prudence. It’s more apparent than real, given JSE returns and delistings over recent years. John Oliphant of Third Way, who was instrumental in bringing the UN-backed Principles for Responsible Investment to SA when he served as principal executive officer of the giant Government Employees Pension Fund, makes a radical proposal. It’s that Reg 28, instead of being guided by risk avoidance, stimulates economic growth and job creation.

“There’s a misallocation of capital to the JSE’s top 40,” he contends. “Smaller companies are unlisted or ignored.” Following adoption of the UN PRI, he spearheaded establishment of the Code for Responsible Investment in SA. From being disappointingly supine, he suggests that it be injected with life as a non-profit company under a strong secretariat. To date the major signatories are asset managers rather than asset owners. A vitalised CRISA, as he sees it, could offer services more effectively and cheaply than the PRI. Amongst the services would be research to precede company meetings, for example to help inform proxy voting on the election of directors demonstrably supportive of ESG. Managers will be hard-pressed not to concur. Says Ndina Rabali of Lima Mbeu: “A pension fund’s ability to meet the obligations to its beneficiaries depends on the decisive role it can play as an owner of SA companies.” Less enthused on the practicalities is Andrew Crawford of Seshego Benefit Consulting: “The mountains of publicly-available literature present a case that’s conceptually powerful. But I don’t foresee that it will be readily adopted in SA.”

With the advent of member investment choice and the preponderance of defined-contribution retirement funds, few segregated portfolios remain. Decisionmaking is dominated by the handful of large asset managers, life offices and administrators. He adds: “In the absence of client demand and commercial incentive, they’ll probably prefer to trundle along with ESG optics and advocacy.” Merely ask Tracey Davies of non-profit Just Share, a rising star in the ESG firmament from her articulate presence at shareholder meetings. Her circulars to companies, requesting information on their plans to address climate change, have met with poor response. “None of our resolutions try to tell managers anything other than to make better disclosure for the sake of better risk assessment,” she notes. Opposed to negative screening – “How can you affect change from outside the company?” – she suggests that the pension-fund owners of companies would become more activist if more of their trustees were below the age of 40.

Breaking the mould

Nonetheless, there is progress. Breaking the mould that frightened asset managers from collaborating (“colluding” being too fraught a word), a unique example was evident at the Sasol agm when six of them together tabled resolutions related to climate change.

The six were the investment-management units of Old Mutual, Sanlam, Coronation, Mergence, Aeon and Abax. Although other big gorillas were prominent by their absence, the pressure worked. Sasol, SA’s second largest carbon emitter after Eskom, did follow up with publication of a climate change report. It committed the company to reduce its greenhouse gas emissions by at least 10% by 2030. A detailed roadmap is to come. Climate change was similarly prominent at the agms of Standard Bank and First Rand where discussion focused on lending to users of fossil fuels. As some asset managers are seen to gain credit for taking up the cudgels, it might be anticipated that they’ll incrementally be joined by others for accountability of JSE-listed companies across the spectrum of ESG criteria; from board composition to workplace pay, for example. All the while, the ogre of prescribed assets continues to lurk. And then from a government

pretty useless at investing in its own enterprises and

slow in offering bankable projects for infrastructure

development.

Impact investment

The alternative to prescribes is argued by Susan de Witt, of the Bertha Centre at the UCT, who’s working with National Treasury and has emerged as a champion of “impact investment” (see article on next page). Given the contentious nature of mandated investment, she says in a recent paper, it should be attractive instead to introduce products that put the decision to invest retirement contributions in development impact initiatives in the hands of beneficiaries.

However, De Witt adds: “Pension plans and trustees will understandably want to ensure the provision of options with expected financial performance suited to funding the retirement needs of beneficiaries as a matter of principle. In any case, there are clear indications that asset owners can participate in responsible and impact investments without facing sub-par returns or an imprudent level of costs.”

The point is so self-evident that it needn’t be laboured, but the imperative that it be emphasised for traction certainly is. There’s no shortage in the investment industry of sustainability specialists – Malcolm Gray, Heather Jackson and Rhona Stewart spring quickly to mind – from whom expertise can be drawn to help formulate an action consensus. And, of course, hard-pressed FSCA regulator Olano Makhubela could always do with assistance.

EVERYDAY USAGE EXPLAINED
After consultation with over 40 investment-management firms representing £5 trillion of assets, the UK Investment Association has sought to create a common language through the wide range of responsible-investment approaches. The trade body wants definitions adopted so that consumers won’t be left “confused” or “unable to find investment opportunities” that match their RI goals.
Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society e.g. setting expectations, oversight of assets, engaging with issuers and voting.
ESG integration is the systemic and explicit inclusion of ESG factors into investment analysis and investment decisions e.g. statement of commitment, firm-wide policies.
Exclusions prohibit certain investments from a firm, fund or portfolio. They may be applied on a wide variety of issues, including alignment with client expectations, and at the level of sector, business activity, products or revenue streams, companies or jurisdictions/countries e.g. ethical, values-based or religious exclusions.
Sustainability focus refers to investment approaches that select and include investments on the basis of their fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcomes e.g. sustainability-themed, positive tilt, best in class.
Impact investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return e.g. social-bond funds, private impact investing.
RED FLAGS FROM ABROAD
In the UK, Mark Carney has retired as Bank of England governor to become the UN special envoy for climate action and finance. He warns that a substantial proportion of corporate assets are at risk of becoming worthless.
Unless companies and investors act now, in the face of extreme weather events, he believes that it will soon become too late to do anything about it: “A question for every company, every financial institution, every asset manager, pension fund or insurer: What’s your plan?”
Pension funds must make the case for their investments in such companies as oil and gas that have been showing attractive returns, he insists: “We can’t have a financial sector that ignores the issue and then suddenly has to deal with it.”
In the US, the giant CalPers released the first climate-risk assessment of its $394bn pension fund. The report found that one-fifth of the fund’s public-market investments were in sectors that have high exposure to climate change. These include energy, materials, buildings, transportation, agriculture, food and forestry.
The financial risks stem partly from physical impacts such as rising sea levels, fiercer storms and heat waves. But company profits can also be hit by, amongst others, regulations to curb global warming and lawsuits against polluters.
Pension funds are confronted by a whole series of new investment challenges.

PRODUCT SELECTION: Editorials: Edition: March / May 2020

Value judgments

Costs not the be-all and end-all when offers from fund managers are compared, Rael Bloom* points out.

Acritical issue in the retirement-fund industry is its costs and their impact on member outcomes. In aiming to deliver value for money (VFM), it’s ultimately about deciding whether the benefit (the value) of buying something justifies the cost (the money). As with any purchase, assessing VFM requires informed judgment. Many commentators tend to look past the benefits and narrow in on costs as the most predictable and measurable component. But a focus on fees alone does not provide meaningful assessment. A concentration only on costs will lead to unintended consequences. There is a range of different role players that make up the retirement-industry value chain. These include fund sponsors, trustees, administrators, consultants and investment managers. They provide services for which they charge fees. The questions are whether fees are commensurate with each of the services provided, and whether they align the long-term interests of members with those of the service providers. A big challenge in assessing VFM is comparability across offerings, given the different ways in which providers charge for their services. ASISA’s Retirement Savings Cost (RSC) Disclosure Standard, which came into effect last year, is designed to help employers make better cost comparisons between different umbrella funds. RSC helps employers assess the VFM of each cost component by separating out the costs of advice, administration, investment management and ‘other’ costs. The Default Pension Regulations also require comprehensive disclosure on the costs of default investments and should further improve cost transparency. Take investment costs. They should be seen in the context of the portfolio strategy. For example, highequity portfolios are typically more expensive than low-equity portfolios. Fees also vary across different investment strategies, most notably whether a strategy is actively managed or tracks an index. Performance-based fees are prevalent feature in many of the larger SA retirement funds. Appropriately structured, they ensure that the fees charged for active management are linked to the performance (and hence value) delivered. Another important VFM consideration is sustainability. Regulation 28 of the Pension Funds Act requires trustees to consider environmental, social and governance (ESG) factors when making investments. Retirement funds therefore need to ensure that their appointed investment managers are able to meet their sustainability obligations.

To ensure good VFM for fund members:

Be clear about the outcome you require and the services that you need. Focus on the total benefit and costs across the full value chain;

Understand that future returns are unknown and VFM decisions require informed judgment;

Ensure that all aspects of investment management are covered, including the need for effective ESG practices;

Understand your costs. Make sure that they are competitive and commensurate with the quality and scope of services provided, and create the right incentives for good outcomes;

Avoid interest conflicts wherever they may create conditions that work against the member’s best interests.

To significantly improve VFM, the industry needs to address such issues as ensuring that more people contribute higher amounts to retirement funds, preservation rates improve and better decisions are made at retirement. The effectiveness of the default regulations will only become evident in time.

*Bloom is product development actuary at Coronation. This is a summarised version of his article in the January edition of Corospondent. Visit www.coronation.com/institutional for the full article.

GOVERNANCE: Editorials: Edition: March / May 2020

Cats that can’t be skinned

Prescription by stealth, or any other way, is out. Simply out. It’s not only “workers’ money” vulnerable to misuse.

When a near-bankrupt government wants money and cannot raise more of it in taxes, to feed the bankrupt state-owned entities, its eyes turn desperately to the pots in pension funds. The two easiest to target, theoretically but mistakenly, are the Government Employees Pension Fund and the Eskom Pension & Provident Fund. In submitting to the temptation, government can fool itself. Through taxpayers, who dare not be fooled, government would still ultimately foot the bill. Shifting money from one pocket to another is playing with smoke and mirrors. This is because both the GEPF and the EPPF, respectively the largest and second largest pension funds in SA, are both defined-benefit arrangements. At the GEPF, government as the employer of civil servants makes monthly contributions to the fund and guarantees the member’s minimum benefits. That’s a huge burden for government, especially when the size of the civil service is unduly overstaffed. Much the same applies at the EPPF. The employer guaranteeing the benefits is a beyond-bust Eskom. If there is no capital injection into Eskom (from whom?), the fund would have to dig into its reserves as a temporary palliative or the employer would have to renege on its pensions promise.

These scenarios worsen. It’s common cause that a turnaround at Eskom requires large-scale retrenchments. Such a commitment, in the face of trade-union resistance, must be a precondition for future investment. Once it happens, the EPPF will be bound to pay out untold thousands of members many millions of rand in their retrenchment entitlements. Now, there are minimum benefits and there are bonuses. The latter, usually calculated on inflation adjustments, rely on investment performance. Last year the portfolios of both the GEPF and EPPF produced returns below the cpi inflation rate.

Force portions of them into bail outs, against trustees’ mandates, and the consequences are predictable. They won’t have much to do with the primary purpose of pension funds to optimize members’ benefits. Whilst under scrutiny, it’s surely the occasion to reconsider the arrangements of all funds in the public sector where standardized service conditions can be introduced. One proposal, for example, is to consolidate municipal funds into umbrellas for better governance. Another is for conversion from definedbenefit to defined-contribution of specifically the GEPF and particularly, in light of what former chief executive Brian Molefe has thrown up, the contentionfraught EPPF.

Some years ago, when the suggestion of the EPPF’s conversion was in the air, an evaluation was done of its actuarial report. In brief, it showed that the fund could safely provide members with a 33% benefits increase as an incentive to switch and that there’d still be a significant surplus to provide for Eskom’s operational requirements.

Eskom contributes 13,5% and members 7,3% of pensionable salary to the fund. This 20,8% is high by industry standards and raises questions of whether:

New employees should continue to be hired on a basis out of line with similarly large companies in the private sector whose pension funds are overwhelmingly of the defined-contribution variety;

EPPF trustees, on both the employer and employee sides, have interest conflicts (as fund members) that might influence the manner in which they direct it.

Government could do itself and taxpayers a favour by similarly evaluating it now, then extending the evaluation to other public-sector funds such as those of SA Airways.