FIDUCIARY DUTIES: Editorials: October 2019 / January 2020

Crunch times

Between irregularities at the PIC and controversies at Old Mutual, tough

decisions will have to be made. They lie at the heart of good governance.

So frequently is the term “onerous fiduciary duties” drummed at retirement-fund trustees that it beats with a hollow monotony. Sure, trustees and service providers will say, they’ve complied and usually they have or at least can produce defences that they had. But every now and then there spring unusual events that will challenge more than an ability to tick boxes.

Two high-profile situations have arisen at much the same time and both are extraordinarily tricky. One arises from the inquiry of the judge-led commission into the Public Investment Corporation. The other is in the contentious dismissal by Old Mutual of chief executive Peter Moyo.

Start with the PIC

The commission’s terms of reference were confined to investigations into allegations of irregularities. Okay, so a whole series was investigated. Then what?

Some people will lose their jobs. Perhaps there’ll be recommendations on the future governance of the PIC, its hitherto-confidential mandate from the Government Employees Pension Fund as its major client, and maybe proposals for reductions in duplicated activities in what was thought previously to be a model of the relationship between client and asset manager (TT April-June).

Back in the day, until fairly recently, the PIC was the powerhouse for stakeholder activism. It had the muscle with the GEPF to cause shakes in investee companies and shivers on directors’ boards. No longer, unless an outcome of the commission is to restore the credibility of the PIC as a moralist for others.

The immediate fillip is in the appointment of a new 14-member PIC interim board. Chaired by the redoubtable Reuel Khoza and including the forceful Maria Ramos, neither of whom were government lickspittles during the Zuma years, amongst these non-executive directors are senior officials of three large trade unions.

Therein lies a potential conflict. That the unionists were nominated to represent the interests of workers who contribute their savings, once appointed as directors it’s impermissible that they do anything of the kind. Their fiduciary duty is to the retirement-fund client and their accountability is not to the unions that sought representation. Were they to think otherwise, as many unions erroneously still do, the GEPF should quickly put them right; that is, if it has the gumption to tell them.

Then, without anticipating particular findings of the PIC commission, from the mountains of evidence there emerged a number of practices that might politely be described as questionable. Accordingly, to be asked is whether prejudice arose from the irregularities; if so, who was culpable for the prejudice and in what amounts.

If there was prejudice, the GEPF as the PIC’s major client would have been the major victim. Logically, therefore, the GEPF is obliged by fiduciary duty to sue for recovery. Either it acts against respective individuals for pocketing gains irregularly received; or against the PIC in which case the GEPF would be refunded from its own assets unless the new PIC board itself claws back from the individual beneficiaries (be they people or companies).

Strange days indeed. They’re made no less complex by the oversight of the PIC that the GEPF investment committee presumably had a duty to exercise.

Especially welcome is that the PIC board is now cleansed of incumbent politicians. The directors are non-executives, whereas the shenanigans appear largely have taken place in the ranks of executives. This happened even when the board was chaired by the angelic Mcebisi Jonas, then in his capacity as deputy finance minister, illustrating lacklustre controls.

The new board, assisted by the commission’s revelations, will need to dig a lot deeper into the organisation and get a much tighter grip than suited previous regimes.

Meanwhile, at Old Mutual…

It’s trite that directors owe a fiduciary duty to the company. Individuals, such as dismissed directors, don’t.

Peter Moyo, sacked as chief executive by a unanimous decision of the Old Mutual board which Trevor Manuel chairs, must be well aware of it. The more airtime Moyo gets over the scrap – and he’s getting plenty – the better his chances for a golden handshake.

The board dare not succumb to supplementation of the R50m that Moyo picked up last year. So egregious was this amount that even Old Mutual Investment Group had voted against the remuneration policy of its parent. Now, were Mutual to top up Moyo, it would not only be hoisting itself by the petard of its own remuneration policy but exemplifying that something akin to ransom is acceptable.

Between the rock of embarrassment and hard place of payment, the lesser of two evils is that Mutual remains steadfast in telling Moyo to take a hike. Had the board not fired a senior executive in whom it had lost trust and confidence, thus impacting negatively on his workplace role, it stood to be accused of fiduciary breach at a cost to stakeholders.

It isn’t obvious how disciplinary proceedings might have repaired a loss of trust and confidence; for example, if the breakdown related primarily to a leadership style too divisive for large teams. Likeability, it’s said, was insufficient.

Moyo wants the board fired. The proper place is at the annual general meeting when directors come up for re-election.

There he can vote without fiduciary constraint. So too can such other shareholders as OMIG and the asset managers of umbrella funds that Mutual sponsors respectively obliged by their fiduciary duties to clients and fund members in the exercise of independent discretion.

At issue is whether it’s in the better financial interests of clients and fund members, as well as policyholders and shareholders, that Mutual gives Moyo additional pay to go away. If it does, then voting by fiduciaries at the general meeting could be more contentious than the usual formality.

What a mess. What tests await fiduciary theories in their practical application.

PRESCRIBED ASSETS: Editorials: October 2019 / January 2020

Views of the regulator

Included in the overwhelming case against prescribeds, Olano Makhubela*
argues, is the imperative that funds earn decent returns.

A lot has been said recently about the topical issue of prescribed assets in SA. It is important for all of us to appreciate that retirement funds are custodians of millions of South Africans’ retirement benefits. The term “prescribed assets” refers to a government policy which requires investors, such as retirement funds, to hold a certain amount of investments in government-specified assets; for example, bonds issued by government or state-owned enterprises. All the published reactions to the possible re-introduction of prescribed assets have argued strongly against such a move (TT July-Sept). The reasons provided include concerns around lower returns, market distortions, compromised pensioner benefits and reduced participation in retirement funds. The last concern is worth highlighting because there is nothing in SA law that compels employees to be members of retirement funds, unless an employer provides one as a condition of employment. Another concern worth raising is that prescription can weaken the disciplining mechanism embedded in a market-driven economic system. Even though not always perfect, freedom of choice is a basic tenet that all customers enjoy in SA. This includes the ability of investors to freely change their investments to adapt to changing market conditions and investment goals. The Financial Sector Conduct Authority (FSCA), as the regulator of retirement funds, deems it appropriate to weigh in on the debate. It is the FSCA’s opinion that the reasons and concerns given by the public are sound and justified. Bonds are an inevitable asset class for retirement funds, especially if the funds practice asset and risk diversification and require stable incomes. Prescription does not seem, therefore, to be of absolute necessity. Even if it were to be necessary, it seems to result in unintended consequences which might do more harm than good. History does repeat itself at times, but previous mistakes need not be repeated. SA has been down this path before. The statistics also do not seem to indicate a dire shortage of funding. In the last 17 years, retirement funds have on average held government and SOE bonds at around 20% of their total assets. For the right product and price, there should be a buyer or investor. Current RSA bonds yield good returns compared to other foreign sovereign bonds. The question, most
probably, should be whether this 20% is sufficient. Fiduciary duty The answer to this question is best left to retirement funds, and in particular to the trustees who govern and manage these funds on behalf of members. Section 7C of the Pension Funds Act imposes an explicit duty on trustees to act in the best interest of their members and the fund. But what exactly is this duty towards members? It is the duty to ensure that members’ assets are invested and managed in the best interest of the fund members, so that they can retire comfortably. This is the goal which prompted National Treasury to roll out much-needed and extensive retirement reforms in the past eight years. These reforms ensure that the member is put at the centre of every decision made by funds and their service providers.

Makhubela . . . simply not on

It is a statistical fact that SA households experience challenges when it comes to both discretionary and retirement savings. This lack of preservation means that many South Africans reach retirement age with insufficient savings. Four factors are important in order to reach one’s retirement goals:

  • Start contributing early;
  • Contribute consistently and preserve;
  • Ensure that costs are fair and reasonable, especially in a low-return environment;
  • Ensure that the savings earn a decent return.

In the absence of mandatory preservation, it becomes even more imperative that funds earn a decent return — meaning at least above-inflation adjusted returns in the long term at a reasonable cost.

Any investment decision resulting in assets being purchased at overvalued prices because of artificial demand, or which do not yield above-inflation returns or have an opportunity cost (because in the long term equities usually outperform bonds), means that the member is likely to be worse off and not have a comfortable retirement.

This also means that trustees would be failing in their fiduciary duties. Then only they can be blamed for a fund’s poor performance if they are the sole key decision makers.

This fiduciary duty is something the FSCA has a legal duty to monitor. Why is this fiduciary duty also important to the regulator?

It’s because any fettering of the trustees’ decisions has the real potential to compromise their ability to act in the best interest of fund members. This would further compromise the long-term well-being of members. Clearly, this is undesirable because it is difficult to recover from bad retirement decisions.

Funds, through their trustees, should be the ones making the decisions, difficult as they might be, on how best to constitute their portfolios based on the demographics and needs of their members and pensioners. This allows the FSCA to hold them accountable for bad decisions.

Broader society

It is also fair to say that there is no point in ensuring that workers have decent retirement benefits only for them to retire in wastelands, under or undeveloped areas, and societies plagued by extreme inequality and social-ills. As a result, society has also appealed to large drivers of capital, such as retirement funds, to contribute towards addressing these socio-economic challenges. This is not only a SA issue but a global one too.

Does this therefore suggest that prescription might be the solution to these challenges? The FSCA does not think so. Instead, the FSCA would like to continue nudging the industry into doing what is right and good for the environment and society. This responsibility falls on all who live in SA. The FSCA would also like to encourage the market to continue providing scalable projects and investable instruments.

To this end, the FSCA recently issued a guideline on Sustainable Investing to help retirement funds to comply with the law (Regulation 28) on Environment, Societal & Governance (ESG) issues. Sustainable and Impact Investing do not mean investment choices that yield sub-optimal or no returns. They still mean undertaking sound investments for a return but bearing in mind the risk and consequences of such investments on all of us.

The best results in life come with balancing various difficult objectives and realities. The ability to make such decisions freely, and to take responsibility for them, are important in supporting the principles of freedom and progress in a democratic society.

*Makhubela is the Divisional Executive for Retirement Fund Supervision at the Financial Sector Conduct Authority.

FIRST WORD: Editorials: October 2019 / January 2020” is locked FIRST WORD: Editorials: October 2019 / January 2020

Riot act

Assets of SA pension funds are a “buffer” against financial shocks,
the IMF has noted. So far, so good.

The writing is on the wall. It proclaims that there’s an urgency for SA to feel out the International Monetary Fund on the best possible terms for a debt bailout. Quite conceivably, discussions in secret are already well progressed. They’d enable SA to decide whether to proceed on its own with the structural reforms that government knows are necessary, but which have been obscured in promises and prevarications, or to accept the conditionalities for these same investor-friendly adaptations on which the IMF is certain to insist. Either way, the consequences won’t be pretty. They’ll take SA into another stage of disruption. The best hope is that it will be short-lived and ultimately worthwhile; perhaps with the role of the IMF being comparable to the mid-1980s interventions of the US and European banks that proved a vital catalyst in the demise of apartheid hegemony. Money, specifically the lack of it, is a cruel taskmaster. It limits choice. The ruling National Party government had to confront it then, and the ruling ANC government will have to confront it now. In whichever manner one plays the fiscal numbers, tweaks to the affordable inventory cannot deflect the politically and financially inevitable. Such is the ballooning of SA debt that it is stuck in a binary rut. To keep borrowing, for the payment of ever-more interest on ever-mounting interest, is to invite a Humpty Dumpty scenario likely to shatter the fiscus.

Who’s been visiting?

That this cannot be an option – with unimaginable consequences for savers, taxpayers and financial institutions holding up the pillars of economic activity – forces consideration of other means for a debt default to be avoided. The race against time is accentuated by frightening levels of unemployment, depressing levels of economic growth and shrinking levels of tax availability. It’s superfluous repeatedly to analyse the causes of this dangerous convergence, so deep is the consensus amongst sophisticates. Better to stimulate an awareness preparation amongst the population at large, for straight-talk understanding of the dilemmas, not least to anticipate a groundswell of recalcitrant opportunists. Reserve Bank governor Lesetja Kganyago has made a start. Recently he insisted that SA could avoid reaching out to the IMF provided that hard decisions are made. “We know exactly what must be done,” he said. “We know the trade-offs that must be made and we must make those trade-offs.” Sooner than later, somebody amongst the “we” will need to spell out those trade-offs. Whether in the sights of government or the IMF, nothing can be sacrosanct. No matter how dear to ANC programmes, a rebuild of investor confidence and restoration of policy certainty must envisage widescale publicsector retrenchments (to chop exorbitant wage bills) and privatisation initiatives (to stem losses and raise capital). Discomfiting to predict is that such reviews, ideologically anathema to potent factions, will meet with resistance in strike activity and street protests. What Kganyago describes as “bitter medicine” might be more like a course of chemotherapy. But it’s necessary, he warned, that government takes it “in order to prevent matters from spiralling out of control”.

If they aren’t already out of control, then clearly up for review must be such contentious examples as:

  • Eskom and other failed state-owned enterprises whose borrowings are backed by government guarantees, such as SA Airways, so that monies aren’t irrecoverably poured into infinity;
  • Affordability of free university admissions and the envisaged National Health Insurance, so that they aren’t prioritised at the expense of such basic imperatives as school education and social grants;
  • Broad-based Black Economic Empowerment, so that incentives to redresses inequalities aren’t impeded by disincentives to grow businesses and recruit skills;
  • Liberalisation of labour laws, so that hiring and firing of employees are facilitated;
  • Expropriation of property (not necessarily limited to land) without compensation, so that constitutional protections are seen to be inviolate;
  • Capacitation of the National Prosecuting Authority, so that it has sufficient resources to hunt down the beneficiaries of state capture and to seize their assets.

The list continues. Why should the IMF be the backstop? Because, by a process of elimination, if all else fails then it is the lender of last resort. The debate should usefully turn on what government will Todays Trustee October 2019/January 2020 5 Kganyago . . . problems “within our grasp” realistically do within the context of IMF alternatives, including assessments of upside potential against downside risks. The success record of the IMF isn’t pristine. Neither is it Santa Claus. Funded by loans mainly from western governments but also from China, its loans must be repaid with interest. Further, the loans come with conditions (see box). It’s officially explained: “When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will repay the IMF. This system of conditionality is designed to promote national ownership of strong and effective policies.”

Since the 1990s the IMF has been implementing the ‘Washington consensus’, a policy demanding an increased role for market forces. Principles include lower government borrowing to discourage high fiscal deficits, cuts in government subsidies and reduced corporate taxes. Amongst other recommendations are support for privatisation of public assets as well as relaxation of rules hampering competition and foreign direct investment. Nothing too bad about that, is there, if the debt stranglehold is to be broken and the trajectory of jobs destruction reversed? What say Messrs Kganyago and Ramaphosa, even Magashule and Malema? The IMF keeps a close watch on SA. Its most recent country report, in July last year, concluded that “the subdued medium-term outlook falls well short of exploiting SA’s economic potential and could have unwelcome social implications and outward spillovers”. Thus, sadly, has it proven. An important buffer against financial-market shocks, it also noted, is the “large pension-fund assets (which) provide a solid domestic investor base”. Thus, optimistically, may it remain. But this depends on financial emigration being staunched. In turn, it relies on policymakers eschewing denial and instead displaying the courage that no ANC predecessors have previously had to fathom. The decisions they take will be as tough as those faced by the government of F W de Klerk, similarly confronted by a fiscal wall, 30 years ago. As then, virtue can be born from necessity.

Allan Greenblo,
Editorial Director.

Kganyago . . . problems “within our grasp”


When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF.

This system of conditionality is designed to promote national ownership of strong and effective policies.

Conditionality covers the design of IMF-supported programs – that is, macroeconomic and structural policies – and the specific tools to monitor progress towards goals outlined by the country in cooperation with the IMF. Conditionality helps countries solve balance-of-payments problems without resorting to measures that are harmful to national or international prosperity.

At the same time, the measures are meant to safeguard IMF resources by ensuring the country’s balance of payments will be strong enough to permit it to repay the loan.

The member country has primary responsibility for selecting, designing and implementing policies to make the IMF-supported program successful. The program’s objectives and policies depend on a country’s circumstances.

But the overarching goal is always to restore or maintain balance-of-payments viability and macroeconomic stability while setting the stage for sustained, high-quality growth and, in low-income countries, reducing poverty.