Bigger and bigger
Umbrella arrangements are on a one-way trajectory.
Their efficacy deserves ongoing scrutiny.
The consolidation of standalone funds into umbrella arrangements is proceeding apace. The last annual report of the old FSB, and first of the new FSCA, shows the number of active funds down to 1 647 by end-March 2018 from 1 758 the previous year.
But the sting is really in the contrast with five years ago when there were over 5 000 funds. Ideally, the FSCA would like the number consolidated much further to match its capacity for supervision; perhaps to 200 mega-funds although a recent count suggests that there are more than this number of umbrellas alone. Most of these are smaller and newer.
A pattern of the major sponsors of commercial umbrellas is emerging (see chart). However, these FSCA figures are about a year out of date. For instance, as mentioned at the Batseta conference, Sanlam is now approaching the R50bn mark. Also, according to the latest Sanlam benchmark survey, there are now only about 1 100 funds that can broadly be categorised as standalone (compared to some 13 000 in 2005), and roughly 350 of them are busy transferring primarily into umbrellas.
The chart nonetheless shows the huge gap between the upper and lower 10 sponsors, together accounting for 98% of the umbrellas. Old Mutual, having abandoned administration of standalones, leads the pack.
As consolidation progresses, there are at least three issues around umbrella funds that need to be properly clarified:
• What is meant by “independent” directors when they’re appointed by the sponsor;
• Whether management committees should be mandatory at participating employers in order that their workplace link to employees isn’t compromised;
• How the economies of scale are comparatively reflected in cost advantages.
Marcus: different hats
Not so great
For the 2019 Sanlam benchmark survey, 100 principal officers were asked for their wish lists. Coming out tops were compulsory preservation and regulatory simplification. Sadly, believes Sanlam’s David Gluckman, neither is likely to happen.
He added: “If we want to make retirement great again over the next decade, we need to win the battle against the armies of compliance and risk managers that make providers and trustees too scared to do anything positive.”
When an actuary is not allowed to talk to a member about financial matters for fear of straying into advice, or when people claim that no one aside from a financial adviser is allowed to indicate to a member such basic information as to how tax benefits work, “then something has gone very wrong with our industry”.
The commissioner of the Financial Sector Conduct Authority was supposed to have been appointed by October last year. But it still hasn’t happened. The role is filled by Abel Sithole who variously signs FSCA documents as commissioner, acting commissioner and representative of the transitional management committee.
So that’s Peculiarity No 1. Peculiarity No 2 was raised by Gill Marcus who sits with Judge Mpati at the inquiry into the Public Investment Corporation.
She asked whether Abel Sithole, who is the “interim person” as FSCA commissioner, is the same
Abel Sithole who simultaneously serves as chief executive of the Government Employees Pension Fund (the PIC’s largest client).
Nomkumbulo Tshombe, head of the FSCA legal department, replied that the GEPF is not regulated by the FSCA whereas the FSCA regulates the PIC and the GEPF governing structure is its board of trustees: “Mr Sithole is the principal officer of the GEPF which is different from a chief executive in the traditional sense.”
Marcus: “It doesn’t necessarily resolve the conflict….Given the same personality, all I’m doing is pointing out that there is a grey area in relation to Mr Sithole.”
Now to await the Mpati recommendations and the actions to follow. Never a dull moment.
Unless newspapers in Independent News & Media SA have miraculously turned to profit, with each day that passes the group’s exposure to the PIC must compound. So long as the group’s daily and weekend titles continue hit the streets, as they do without interruption, the PIC is between a rock and a hard place.
The PIC can cut its losses by folding the newspapers. On the other hand, closures will kill prospects to find potential buyers which – presuming they exist outside the PIC’s imagination – are taking inordinately long to come forward.
Such is the PIC state of paralysis that it does nothing at all. It doesn’t even answer questions on how INMSA’s debt is escalating. After the disclosure in parliament late last year that INMSA had not repaid to the PIC a loan of R253m due in August 2018, think in more hundreds of millions.
There’s clearly a price to be paid for media diversity, as much for INMSA as for the SABC. Less clear is who’ll pay it, as much for them as for other iconic titles whose futures are threatened.
For so long has Regulation 28 required that pension funds “give appropriate consideration” to environmental, social and governance (ESG) factors in their investment decision-making that it’s become one of those things without consequence if not taken seriously. Okay, trustees could say, we’ve “considered” these factors so we’ve done our bit.
The guidance note issued by the Financial Sector Conduct Authority tries to put meat onto the bones of Reg 28. But it’s merely a guidance note, with no penalties for non-compliance, where “consideration” is upscaled to “encouragement” and “expectation”.
In the UK, by contrast, the pensions regulator will sanction trustees who don’t follow the ESG rules that came into force last year. Guy Opperman, speaking in parliament for the pensions ministry, described as “utterly wrong” the perception amongst many trustees that they needn’t worry about ESG: “They’d be breaching their statutory and potentially their fiduciary duties not only to current but to future members”.
The value of the guidance note is in the FSCA specifying what it encourages and expects of trustees, to focus their minds in the compilation of their regulatory investment policy statements (IPS) and on their oversight of outsourced service providers. For consultants, who know more about ESG than most trustees, and asset managers, for whom ESG promotion is a selling point, the guidance note must be a joy to behold. They’ll be loaded with fees-earning work.
Implementation of the guidance note’s principles relies on transparency and disclosure to the regulator and stakeholders who’d include fund members. The regulator must anticipate that more funds will promptly file their annual reports and stakeholders might hope that more funds actually create informative websites.
Information requirements are demanding. As an example: “Where a fund holds assets that limit the application of ESG factors, sustainability criteria or the full application of an active ownership policy, the IPS should also state the reasons as to why this limitation is to the advantage of both the pension fund and its membership. Alternatively, the IPS should set out the remedial action (or) where no remedial action is taken, the fund should set out the reasons therefor.”
The stage is set for delicate debates, not least being the myriad conflicting factors over Eskom: fossil fuels versus climate change versus jobs for coal miners versus poor governance versus national energy supplies vs financial viability.
These are issues that government is battling to resolve. Maybe, just maybe, the clout of pension funds can help.
Internationally, according to the Global Sustainable Investment Alliance, assets invested sustainably have passed the $30tn mark based on a classification that encompasses funds (including pension funds) using ESG criteria. Today there’s a plethora of ESG indices.
It’s well worthwhile for trustees to invest the time – no money is required – for taking the e-learning course offered by the toolkit on the FSCA website. Whether as an introduction or refresher, be tempted to explore www.trusteetoolkit.co.za.
It’s made delightful by the case-study games that complement the basics you thought you knew, from board governance to stakeholder relationships.
In fact, the toolkit shouldn’t be for trustees only. Members of pension funds, and consumers of financial products at large, will equally derive knowledge and pleasure from it.
Tax at Alex
Still there’s residue, after all these years, over the profits taken by Alexander Forbes from its controversial “bulking” operations. It was back in 2006 that Forbes had “bulked” the bank accounts of numerous pension funds in order to earn interest for itself from the banks.
These were considered “secret” profits that should rightfully have belonged to the affected funds. But then Forbes reflected them as its own profits and paid tax on them. However, once Forbes subsequently passed the “bulked” profits onto the funds, what’s to happen with the tax?
Because the profit belonged to the funds, Forbes shouldn’t have paid tax on it. And once the profit had been passed to the funds, it should have been only for the pre-tax amounts as the funds aren’t liable for tax.
The “bulking profits” were not in themselves assets of the funds. Rather, they’d accrued from an agreement reached between Forbes and the banks. As the base of the profit was pension funds, these profits should be distributed – where they haven’t already — to funds that are still active.
Within this shambles there’s another poser. It’s the destination of profits belonging to funds that are no longer active but, in future, will have assets in the form of these profits.
In his SONA address, President Cyril Ramaphosa spoke of the new post-apartheid cities that he envisioned. He was accused by critics of fantasising.
The critics might be wrong. They should look back to the well-advanced plans announced by Paul Mashatile, as the then chair of the Gauteng ANC and in charge of the province’s human settlements, to launch a R1,8 trillion public-private partnership for precisely this purpose (TT Sept-Nov ’17).
Now that Mashatile is in the ANC’s top six, as its treasurer-general, he’s strategically positioned to give these extensive plans the oomph they need.
“One of SA’s biggest unions was used as a conduit to launder about R65m in pensions allegedly plundered from impoverished orphans of deceased mineworkers,” reported City Press in June.
The fund is identified as the SA Transport & Allied Workers Union. The matter dates back to unfolding scandal at Mvunonala which involved, amongst others, the Bophelo Beneficiary Fund (TT May-July ’18).
And still nobody’s been arrested.