LIBERTY CORPORATE: Expert Opinions: Edition June / August 2020

Financial distress amidst Covid-19

Different countries have responded differently in the use of retirement savings.
Tiaan Kotzé, managing executive of Liberty Corporate, compares them with
relevance to SA and examines the impacts of early withdrawal.

Many South Africans are facing significant financial uncertainty as the lockdown required to manage effects of the Covid-19 pandemic wreaks havoc on the economy. Millions of employees are expected to lose their jobs, while others are receiving reduced salaries or are not being paid while in lockdown.

As many of these employees are members of retirement funds, the option of a Covid-19 linked fund withdrawal could alleviate their immediate financial distress. This does, however, come at a long-term cost to the retirement-fund member, the retirement-fund industry and to government.

A number of countries have implemented relief measures. For example, they’ve amended their retirement-fund legislation temporarily to grant members early access to their retirement savings.

Australia is allowing members who have lost their jobs or had working hours reduced, as well as sole traders facing financial difficulties, to access up to AUD10 000 (about R120 000) of their retirement savings before 1 July 2020 and an additional AUD10 000 in the third quarter of the year, tax free.

India’s Employees’ Provident Fund Organisation is allowing employees who have lost their jobs to withdraw the lower of 75% of their retirement savings or three months’ salary as an advance from the fund while remaining an active fund member.

The Malaysian Employees Provident Fund, which is the eleventh largest pension fund in the world, has said members under 55 years’ old will be able to withdraw the equivalent of R2 175 a month for the next 12 months from their retirement savings.

In the US the Coronavirus Aid, Relief & Economic Security Act (CARES) has introduced a number of relief measures for retirement-fund members. This includes suspending required minimum distributions and waiving the 10% tax charged on early distributions from individual retirement accounts and employer-sponsored retirement plans for members affected by Covid-19.

These countries operate significant retirement funding industries. The Global Pension Asset Study report of 2020 shows the size of these markets relative to SA. The figures in brackets in the first column indicate the ranking, out of 22, by size of assets.

Current legislation

The SA retirement fund industry is regulated by the Pension Funds Act and the Income Tax Act. Under this legislation, active members of most retirement funds — in particular defined-contribution funds — cannot access their retirement savings while employed unless it is for housing purposes. However, the full asset value can be withdrawn when they resign or are retrenched.

Where members who leave employment choose to take a portion of their retirement savings as cash, this is subject to tax. However, where the member was retrenched some tax relief is available. The SA National Treasury and the Financial Sector Conduct Authority (FSCA) have to date not announced plans to follow the international trend and amend the current retirement industry legislation, but we think this is a potential consideration.

Extraordinary measures for extraordinary times

Early access to retirement savings is in direct contradiction to National Treasury’s retirement reform measures that aim to encourage more savings and ensure South Africans have sufficient income for a comfortable retirement.

However, the measures introduced to combat the Covid-19 pandemic have started an economic crisis that could have a far-reaching effect into the future. The SA Reserve Bank (SARB) has said that approximately one million workers could be retrenched as a result of the economic crisis. A business impact study by Statistics SA found that 28,3% of respondents said they had reduced their workforce hours and 19,6% reported laying off staff in the short term.

Allowing access to retirement-fund savings may at first sight be seen as contradictory to the industry’s long-term savings objective. But the immediate financial needs and uncertainty our members face, dueto the Covid-19 lockdown, also need to be considered. President Cyril Ramaphosa has called on the country to work together to respond to the crisis, saying we face “an extreme situation that requires extraordinary measures”.

Utilising retirement fund savings to alleviate financial hardship

Allowing financially distressed retirement-fund members to access their savings early could alleviate some of their financial hardship. Members could access much needed income without having to apply for loans, sell assets, or resign to access their retirement funds.

Mentenova Consultants and Actuaries (MCA), a part of the Liberty Group that offers specialist benefit consulting and actuarial solutions, has looked at various scenarios to understand what effect early access to retirement benefits could have for SA. If we follow the international examples, early access to retirement funds could be made available to members who have been negatively affected by the coronavirus; for example, through salary cuts, retrenchment, reduced pay, or they or their spouses are suffering from the virus. Access to retirement savings could be limited to a portion of the total value of their savings and be made available for a limited period that could coincide with the members’ return to work or receiving their full salary. The value of the early withdrawal benefit could be expressed as a fixed amount or as a percentage of total savings, or a combination of both.

Impact on industry

If projections are correct, around one million retrenched workers are predicted to make retirementfund withdrawals. This will place an administrative burden on retirement-fund administrators. If early access to retirement savings is allowed, it will further add to the number of withdrawal claims to be processed.

SA has 11,245 million active members of retirement funds (including the Government Employees Pension Fund) with total industry savings of R4,26 trillion, according to the FSCA 2018/2019 Annual Report. MCA has considered various scenarios to estimate the expected outflows of funds from the industry, should members make use of the early withdrawal benefits. In one such scenario, based on 50% of the three million members being eligible for the early withdrawal benefit (applying the 28,3% working reduced hours) and assuming an average withdrawal of R100 000 per member, we could see R150bn being withdrawn.

Impact on individual members

One measure of an individual’s income at retirement is the Net income Replacement Ratio (NRR). This is the level of income that an individual’s retirement savings can fund after retirement, expressed as a percentage of salary immediately prior to retirement. The higher the NRR at retirement, the better the retirement outcome. If a member were to gain early access to their retirement fund savings, they would have a reduced NRR at retirement if they were not able to replace the withdrawal amount through investment savings growth or lump sum contributions. This would negatively affect their ability to fund a comfortable retirement.

MCA compared the impact of early access to retirement savings on a member who is on track to achieve a 75% NRR if they withdraw 25% of their current retirement fund savings, without any future increase in contributions or payment of an additional lump sum into the fund. For illustrative purposes, MCA has used a 30-year-old and a 50-year-old member. This assumes the 30-year-old has been in the system for eight years and the 50-year-old for 28 years. It is assumed both members have no retirement savings outside the retirement-funds system. After accessing the 25%, the 30-year-old member’s NRR would reduce to 69% while the 50-year-olds would drop to 60%.

Accessing retirement savings at this time would be detrimental to members. History has taught us that liquidating a portfolio immediately after a market crash can be costly as investors miss out on the subsequent recovery. Following the market crash in March 2020, there has been a significant recovery, but markets remain uncertain.

Impact on the government

Taxation of the early withdrawal benefit would provide a source of revenue for SARS while a tax-free payment would mean that SARS would forgo revenue that will not be collected. Our calculations show that between R5bn to R20bn of tax revenue could be lost to the fiscus, depending on how the early withdrawal benefit is implemented and the take up rate.  The introduction of an early withdrawal benefit has to consider the need to alleviate immediate financial distress against the desired outcome of members having sufficient savings for retirement, and the cost to the retirement-fund industry and government.

This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purposes only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented.

Liberty Group Ltd is an Insurer, Retirement Fund Administrator, provider of investment solutions and an Authorised Financial Services Provider (no 2409). Liberty offers retirement fund solutions to more than 10 000 employers and sponsors the umbrella fund with the highest number of participating employers. Mentenova Consultants and Actuaries is part of the Liberty Group and an Authorised Financial Services Provider (no 46671).

ESKOM PENSION & PROVIDENT FUND: Expert Opinions: Edition June / August 2020



At close of business 26 March 2020, before South Africa went into lockdown, the value of the Eskom Pension & Provident Fund was R123,99bn. It had recovered from the low of R114bn a few days earlier. However, about 20% of the EPPF (14% inflation-linked bonds and 6% nominal bonds) is exposed to fixed-income securities with about 4% exposed to the Listed Property sector. Hence, the impact of the credit downgrade on the assets of the Fund was not expected to be as severe as the Covid-19 market crash and (to date) has proved not to be. Importantly, the present value of the Fund’s liabilities is valued using a set of real (i.e. inflationadjusted) interest rates. If these real interest rates go up, then the resultant present value of the liabilities will go down. Hence, rising interest rates lead to decreasing liabilities.

• A rise in interest rates will cause a fall in about 25% of the Fund’s assets (i.e. interest rate-sensitive assets such as nominal bonds, inflation-linked bonds and Listed Property) but will affect 100% of the liabilities of the Fund (a larger fall in value).

It is expected that the funding ratio will either remain unaffected or actually be enhanced. So far, this has proved to be the case. Going into the Covid-19 market sell-off as well as the SA credit downgrade, the Fund had a full allocation to international assets. These are now in excess of 30% due to market movements.

This cushioned the impact of the fall in the assets of the Fund. The rand’s exchange rate moved from ZAR14/USD1 to over R17,5/$1 during the Covid-19 market sell-off. The international sleeve of the portfolio was not affected by the SA credit downgrade of 27 March 2020.

The Fund had a slightly underweight exposure to the Listed Property asset class. It has fallen in value by approximately 50% since the start of the Covid-19 pandemic and was marginally negatively affected by the sub-investment rating of SA bonds. Both the Covid-19 and Sovereign bond downgrade effects may not yet have been fully digested by the market and therefore market volatility is still expected for a large part of the year.

The Fund will remain vigilant to the risks as well as the opportunities that are presented by the current turmoil in the financial markets. The prudence of maintaining a robust funded status has prepared the Fund well for the unexpected sharp negative movements in asset values. Furthermore, the liability-driven investment framework will ensure that the credit downgrade of SA into junk territory will not compromise the funded status of the EPPF.

The Fund remains vigilant. It monitors the marked-to-market funding ratio regularly, using its robust risk system. The Fund has a sound investment strategy for allocating assets while maintaining appropriate levels of risk with an eye on a long-term horizon.

OLD MUTUAL INVESTMENT GROUP: Expert Opinions: Edition June / August 2020



Head of Responsible Investment, Old Mutual Investment Group

Jon Duncan leads Responsible Investment (RI) at the Old Mutual Investment Group. The programme is focused on driving the systematic integration of material environmental, social and governance (ESG) issues across the Old Mutual Investment Group. Today Jon looks at some of the very real lessons that the COVID-19 crisis is teaching us on the investment front.


Do not neglect the interconnectivity of social and market systems. The COVID-19 crisis has laid bare the very real interconnectivity between our social, environmental and market systems. An interconnectivity that is at the very core of responsible investing that recognises the impact of unpriced externalities on the safe operation of the market, society and environment. The lesson here is that all participants consider the wisdom of pursuing short-term returns at the expense of long-term resilience of social and environmental systems.


Be aware of shared value. COVID-19 puts a sharp focus on management approaches to human capital management, corporate culture, and the treatment of customers. Corporate responses around these issues can potentially have lasting impacts for all company stakeholders. For investors that are ESG-literate, it’s no news that workforce management, employee satisfaction and corporate culture have a long-term impact on productivity, share price performance and returns. Similarly, that companies’ treatment of customers is an important driver of brand equity and improved customer relationships over time. How management teams respond in this time of crisis will be telling for their long-term profi tability.


Be led by science. The fi eld of RI relies on much scientific data to make the business case for sustainability. Most asset managers with a focus on RI will thus have a clear understanding of the science behind climate change and the attendant risks and opportunities. Notwithstanding this, in the current age of populist politics, the role of science has increasingly taken a back seat. Now, while the COVID-19 crisis is more near-term compared to climate change, it is instructive to see how rapidly political leaders, despite their differing views, have fallen in line with prevailing medical and scientific consensus. The lesson of COVID-19 is–don’t forget the science.


ESG is not just a nice-to-have. Old Mutual Investment Group has long maintained that analysis of ESG issues can, and does, drive long-term investment performance. It is not just a nice-to-have; it is a good-to-have. We see sustainability as a macro-thematic trend that is fundamentally reshaping the competitive landscape across all sectors. Companies that respond to this trend early enjoy stronger social licence to operate, lower staff turnover, better resource efficiency, lower cost of capital, better innovation and stronger access to market.


It is not clear what’s next. The COVID-19 pandemic is unprecedented in modern times. There is much we don’t know about how this will play out. However, what we do know is that the world will be much changed. Our sense of interconnectivity will be enhanced. We’ll have learnt that it’s not just returns that matter, and that businesses that focused on long-term outcomes will be the ones that thrive in the new world to come.

Worth noting: Like all funds, sustainable equity funds suffered large and sudden losses of value in the first quarter of 2020 due to the global pandemic. However, Morningstar reports that sustainable investment funds held up better than conventional funds during this period. They report that seven out of 10 sustainable equity funds finished in the top halves of their Morningstar categories, and 24 of 26 environmental, social and governance-tilted index funds outperformed their closest conventional counterparts. This is also evidenced by the MSCI ESG index tracker funds that Old Mutual offers, which have shown resilient performance over the past quarter. And, in Europe, ESG funds have seen persistent inflows, including recent weeks, even amid EU stock outflows.

RISCURA: Expert Opinions: Edition June / August 2020



By Lars Hagenbuch, consultant at RisCura

Each day now brings further news of the spreading coronavirus and its impact on communities and economies, but some positives have started to emerge, most notably from China. Chinese equity indices have recently outperformed global markets significantly. In addition, Chinese investment managers have continued to outperform during these turbulent markets. In short, China has offered material diversification benefits recently just as it did from 2007 to 2009. The low correlation of Chinese equities with other regions is well-documented. But, why is this? In our opinion, a fundamental reason is the unique shareholder base that has different motivations to shareholders in other countries, both in developed and emerging markets.

We believe foreign shareholding will increase over time. However, it depends on many factors such as the pace of reform of Chinese markets, and adoption by global asset owners, index providers and fund managers.

For now, Chinese A-shares are not reliant on the same global flows as other equity markets. There is an almost consistently high, positive relationship between developed markets and emerging markets whereas the relationship between Chinese A-shares and developed or emerging markets is inconsistent and negative at times.

Furthermore, the make-up of Chinese shareholders is very different. Almost half are retail investors. Many, if not most, local asset managers are still guided by short-term performance. This means that prices are driven far more by sentiment and speculation than underlying fundamentals of companies. This creates a different pattern of returns, albeit with higher volatility.

Next, the Chinese state attempts to manage all aspects of the local economy. We recognise this as a double-edged sword: centralised management means that the country can achieve objectives that are nearly impossible for others – for example, around infrastructure or regulatory changes – but policy mistakes do happen and can be costly. The management of financial markets is no exception. Just as many of the world’s investment policies are shaped by the US Federal Reserve and European Central Bank, the Chinese are affected by what their central bank does. Over the last decade, China has implemented both extremely tight and loose monetary and fiscal policies in pursuit of a stable economy. This has caused shorter and sharper market cycles that can be completely unrelated to what is happening elsewhere in the world. Unconventional measures may also be used, like influencing the activities of state-owned asset managers to prop up stock markets. When mistakes are made, having ‘executive control’ allows the Chinese government to respond to policy mistakes quickly.

The last pillar, perhaps most important in the longer run, is the Chinese economy, fed by its large population. There are more than 5 000 Chinese companies listed on the mainland and internationally that benefit from this large population, which is well-connected through technology and roads and railways, with a fast-growing middle class, a steady trend towards urbanisation and with that substantial domestic consumption. Many of those 5 000 companies only focus on domestic business and have little exposure to overseas markets. The vast domestic market presents them with incredible growth opportunities. All this means that China can press ahead independently and impact the world in a way that currently only the US can.

Every investor seeks diversification and we believe that China has much to offer to improve the risk profile of an equity portfolio. Ignoring it, or lumping it in with the emerging markets allocation, leaves a tasty free lunch uneaten at the table.

ASHBURTON INVESTMENTS: Expert Opinions: Edition June / August 2020

When defaults occur

Ways for lenders to protect themselves are discussed by Corneleo Keevy,
head of credit risk management at Ashburton Investments.

Following the announcement by the Land & Agricultural Development Bank of SA (Land Bank) on 24 April, that an event of default (EoD) occurred on its notes, there has been rising concern around such events occurring on the debt obligations of other issuers.

In the current economic environment, the revenue of counterparties is likely to have been materially reduced due to limited trading during the lockdown. They are also unlikely to have sufficient scope to reduce costs to the same extent as the decline in revenue, therefore ultimately impacting the profitability and liquidity of counterparties. The result is that counterparties could trigger EoDs.

What happens when an EoD occurs?

Upon an EoD, a lender has the right to demand immediate repayment of all outstanding amounts owing. In practice, lenders or creditors rarely enforce this right, as it could result in the triggering of a crossdefault on other obligations of the counterparty and cause a material part of a counterparty’s debt obligations to become due and payable on demand.

As a result, if all creditors exercise their rights to demand immediate settlement of their obligations, the counterparty is likely to have insufficient liquidity to honour all claims. This could result in the counterparty applying to be placed under business rescue, administration or curatorship and/or ultimately being liquidated. Therefore, instead of demanding settlement of their obligations, lenders and creditors will likely commence a formal debt-restructuring process to increase the likelihood of full debt recovery.

Can an EoD be avoided?

Counterparties are often aware of potential financial covenant breaches before the relevant measurement dates. In such cases, counterparties will pre-emptively engage with lenders in an attempt to secure a waiver for the potential EoD before it occurs or to reset the financial covenants. In the event that the counterparty can satisfy the specific lenders that the causes of the EoD have not impacted the long-term sustainability of the counterparty, or that the credit risk on the debt obligation has not fundamentally changed from when it was entered into, it may well be able to secure waivers or amendments from lenders.

What takes place under debt restructure?

The initial phase is characterised by engagements between the counterparty and its debt funders. During the restructuring period, there are many actions to which a counterparty can agree in order to reach an agreement to restructure its debt obligations. These actions may include but are not limited to the cessation of dividends, deferral of non-critical capital expenditure, cost reduction measures, disposal of assets, or an equity rights issue. The ultimate goal of the restructure process is for the counterparty to be returned to a position where it has a sustainable capital structure (solvent) and sufficient liquidity to continue operating and pay its debts. From experience, the debt funders in SA have mostly approached debt restructuring in a responsible and measured manner. We believe this will continue during and after Covid-19.


The corporates which raised funding in the SA debt capital markets were generally well-capitalised with sufficient liquidity to trade through the initial stages of the Covid-19 lockdown. This does not mean that all the borrowers will not seek relief from their funders to avoid potential EoDs. But given their standing, many are likely to receive support from funders.

FUTUREGROWTH: Expert Opinions: Edition June / August 2020

RI questions for your asset manager

Checklist provided by Angelique Kalam, manager for
sustainable investment practices at Futuregrowth.

While many asset managers have signed up to various (voluntary) codes and principles for responsible investing (RI)1, not many have embedded these into their investment processes. Therefore, it is important to distinguish between applying RI principles to investment decision-making and merely performing a tick-box exercise.

With an increased prevalence of corporate governance failures, environmental non-compliance, corruption and fraud, it has become apparent that non-financial issues – including environmental, social and governance (ESG) criteria — increasingly impact the long-term, sustainable performance of companies.

Here are some useful questions and checks for your asset manager, collated from a combination of client interactions, the UNPRI investor toolkit and Futuregrowth’s own experience. These aim to assist pension funds when assessing the integration of RI practices and ESG into their investment decision-making and in fulfilling their reporting requirements as outlined in the Guidance Notice 1 of 2019 (PFA): Sustainability

Reporting for Pension Funds.

1. RI policies

– Do you have a policy, or set of policies, that make specific reference to RI practices and, in particular, ESG issues? If yes, provide an outline of the policy objective.

– Do you have a corporate governance and voting policy? If yes, provide an outline of the policy objective.

– Is ESG a board agenda item, or a subcommittee agenda item reported to the board?

– Is there a board member responsible for ESG?

– Do you have an exclusion list or policy that references specific exclusions, e.g. controversial weapons, human rights violations etc.? If yes, list the exclusions and rationale.

2. Integration of ESG and decision-making

– Have there been any changes to your ESG integration processes over the reporting period (e.g. additional resources, information sources)? If so, why?

– What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making processes? Outline which ESG factors were relevant to the investment company/sector and why.

– Provide some specific examples of major ESG risks that you identified in the portfolio over the reporting period, and what you have done to mitigate the risk/s.

– Do you assess the exposure to climate risk of the investments in your portfolios? If yes, then provide a recent example.

3. Active ownership and voting

– What public disclosures are available on your proxyvoting policies and voting outcomes?

– How frequently are your voting decisions reported and disclosed?

4. Bond holder and equity engagement

– Do you have an engagement policy or other document that outlines direct engagement with fixed income or equity on ESG issues? If yes, then describe your approach to ESG engagement:

• How is the engagement defined?

• What is the objective?

• How is the engagement measured?

– How many fixed income or listed equity issuers have you engaged with in total on ESG issues during the last year and what were the issues of engagement?

5. Reporting

– What type of ESG reporting is available to clients?

– Are any of these reports available on your website?

If so, please provide a link.

6. Collaboration and capital market development

– To what industry bodies/associations do you belong or subscribe?

– In which sub-committees and working groups do you participate to drive change at an industry level?

Asset managers have the opportunity to belong to ASISA2, which has a number of sub-committees, including the Fixed Income Standing Committee (FISC) and the Responsible Investing Standing Committee (RISC), which meet at least quarterly to review matters of interest to the industry as a whole. They also comment on proposed regulatory changes and participate in broader industry discussions. When assessing your asset manager’s commitment to RI, it is worth reviewing their participation and level of involvement in these committees and working groups – and to ask for evidence or examples of particular sub-committees, working groups or pertinent issues in which they have involved themselves.

When new legislation or proposed amendments to existing legislation are circulated for public comment, what is the process internally for submitting comments and ensuring that the investor’s viewpoint is considered? Legislation and regulation are continuously changing, and a cornerstone of our democracy is the ability to participate in the legislative process. While many of these discussions are held within the auspices of ASISA, its subcommittees, working groups and other industry/regulatory bodies, it is worth asking your asset manager about the extent of their individual participation in public comment processes and how they view their responsibility to raise awareness of investors’ concerns about the proposals.

A recent example of this is National Treasury’s request for comments on its proposed amendments to the Financial Markets Act. Futuregrowth commented extensively in a submission directly to National Treasury, and also included our comments in the ASISA-led process. While our comments are not public, the Futuregrowth investment team coordinated the ASISA response to the 71-page document, to ensure that we uphold our fiduciary duty to our clients.

Similarly, even though there is no proposed legislation on this contentious issue, we think it is important to raise our view when the topic of Prescription periodically raises its head. Our view on Prescription is well known. It has been widely and publicly communicated.


One requirement of being a responsible investor is to be a vocal and active participant in ensuring that regulation, legislation and industry changes consider the investor’s viewpoint and the protection of investors’ hard-earned savings. It is important to ask these questions, to hold your asset managers accountable and to ensure that they are not paying lip service to the principles of RI.

“The only thing necessary for the triumph of evil is for good men [and women] to do nothing.”

Futuregrowth is a signatory to the UN Principles for Responsible Investment (PRI). We also endorse the Code for Responsible Investment in South Africa (CRISA).

Futuregrowth is a licensed Financial Services Provider.

1 For example: CRISA (Code for Responsible Investing in South Africa); UNPRI

(United Nations Principles of Responsible Investing)

2 Association for Savings and Investments South Africa