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RISCURA: Expert Opinions: Edition October 2019 / January 2020

PENSION FUNDS – SHOULD PERFORMANCE FEES BE RETIRED?

Prasheen Singh, Senior Consultant, Investment Advisory, RisCura

While some pundits have argued recently that performance fees have had their day, this is an oversimplification, particularly in the retirement fund industry.

In the retail space, investors are essentially price-takers, as they have no negotiation power over the fees and the fee structures that they pay to asset managers. If they are unhappy, their only option is to vote with their feet. With retirement funds, the situation is different as trustees and their advisors can influence the way performance fees are structured.

Performance fees have historically favoured asset managers, were often highly complex and calculation was not readily replicable or sufficiently transparent to investors.

Regulatory instruments like the Default Regulations and Treating Customers Fairly are promoting simplification and transparency of fees. Active asset managers are facing increased competition, including in the form of passive or index investments. Consequently, asset managers are recognising the need for compromise in fee structures.

Though increasingly viewed with skepticism, performance fees can, in fact, be beneficial to retirement fund members if they are structured in a way that appropriately incentivises fund managers. Equally, flat fees can sometimes act as more of a drag on returns than performance fees.

When it comes to structuring a performance fee, there is a breakeven point or ‘sweet spot’ that trustees or their advisors can calculate to determine the point at which a flat fee or a performance-based fee provides longer term better value. Further, the appropriateness of the benchmark on which performance is measured, should be interrogated.

Over and above that, we believe that in today’s environment performance fees need to meet certain minimum criteria, namely:

• They should be transparent. Gone are the days when a ‘black box’ approach is acceptable. How fees are calculated, what the threshold is before they kick in, and every other aspect of a performance fee should be disclosed by the asset manager.

• They should be simple and replicable. An overly complex fee structure makes it difficult for trustees and members to understand and can often leave trustees feeling that a manager is simply pulling the wool over their eyes.

• It should be representative of the investment opportunity and the investment mandate being implemented.

• It must be fair to both the members and the managers when underperformance occurs. This means there should be a structure in place whereby managers give back some of performance fee charged to the fund if they subsequently underperform.

When structured appropriately, performance fees can align the interests of asset managers and retirement fund members, to the ultimate benefit of both.

RisCura Solutions (Pty) Ltd and RisCura Invest (Pty) Ltd are authorised financial services providers

www.riscura.com

OLD MUTUAL INVESTMENT GROUP: Expert Opinions: Edition October 2019 / January 2020

 

SA has a highly carbon-intensive economy. We’re one of the top 20 largest emitters of greenhouse gases (GHG). On a

per-unit-of-gdp basis, we rank well above the global average.

This should be seen in the context of the global effort to decouple economic growth from fossil-fuel use. The winners will be those countries, and companies, that can decarbonise their growth. SA’s participation in the global economic race comes with a handicap that we can ill afford considering our high levels of poverty, unemployment and inequality.

SA relies on coal to generate about 90% of its energy requirements and some 20% of all our liquid fuel requirements. Sasol and Eskom collectively account for around 50% of our annual GHG and some 85% of domestic coal consumption. However, simply turning off these two entities to address climate concerns is not a solution; certainly not in the short term, and especially when considering how important these companies are to the running of our economy as well as sources of employment.

Coal lives matter

The Mineral Council SA reports that the coal industry employs some 82 000 people (down from a historical high of 120 000 in the 1980s). Eskom provides work for over 50 000 people in its primary coal fleet. Sasol, while being a global company, provides the bulk of its 31 000 jobs in SA. Any effort to decarbonise our economy needs carefully to consider potential jobs losses as well as, more broadly, long-term national socioeconomic development.

From a purely financial perspective, Sasol is one of SA’s largest taxpayers. Last year it contributed R39.5bn in taxes to government. Coal miners contribute not only tax and mining royalties but are also important sources of foreign revenue.

Mining in general is the largest contributor to SA’s foreign-exchange earnings, with a 40% share. And the coal sector is the largest revenue generator within mining, outweighing the gold and platinum sectors.

Yet the coal sector faces headwinds both globally and locally. Already, coal demand has peaked globally and the decline of coal-fired power generation is projected to be steeper than previously estimated. Aside from mounting public pressure against coal, a large part of the shift is being driven by our economics and the steeply-falling prices of alternative energy. The implications of these global dynamics are material for SA, especially if phasing out of coal is not well planned.

Vital factors

In SA’s transition to a low-carbon economy, the implications of an orderly retreat are material not only for those directly employed in the coal value chain but also for the economy and the investment returns of SA savers. On the plus side, an increased role for renewables in the SA energy mix (up to 60%) is seen as technically viable. With this come the benefits of net new job creation and the potential for local supply-chain development. So while SA has the challenge of fossil-fuel dependency, we have also been blessed with leading global solar and wind resources. Capturing these benefits while managing the socio-economic transition risks will require a coherent plan from government with broad support from civil society, labour and business.

The current risks surrounding Eskom show how vulnerable we are to a collapsed energy system. Along with this, addressing climate-change issues has never been more pertinent. Through global concessionary climate funding, it is possible both to fix Eskom and to solve the transition to a lowcarbon economy.

Duncan…coherent plan essential

This presents SA with the unique opportunity to reset our long-term energy plans and drive perhaps a massive industrialisation programme. We require government to take an intentional stand and work aggressively towards our Paris Accord commitments.

At present, our National Determined Contributions (the intended reductions in GHG emissions under the UN Framework Convention on Climate Change) explicitly state the need for a just transition. They also acknowledge the declining role of coal in our economy. The inexorable energy transition is underway globally.

SA Inc would do well to work collectively in this endeavour.

www.oldmutual.co.za

Old Mutual is a licensed financial services provider.

ASHBURTON: Expert Opinions: Edition October 2019 / January 2020

A change in the tide

There’s a new wave of investor engagement, suggests
Ashburton Investments head of legal Alessandro Scalco.

There’s a new wave of investor engagement, suggests Ashburton Investments head of

legal Alessandro Scalco.

Stakeholder activism has traditionally been associated with equity investment. But with investors and asset managers seeking ways to protect against the downside risk of the listed-equity markets and to access diverse return sources, the use of alternative asset classes has become more attractive.

The result of this shift in the market cycle is the emergence of a new wave of stakeholder activism in these alternative asset classes. It looks and feels like traditional stakeholder activism but tastes different. Take corporate loans, also referred to as private debt:

Background to the rise

For several years, the loan market has predominately been the domain of banks. However, with adoption of the various Basel regulatory standards, banks have been syndicating the loans they originate to third parties to free up capital on their balance sheets to write more business. At the time of drafting the various pieces of SA legislation governing pension funds – as well as collective investment schemes and insurance companies — loans were not included as a type of asset/security that could be part of these entities’ asset allocation by the regulator.

Nonetheless, asset managers indirectly gained access to loans from using acceptable investment vehicles/structures such as repack vehiclaes, credit linked notes and linked policies.

These vehicles are often managed by asset managers who also manage the assets of the entities. In some cases, the asset manager will manage loans on behalf of a client on a segregated mandate basis. But in all these cases the entity or client becomes the lender of record alongside the loan-originating bank. This results in the asset manager now sitting alongside the banks (and other financial institutions) on lender decisions.

As assets under management have grown (which are linked to underlying entities’ assets under management), so too has the ability of the asset manager to take a bigger exposure to these types of assets. With this, we now see asset managers starting to have exposures to corporate loans. This is significant. It requires that the banks take heed of the asset managers who can affect, or even block, decisions related to the underlying loans.

Attention to ESG

Asset managers are no strangers to stakeholder activism. Globally there is also a growing focus on Environmental, Social & Governance (ESG) elements. With the greater exposure to corporate loans, asset managers are increasingly assuming a stakeholder-activism role in asking the tough ESG questions of potential and existing borrowers.

Inherent in the rise of this new form of stakeholder activism is a tension between borrowers, banks and asset managers. Under the FAIS legislation, asset managers are fiduciaries. They need to act in a fiduciary capacity towards their clients, whereas banks are not under the same legal obligation (although they still need to protect depositors’ monies).

The banks also often have a wider relationship with the borrower, such as a banking relationship, which may be considered in requests from the borrower. While asset managers may have exposure to the borrower via equity or even exposure to another loan of the borrower, asset managers approach lender requests under the loans with different considerations.

Scalco . . . look at loans market

Going forward

Alternative assets will become more relevant in investors’ portfolios. It means that asset managers need to ensure that they have an in-depth understanding of these asset classes. Importantly, a thorough upfront due-diligence process — taking into account all factors including ESG – is undertaken prior to any investments.

They are affected by the buy and hold nature of these assets given the limited liquidity embedded in them, loan portfolio concentration and reinvestment risks. This due diligence is achieved through strong credit committees and a depth of knowledge in the investment team responsible for approving and monitoring the transaction, and potentially managing a workout scenario if the company defaults on its loan covenants.

This can and will mean that asset managers can further the call for sustainable investing by taking steps to measure and report on the positions they have taken in holding borrowers to account on ESG issues, but at the same time offering their investors further diversification and protection from the risk of traditional asset classes.

www.ashburtoninvestments.com

MENTENOVA CONSULTANTS & ACTUARIES: Expert Opinions: Edition October 2019 / January 2020

Is retirement preservation adequately
designed for millennials?

Manie de Bod, managing director of Mentenova
Consultants & Actuaries, is helpful.

The professional working world has changed significantly since millennials1 started entering the SA workforce. The days when employees spend 20 to 30 years working for one company until their retirement is quickly coming to an end. This has an impact on trustees of retirement Funds in the way they structure their funds and communicate with members.

According to the Deloitte Global Millennial Survey 2019, 49% of global respondents indicated that they are considering a change in job within the next 24 months. A quarter of these respondents moved to their current job in the previous 24 months. The research also showed that the reason people are changing jobs is because they are either in a hurry to climb the corporate ladder, in search of better salary packages, or looking for career progression.

According to the administrators of the Liberty Corporate Selection Umbrella Fund (the fourth largest SA fund in terms of individual members), millennials make up nearly 50% of the fund. This is in line with SA’s workforce make-up. 10X’s recent Retirement Reality report, released in September 2019, shows that 80% of people under the age of 35 responded that retirement saving was not a priority for them.

The fact that millennials tend to job hop, and don’t prioritise saving for retirement, delivers a significant challenge for the retirement industry. One of the biggest pitfalls is related to retirement savings where the success of the investment is based on a significant long-term investment horizon and the inherent benefit of compound interest.

Mentenova Consultants and Actuaries2 calculated the likely retirement outcomes of three hypothetical members that start their careers at age 22 , work until they retire at age 65 and make the same contributions, based on the same salary into the same investment portfolio3.

a) The first member, John, changed jobs a few times but preserved his benefits into a fund with a similar investment profile;

b) The second member, Themba, changed jobs a few times, but withdrew his benefits as cash every time he changed jobs and only started investing for retirement when he moved into a management role at age 37;

c) The third member, Ahmed, also changed jobs a few times, withdrew his benefit as cash and started investing for retirement when he got his dream job at age 43.

The graph below shows the investment growth and the compounding effect for each of the three members over their careers:

The effect of compound interest is clear from the graph above. John is able to retire comfortably and maintain his standard of living, but both Ahmed and Themba would have to supplement their retirement savings. While Themba only missed the first 15 years of savings out of a possible 43, the long-term effect on his retirement outcome is over 50% reduction compared to John.

1 Millennials, also known as Generation Y, is a demographic cohort of people born between 1981 and 1996.

2 Mentenova Consultants and Actuaries (Pty) Ltd is a specialised employee benefit and actuarial consulting business. It’s an Authorised Financial Services Provider (FAIS nr 46671) and a wholly owned-subsidiary of Liberty Holdings Limited.

3 This is a hypothetical example provided merely for illustrative purposes.

De Bod . . . preservation lessons

Missing out on the opportunity to build a substantial retirement nest egg Unfortunately, the tendency in SA is for people to cash out their retirement savings when they leave their jobs. This erodes the ability to take advantage of the magic of compounding. Albert Einstein said that compound interest is the most powerful force in the world:
“Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

With a generation that is likely to change jobs every three years until they reach a senior position in a company, retirement saving is left much too late. By the time the individual reaches the age of 35 or 40, this only leaves 25 to 30 years in a formal job. As a result, the first 13 to 20 years of potential savings is lost forever. To correct this trend Pension Fund Regulation 38, which is part of the default regulations that came into effect on 1 March 2019, requires retirement funds to provide members leaving the fund before retirement the option to preserve their money in the fund. It also encourages preservation by requiring the trustees of a fund to amend the rules of the fund to make provisions to accept transfers from previous funds. While this is a positive step, it may not necessarily encourage members (specifically millennials) to preserve their money. Fortunately, regulations attempt to address this by introducing benefit counselling that should be offered before any benefits are paid or transferred. This is an opportunity to educate the member about the benefits of preservation and what is offered by the fund. If utilised correctly, benefit counselling can make a positive difference in the retirement investment landscape.

Improved communication

Currently there appears to be a disconnect in the way funds communicate with its members, seemingly adopting traditional methods of communication. In order to appeal to millennials and to encourage preservation and amplify the positive outcomes, trustees and fund administrators need to speak to millennials using channels and language they’ll understand.

Multichannel communication

Millennials are digital savvy and often prefer to investigate something themselves rather than talk to a person. Therefore, funds need to consider digital communication that drives employees to simplified websites where the required information is hosted. There needs to be a seamless marriage between simplification to more sophisticated models and tools such as chatbots, mobile apps and online retirement investment calculators.

Proactive communication

Funds should provide information to their members proactively. We shouldn’t assume that members understand the power of

compounding or long-term investment returns. Benefit counsellors and financial advisers have a pivotal role to play in providing the member with all the information required to make a well-informed decision.

Effective Human Resources

We need to embrace the fact that members will change jobs often. It is therefore pivotal that employers’ Human Resource divisions are equipped to explain the benefits of preservation more clearly or ensure that benefit counselling processes are in place for members of the fund. Employers receiving new employees should discuss the opportunity to transfer funds into the new fund and equip new members with this information as early as possible by making it a part of the employee offer letters.

Mentenova Consultants and Actuaries’ experience indicates that most businesses struggle with staffing issues. At the top of their mind is the number of employees that have financial difficulties and look to their employer to support them. This assistance, particularly related to the financial benefits of retirement preservation, may ultimately ensure that employees remain invested for their retirement and build a long-term relationship with their employers.

PRESCIENT: Expert Opinions: Edition October 2019 / January 2020

Prescient credited for its BEE and
investment performance credentials

Cheree Dyers: CEO, Prescient Investment Management (Pty) Ltd

In our 21st anniversary year, we are delighted to achieve two significant milestones that confirm our commitment to delivering results for our clients seeking certainty in an uncertain world.

During September, Prescient Investment Management was included in the industry-leading 2019 27four BEE Survey in recognition of our strong empowerment credentials and status as a large BEE investment manager in South Africa. This was not long after receiving industry recognition for the consistent performance of some of our funds, which have delivered favourable returns on behalf of our clients.

We are delighted to be included in the 27four BEE Survey for the first time. It independently verifies our elevated empowerment credentials after investment holding company, Sithega Holdings (Pty) Ltd, became a significant shareholder and partner in the business in April.

The deal places Prescient in a favourable position to transition to its next growth phase as an empowered, multi-national investment manager that consistently delivers performance ahead of expectations.

The well-regarded annual 27four BEE industry survey showcases the leading BEE asset managers and how they are changing the asset management environment for the better.

As a leading BEE manager, we are wholeheartedly committed to offering our talent opportunities to flourish and stretch themselves in our team-based investment environment. We are in the privileged position of having a balance of experience and young dynamism in our investment team

– the perfect recipe for navigating all market conditions and delivering consistent returns.

In late July, Prescient was recognised in the Quarterly PlexCrown Fund Rating Survey as the leading South African asset manager of actively managed unit trust funds. The results of the PlexCrown Fund Rating Survey released at the end of July were based on risk-adjusted performance over five years, taking into account consistency of performance and the amount of risk a manager takes in achieving that performance during the second quarter of 2019.

This acknowledgment is confirmation that our teambased approach and core philosophy of capital preservation and the management of relative and absolute downside risk is still working and has been for more than two decades.

Since founded in 1998 as an entrepreneurial investment management company focused on managing interestbearing and positive return mandates, we have grown substantially into a highly regarded, full-spectrum investment management business.

We now offer a compelling multi-asset class capability as well as access to new and diversified markets, such as China. We are also looking to explore opportunities in the alternative investment space as we enter our next growth phase.

We are excited to explore all the new opportunities that are opening up in today’s fast-changing world. We believe that our strong BEE credentials and performance track record position us well to deliver on retirement fund trustee aspirations to support BEE while achieving consistently superior returns for their members.

www.prescient.co.za

Disclaimer:

– Prescient Investment Management (Pty) Ltd is an authorised financial services provider (FSP 612);

– This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.

OLD MUTUAL CORPORATE: Expert Opinions: Edition October 2019 / January 2020

A recent analysis conducted by Old Mutual Corporate Consultants estimates that more than 40% of retirement fund members contribute 10% or less of their salary toward retirement savings every month. It is however advised that retirement fund members should contribute at least 15% of their salary toward retirement, to have enough saved up when they retire.

It is imperative for employers to take a holistic approach to the financial wellbeing of their employees incorporating a solid employee benefits package that is designed to deliver sound outcomes. Many employees make the mistake of believing that mere membership of a retirement fund assures them of a comfortable retirement. The reality is that not all retirement schemes are created equal. Some are optimally structured to deliver a pension that resembles the employee’s salary while they were working, but other schemes are only a retirement fund by name. Those funds usually do not deliver the benefits members expect.

THE VALUE OF ADVICE

In the time-starved environment that most executives of companies find themselves in, actuaries are very specialised professionals and provide a valuable service – particularly in the retirement funding industry. They calculate replacement ratios, fund valuations, fund interest declarations and employer liability valuations. They establish and convert funds, advise on mergers and acquisitions and manage Section 14 transfers. There are many reputable retirement and actuarial consultancies in South Africa, each bringing their own unique blend of strengths to the table. Although this can be a costly service, the value of the advice will far outweigh the consultancy costs. By examining issues such as the overall cost effectiveness of the fund and its impact on members’ benefits, Old Mutual Corporate Consultants’ actuarial services provides valuable information to trustees and other stakeholders to help them make informed decisions.

TRACKING YOUR FUND’S PROGRESS

Having a retirement fund in place that provides benefits to employees is one thing. But how healthy is that retirement fund and, more importantly, is it delivering on its promises? By regularly monitoring a fund’s progress and taking steps to improve the assets accumulated by members, funds can deliver superior retirement benefits to a much higher proportion of members. Tracking tools have the potential to transform the way trustee boards and employers approach their retirement funding arrangements. OnTrackTM, a new consulting tool launched by Old Mutual Corporate Consultants, helps trustee boards and management committees to assess the effectiveness of their funds and benchmark them against other schemes of similar size or in the same industry. OnTrackTM sets clear target levels of asset accumulation, using savings as a multiple of annual salary, for each member, based on their number of months of service in the fund. The actual level of assets accumulated by each member is then compared to this target to determine whether they are ‘on track’ or not.

WHAT CAN EMPLOYERS AND FUND TRUSTEES DO?

Speak to a consultant that has the expertise and a proven track record to help you package your employee benefits to suit your business’ unique needs and budget. Ideally, one that is focused on delivering specific, well-defined outcomes for your employees. That means they partner with you to ensure that your staff are on track with their retirement savings and the outcomes they want for the future.

Call us to create a smart strategy for your business.
Rodney Msimango: Head of Business Development +27 011 217 1420 or RMsimango@oldmutual.com

 

LIMA MBEU: Expert Opinions: Edition October 2019 / January 2020

 

Adapt or die

A new era has emerged within the global investment
management industry, suggests Lima Mbeu Investment
Managers CIO Ndina Rabali.

Introduction

It has become clear that, for us to understand today’s increasingly complex markets, we require much better analytical methods than the blunt instruments currently in use. Traditional methods of investing have struggled to cope with rising market complexity, and active managers have underperformed their benchmarks. The clamour for passive investing is increasing. In response, asset managers across the world have developed a set of new and innovative investment approaches. Methods such as quantamental investing, that blend investment insight with the discipline and transparency of a quantitative framework, have emerged. The rapid development of technology and data over the last ten years has aided the emergence of these new-age investment approaches.

Why should pension funds consider these new approaches to investing?

Many remain sceptical. The collapse of the hedge fund, Long Term Capital Management (LTCM) in the late 1990s, is often attributed to the use of an overly complicated investment approach. Many also blame the use of sophisticated investment strategies for exacerbating the global financial crisis of 2008. The key difference this time is that most practitioners have learnt that using complex mathematical algorithms to predict future prices is unwise! However, these techniques can be quite useful in enhancing judgement and the decisionmaking process when investing.

The primary reason for considering the use of these new methods is the market-sum rule! If some pension funds beat the market, earning higher returns than the market, then other pension funds will be beaten by the market, earning lower returns than the market. In other words, an investor that underperforms the benchmark is merely contributing to the outperformance of another investor. With the rapid development of new techniques to investing, investors that are slow in adapting to change run the risk of funding the improved returns of those that embrace it.

Are investors adapting?

When it comes to change, no one wants to be the innovator or the laggard because of the high risks and penalties involved. Two examples show that investors across the globe are embracing change. Although there are several examples, we highlight two of particular significance.

Firstly, in 2009, the Norwegian Government Pension Fund (over $1trn AUM) requested consultants to conduct an evaluation of the value that active management adds within the pension fund. The findings were quite revealing. Active management was a small but positive contributor to the performance of the fund over ten years. However, the returns may have been better if the pension fund was managed using a framework that combines bottom-up fundamental investing; with factor-based construction of its benchmarks. The consultants recommended a re-organisation of the pension fund to adapt to this new framework

– one that seeks to harness the power of ‘human and machine’ to deliver investment performance for their members.

Secondly, in 2017, BlackRock ($6,8 trn AUM) re-organised its active equity offering. The asset manager introduced quantitative techniques into the fundamental bottom-up investing team in an attempt to improve the performance of its funds. Mark Wiseman, the Head of Active Equity at BlackRock said at the time: “The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy — that does not work anymore.” BlackRock, therefore, decided to combine their quantitative and fundamental investment teams into one cohesive unit. As Wiseman further put it: “The active equity industry needs to change. Asset managers who use the same techniques and tools from the past will limit their ability to generate alpha and deliver on client expectations.”

Rabali…quantamental approach

These two examples, of a large asset custodian and asset manager, demonstrate that we have moved beyond innovation. Globally, the investment management industry has already embraced the use of innovative, new-age investment processes.

Is there any logic behind the emergence of this new era?

Although we all hate change for the sake of change, there is a simple logic behind the rapid developments we see in the investment management industry. Information has been made easily accessible to everyone! The competitive advantage that asset managers have lies in their ability to access information and process it better than others. Advances in technology have decimated this advantage. Today, we all have access to the same news feeds, databases, and research reports on companies. The competitive advantage that analysts had has been eroded by the wide dissemination of investment frameworks used by Warren Buffet and Benjamin Graham. Therefore, pension funds that want to deliver value for their members should embrace, and not shun, the use of managers that have developed innovative investment methods. Additionally, asset managers must search for ways to access new information or new ways of processing information to deliver value for their clients.

Conclusion

Over the last ten years, investors across the globe have become much more sophisticated. Analytical standards have improved, and the market has become more efficient. The search for investment returns, particularly in the current lowreturn environment, has led to the development of elaborate frameworks for decision-making. Older frameworks of investing may deserve some re-examination due to the challenges asset managers have faced in outperforming their benchmarks. Modern methods of investing, such as the quantamental approach, have begun to gain prominence. To avoid funding the outperformance of other investors, pension funds may have to view this as a case of adapt or die.

www.limambeu.co.za

FUTUREGROWTH: Expert Opinions: Edition October 2019 / January 2020

Renewable energy investments:
What to ask your manager

Written by Paul Semple, Portfolio Manager (Power Debt Fund)
@ Futuregrowth Asset Management

As SA transitions from fossil fuels to a more diversified energy mix, the contribution of renewable energy is expected to grow. No longer is there a trade-off between clean and least-cost energy. The updated Integrated Resource Plan envisages that renewables will dominate the build-out of new energy over the next 30 years. Here are some useful questions for an investor when reviewing a renewable energy asset:

The general profile of the renewable energy project

– In what technology is the project invested? The simplest technology to install, operate and maintain is Solar Photovoltaic (PV), followed by Wind, Biomass, Hydro, and, lastly, Concentrated Solar Power (CSP). Most expensive is CSP but can store energy for peak hour demand;

– Does the project have a signed Power Purchase Agreement (PPA) with Eskom? This contract ensures an off-take of power by Eskom at an agreed inflationary-linked tariff for a minimum of 20 years;

– At what stage of the Renewable Energy Independent Producer Power Procurement Programme (REIPPPP) process is the project? Prior to tender, the project is in development stage until it is bid-ready. If selected under REIPPPP, it is awarded a Preferred Bid, followed by a signed PPA, project construction and, finally, operations – once the Commercial Operation Date (COD) is achieved;

– What is the size of the project’s capacity in megawatts (MWs)? One MW is sufficient to power around 650 homes. Wind projects are measured by the number of turbines; smaller projects have fewer turbines, a higher risk of concentration and a disproportionately bigger impact on output if any one or more turbines fail.

The stakeholders in the renewable energy project

– How much experience does the developer/lead sponsor of the project have in prior bid windows of the REIPPPP? Given the increasingly competitive nature of each successive bid window, the experience of previous preferred bidders should benefit the prospects of a project;

– What is the track record of the technology supplier in SA? Equipment might have fared successfully in other regions but has failed in SA due to the harshness of our climate;

– Who is the shareholder of reference in the project and is it a strategic entity with a sufficiently strong balance sheet and energy experience, such as having built and operated energy projects internationally?

– What is the Black Empowerment stake in the project and how broad based is it? In order to win a preferred bid in the REIPPPP, the minimum stake required under the last bid window was 30%. Project location and resource strength

– Where is the project located, and what is its distance from the grid? Many areas, such as the Northern Cape, are over-concentrated with solar PV projects and grid capacity is inadequate to connect new projects unless significant expenditure is made by Eskom to upgrade the grid infrastructure;

– Over what period of time has the strength of the resource been tested? A longer period is better, as many projects have failed to meet budget because of inadequate resource test data that has resulted in inaccurate resource strength predictions and consequent underperformance of projects.

Debt terms and project metrics

– How long is the debt repayment term? As the PPA is limited to 20 years, a longer debt repayment term results in a shorter ungeared tail in the project. Free cash flow spikes when the project debt is settled and a shorter ungeared tail results in a smaller cash buffer to cover a protracted debt redemption;

– What are the forecast minimum and the covenanted financial metrics in the project, such as the minimum debt service cover ratio (DSCR) and the minimum loan life cover ratio (LLCR)? These ratios are important measurements of the amount of cash available to cover the debt repayment obligations;

– How sensitive is the cash flow to a stress test of the assumptions behind the forecast energy production and revenue generation? If assumptions such as the cost of construction or operational overheads increase, or if completion is delayed or resource strength is lower, the debt repayments should remain adequately covered;

– How experienced is the lender consortium and which party has arranged the finance package? Debt structuring experience is important and the arranger should be aligned with the lenders by way of a coinvestment on the same terms and conditions.

Social and enterprise development

– What is the extent of engagement by the project with the local community and is there a clear social and enterprise development plan with measureable outcomes and buy-in by the community? Labour unrest and local community protests about unmet expectations from a REIPPPP investment have elevated energy production risk in some projects.

The replies to these questions will help investors to assess some of the key risk factors in a renewable energy project and those that could have a direct bearing on the returns from their investment.

Visit www.futuregrowth.co.za/newsroom to read the full write-up and glossary.

Futuregrowth is a licensed Financial Services Provider.

MOMENTUM CONSULTANTS & ACTUARIES: Expert Opinions: Edition October 2019 / January 2020

A workforce that thinks differently

Employee-benefits advice must adapt, urges Momentum
Consultants & Actuaries executive director Blessing Utete.

Traditional financial advice has been based on a uniform approach for a relatively uniform workforce. Over the years, there has been a shift in the average workforce age, with the so-called Generation Xers (born mid- 1960s to 1965 to early 1980s) and Generation Ys (the millennials) now making up the majority of employees. The millennial percentage of the workforce composition has jumped from 39% to 52%. Those born after 1996 – the Generation Z workers – are expected to make up 24% by next year.

New workforce, new needs

Younger people’s life events no longer happen in the same linear way as they did for previous generations. Single-parent households, particularly headed by women, far outweigh those where both parents live together. Taking care of parents and extended family, the average employee now has twice the number of dependants compared to five years ago.

For various reasons, millennials change jobs every two to three years. When they do this, they frequently cash out their retirement savings, doing so more than once during their working careers. They see retirement as a distant future, and believe that they will have accumulated sufficient money to retire comfortably when they reach retirement age.

Sadly, death statistics are now higher for younger people. Group insurance data shows that the proportion of unnatural or accident-related deaths is increasing. Critical illness statistics are also increasing. The claims statistics indicate that overall cancer claims have increased by 48% since 2012, representing 15% of all disability benefit claims in 2018. Some 21% of the claims were paid to employees below the age of 40.

This should tell us that we need to understand who these employees are, what their lives look like and what their real needs are. Corporate financial advisers must start considering the new workforce’s real needs at each major life event that influences their financial journey.

Hard realities

• They lack financial literacy. They are financially vulnerable and don’t understand the retirement benefits they have or the terminology around retirement benefits;

• They engage differently. They are bombarded with competing information from all sides. If

communication is not specific to their needs — when, where and how they want to receive it — they don’t engage at all. They want direct information that is easy to understand;

• They see retirement differently. It isn’t uncommon among the younger generations of employees to have at least one income-generating side hustle to sustain a desired lifestyle. They don’t think about retirement because they don’t think they will ever have sufficient funds to retire. They resolve to commit to longer-term plans, hoping that these multiple income streams will sustain them into retirement, or they rely on family.

Employee benefits unchanged

Even though the composition of the workforce has changed, employers and retirement funds are still offering the same major benefits that they have previously provided.

The reason is possibly straightforward. The employer’s employee benefits decision-makers are generally much older and earn a much higher salaries than the average lower-income, younger employee. They may simply be out of touch with the real needs of the workforce.

Different thinking

To provide the employee-benefits requirements of a changed workforce, companies now need corporate financial advisers and fund consultants who understand this. They need advisory solutions and employee benefits with a fresh, new approach.

For example, consider the mentioned increase in the rate of unnatural, accident-related deaths among younger employees. This represents a gap in the benefits traditionally provided, and one that should be looked at differently going forward.

Use of technology

Even though information is available at members’ fingertips through technology, this doesn’t mean they necessarily understand the information. Neither does it give them the knowledge they need to make decisions that will put them on a sustainable path of providing for retirement.

Fund members are real people with individual, unique needs. But most technology, devoid of human interaction, tends to apply a one-size-fits-all or, at best, a broad segmentation model to offer financial solutions. Yet, to address the needs of the new generation of employees, it must be coupled with human advice.

Real people

The world keeps changing So too have the employeebenefits needs of the new workforce.  Taking care of members’ needs before and after retirement now requires a fresh approach to advice, technology and solutions. Traditional fund consultants or corporate financial advisers no longer serve this changed environment.

Solving the real needs of the new generation of employees cannot be accomplished with hi-tech solutions alone. Artificial intelligence solutions cater for averages, not for unique needs. What will be pioneering is how technology is used to provide for real, individual needs. For trustees to offer solutions to the real, individual retirement needs of their members, human advice must form part of the equation.

To provide the needs of the new workforce, it is imperative that the insights gained through technology are interpreted by an expert team of unbiased, trusted consultants.

Smart advice

Using technology, semi-personal individual advice is possible and it is scalable. Innovative fund analytics tools not only help employees to better articulate their needs. They also provide valuable data on member behaviour. Individual data offers insights that allow for advice on how to adapt individual member behaviour to set them on the path of providing successfully for retirement.

Smart advice should be holistic. It should consider current trends and the changing characteristics and behaviour of the workforce, and it should be matched with tailor-made solutions. Members must be able to engage effortlessly around their benefits — on a personal level and in real time – either by SMS or e-mail, or through the web. Member engagement means member insight, and member insight means positively changed behaviour.

Technology and information are only valuable if the data is harnessed to make a real difference where it matters. If the data and results are carefully analysed by a team of expert actuaries and consultants, market-leading analytics and reporting can help employers make better decisions for their employees.

www.momentumconsultantsandactuaries.co.za