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.