GOVERNANCE: Editorials: Edition: March / May 2020


Cats that can’t be skinned

Prescription by stealth, or any other way, is out. Simply out. It’s not only “workers’ money” vulnerable to misuse.

When a near-bankrupt government wants money and cannot raise more of it in taxes, to feed the bankrupt state-owned entities, its eyes turn desperately to the pots in pension funds. The two easiest to target, theoretically but mistakenly, are the Government Employees Pension Fund and the Eskom Pension & Provident Fund. In submitting to the temptation, government can fool itself. Through taxpayers, who dare not be fooled, government would still ultimately foot the bill. Shifting money from one pocket to another is playing with smoke and mirrors. This is because both the GEPF and the EPPF, respectively the largest and second largest pension funds in SA, are both defined-benefit arrangements. At the GEPF, government as the employer of civil servants makes monthly contributions to the fund and guarantees the member’s minimum benefits. That’s a huge burden for government, especially when the size of the civil service is unduly overstaffed. Much the same applies at the EPPF. The employer guaranteeing the benefits is a beyond-bust Eskom. If there is no capital injection into Eskom (from whom?), the fund would have to dig into its reserves as a temporary palliative or the employer would have to renege on its pensions promise.

These scenarios worsen. It’s common cause that a turnaround at Eskom requires large-scale retrenchments. Such a commitment, in the face of trade-union resistance, must be a precondition for future investment. Once it happens, the EPPF will be bound to pay out untold thousands of members many millions of rand in their retrenchment entitlements. Now, there are minimum benefits and there are bonuses. The latter, usually calculated on inflation adjustments, rely on investment performance. Last year the portfolios of both the GEPF and EPPF produced returns below the cpi inflation rate.

Force portions of them into bail outs, against trustees’ mandates, and the consequences are predictable. They won’t have much to do with the primary purpose of pension funds to optimize members’ benefits. Whilst under scrutiny, it’s surely the occasion to reconsider the arrangements of all funds in the public sector where standardized service conditions can be introduced. One proposal, for example, is to consolidate municipal funds into umbrellas for better governance. Another is for conversion from definedbenefit to defined-contribution of specifically the GEPF and particularly, in light of what former chief executive Brian Molefe has thrown up, the contentionfraught EPPF.

Some years ago, when the suggestion of the EPPF’s conversion was in the air, an evaluation was done of its actuarial report. In brief, it showed that the fund could safely provide members with a 33% benefits increase as an incentive to switch and that there’d still be a significant surplus to provide for Eskom’s operational requirements.

Eskom contributes 13,5% and members 7,3% of pensionable salary to the fund. This 20,8% is high by industry standards and raises questions of whether:

New employees should continue to be hired on a basis out of line with similarly large companies in the private sector whose pension funds are overwhelmingly of the defined-contribution variety;

EPPF trustees, on both the employer and employee sides, have interest conflicts (as fund members) that might influence the manner in which they direct it.

Government could do itself and taxpayers a favour by similarly evaluating it now, then extending the evaluation to other public-sector funds such as those of SA Airways.