STRUCTURAL CHANGE: Editorials: Edition: June / August 2020


Hard times,
hard choices

Adaptations from the old and familiar to the new and
unpredictable will produce contradictions.

The ground has shifted for SA retirement funds. It must be so when their structural premise of long-termism is undermined by exigencies of the short. Two examples suffice. Nobody, but nobody, has a clue of where the coronavirus will lead. Neither can the impact of ratings agencies’ downgrades of SA investment to junk be fully quantified, perhaps less for the downgrades themselves than for the severe anti-growth analyses that motivated them.

The one factor compounds the other. They combine to defy predictions except that the consequences won’t be good and the period won’t be brief.

In such circumstances, where globalisation itself has gone into reverse, conventional investment advice is turned on its head. To get through the period of lockdown, just to hang in while demand collapses, is one thing. But to anticipate a return to conditions that resemble days gone by, not least for rand exchange rates, is quite another.

Contraction of economic activity spells job losses; the worse the contraction, the worse the job losses. And the worse for job losses, the worse for retirement funds. Membership numbers will shrink, as will the size of the savings pool on which the economy relies, and as will the adequacy of pensions provision. Survival today displaces sustainability tomorrow.

For increasingly desperate individuals, this invites temptation to cash in contractual savings (even to accept the punitive terms); or not to save at all (simply because they lack the discretionary income). For taxpaying corporates, to the extent that they still produce earnings, survival might require that they rein in dividends (needed by investors, especially retirement funds). In the quest for cash, a vicious downward spiral is perpetuated. Fund members had better start preparing for disappointments, and trustees for hostile questions, when the next sets of benefit statements are presented.

The second act in this unfolding drama is the possibility that the coronavirus has applied a brake to retirement funds’ stakeholder activism. Where they’ve been scrupulously driven to save the planet, uplift societies and broaden the purpose of profits – all for the benefit of older and coming generations – moralism will collide with futurism.

Priority in corporate reviews turns to the optimal extraction of here-and-now money, as in policies that range from employee remuneration to social responsibility. Diminished returns and reduced scale will compromise the noble intentions that retirement funds once, such as yesterday, used to propound. Society as a whole, financially and otherwise, will be the poorer.

It needn’t be so. But there are some critical debates left to hang:

• Is the first responsibility of a fund manager to optimise the investment returns for fund members?

If so, on what time horizons and in terms of what trade-offs, such as weightings towards offshore and domestic markets (affecting job creation) or as between green and growth (affecting pollution, for instance)?

From where will ‘bankable’ infrastructure projects come?

How to stimulate client demand for ESG (environmental, social and governance) investment products and processes?

Jennifer Wu, global head of sustainable investment at J P Morgan Asset Management, has succinctly expressed the paradox that Covid-19 presents: “It has rightly diverted boardroom and policymaker attention to crisis management, slowing ESG agendas. Yet it has tragically underscored how connected humans and societies are to nature. If one part of the ecosystem falls ill, the immunity of the system is compromised.”