Issue: March 2005


Finance Minister Trevor Manuel answers TT's key questions

ABOUT trustees, training and transparency.

ABOUT engagement with fund managers, accountability to fund managers and the exercise of fiduciary duties.

ABOUT the 'critical' need for shareholder activism

Nine years ago it seemed pretty obvious why government wanted to amend the Pension Funds Act, for employers and employees to have equal representation on the boards of retirement funds, but would you remind us of the reasons and give us some idea of how you think the intentions have actually been realised?

The core reason for amending the Pension Fund Act was to enhance corporate governance and accountability in this industry. We must acknowledge that we come from a past where both transparency in decision-making and education have been lacking. More specifically, education regarding the complexities and duties attached to the "trusteeship" of pension funds was virtually non-existent. Prior to the 50% member-elected representation amendments, both transparency and accountability of many funds remained virtually nonexistent.

These issues are important when one considers the shift of many occupational funds from defined benefit (DB) to defined contribution (DC). With the shift of responsibility to DC, worker representatives have had to increase their participation in planning for their own retirement. No longer could employees simply view the pension fund to which they contribute as the responsibility of the employer. Under DC schemes, risk is transferred to the member. The member benefits from favourable returns, but also bears the full brunt of poor performance of the fund's invested assets.

It was therefore necessary to have members represented on the board of the management of the fund to which they belong. Government is of the view that at least 50% member representation is key, primarily because the member is bearing the investment risk, and also because it forms part of good corporate governance.

We do not believe that 50% representation is the panacea for addressing the challenges faced by the board of trustees, but is a step in the right direction. What we need to concentrate on is fully empowering member representatives to fulfil their fiduciary duties to the pension fund and its members. Trustee education is key to ensuring that trustees can perform their duties. Trustees will be empowered to disclose to members in an open and easily understandable way information such as, how well their pension fund has performed; the value of their accumulated fund benefit; how much of their money went to insured benefits and what amount actually went towards retirement.

On education, I want to dispel the myth that only member-elected trustees are in need of education regarding retirement-fund matters. There are certainly many employer-nominated trustees who would benefit from trustee training.

Government is of the view that at least 50% member representation is key, primarily because the member is bearing the investment risk, and also because it forms part of good corporate governance

When the law changed, it was heralded by unions as a victory for worker empowerment. Don't you perhaps get the sense that only now, after the Nedlac conference last October, the change is really about to impact by a swing in the power balance from fund managers to fund members through their trustees?

It is important to clarify that trustees should not be engaged in a "power struggle" with fund managers. Trustees are there to represent the interests of the fund, and by implication, the members of the fund. One should clearly delineate between trustees who have ultimate responsibility for the assets of the fund, and fund managers, who manage the assets of the fund, in accordance with a written mandate granted to them by the trustees of a fund.

The relationship between the trustee board and fund manager should be symbiotic. The trustee board should provide the fund manager with a written mandate that is clear, prudent and unambiguous.

I would like trustees to become involved in the running of their funds, and do so to the best of their ability, fulfilling their duties in terms of the law. I would however caution that trustees cannot and should not attempt to become part of the day-to-day management of the assets of their fund. This is the expertise of the fund manager. Trustees should monitor compliance with the mandate, and concentrate on the suitability of the over-arching investment strategy most prudent for the members of their fund.

It is important to clarify that trustees should not be engaged in a "power struggle" with fund managers.

Trustees are there to represent the interests of the fund, and by implication, the members of the fund

What effects are likely, especially for shareholder activism, which you championed at the conference? More specifically, what effects are you wanting? Any particular targets for that activism?

Shareholder activism is critical. This fact is becoming increasingly recognised internationally. At the Nedlac Retirement Fund Trustees Conference, I compared the role of elected trustees to that of David pitted against the Goliath that the wealth, power and knowledge of fund managers represent. This is the spirit that we need to see permeate the trustee environment – the willingness to stand up for the rights of members and to protect their savings in the face of sharp finance talk. Such vigilance should be directed not only at financial performance, but also the social desirability of investment plans. Such an approach contributes to good governance, both of the fund, and of the entities in which the fund holds equity.

We must realise that in South Africa shareholder activism is still a new concept. We are still to establish the parameters of trustee training, I therefore do not wish to be prescriptive on the matter, but do strongly encourage funds to exercise the voting rights attached to the shares they hold, or at the very least educate themselves with respect to the issue.

How would you define the main responsibilities of trustees? Would they extend beyond ensuring that fund members get the best returns, or would trustees have broader social responsibilities?

Trustees should run the fund optimally and recognise that retirement planning is a long-term objective. Their active participation in this process is crucial. In this context, we should view the sustainability of the entire South African retirement funding system.

At the Growth and Development Summit (GDS), it was agreed that Social Responsibility Investments in the financial sector would be five percent of assets held.

However, the target of five percent is not a prescriptive one but one that was voluntarily agreed to by all the parties at the GDS. It is my belief that socially responsible investment (SRI) can play an important and contributory role in the development of our society.

The argument that SRI compromises the return earned by a fund is, in my view, flawed. Firstly, given that saving for retirement is a long-term objective, one should ask: If we do not invest any of our assets in SRI vehicles are we in fact jeopardising sustainability in the long-run? We cannot take a myopic view here. Secondly, many funds have found that SRI can in fact yield a higher return to fund members.

Although many of the 15 000 or so funds are being collapsed into umbrella funds, there should still be over 30 000 employee-elected representatives if the equality principle is to be retained. Are you confident that there are sufficient numbers with sufficient skills to exercise those responsibilities? If not, what's to be done? Is the suspicion by workers of service providers, who are willing and able to offer training, a real problem?

I would like to re-iterate that the pension reform process has to be consultative, and we have to find appropriate solutions together.

We have recognised a need for a major push on the trustee-training front and need to come up with creative solutions about how best trustee training can be designed, funded, implemented and monitored.

On the matter of service providers, we should recognise that most operators are legitimate, but some may be unscrupulous. We need to ensure there is a code of ethical

standards that protects workers from these unscrupulous service providers. It is not only government's duty to weed out those providers who operate inappropriately, but also the duty of trustees to remain vigilant and not be swayed by inappropriate incentives. It is their role to guard against any conflicts of interests.

You've had quite a lot to say about fund managers' fees, which you seem to think are excessive, and about trustees' independence from fund managers, which you seem to think is easily compromised. Are you warning or are you threatening? Or are you looking to fix something that maybe isn't broken?

I think the view that trustee independence is never breached is na´ve. At the Nedlac trustees conference I spoke about trustees sitting in sponsor suites at sporting events, and how this could place the assumption of independence under stress.

On the matter of fees, I must highlight that escalating fees are not only associated with fund managers. In the holistic review we have undertaken of the South African retirement-funding industry, one should study the entire cost structure faced by funds. This includes fees associated with investment managers, service and product providers, consultants, the cost of insured benefits and administrative costs.

Crucial to the matter of fees is transparency and disclosure. It is easy to overcharge someone when they can't see what you are charging. Fund managers should be required to disclose their fees in a standardised, transparent fashion. Likewise, trustees have a duty to their members to indicate to them the charges levied against their contributions. It is my belief that, for far too long, the retirement-fund industry has lived off the fat of the land without having to be accountable to anybody.

Similar disquiet has been expressed at official level (by Dube Tshidi of the Financial Services Board, for example) about possible conflicts of interest where a single institution offers the full range of services in-house, from consultancy to investment for retirement funds. If you share that disquiet, what should be done about it?

Certainly, a single institution offering a full range of services to a fund can offer benefits in the form of economies of scale, and hence reduced costs to the individual member. However, what is key is that this not be allowed to become a structure to conceal errors or over-charging.

The necessary checks and balances need to be put in place, such as arms-length agreements and stringent disclosure to separate the duties of the fund manager vis-a-vis the actuary. If these concerns continue to present themselves, then more stringent measures will need to be considered.

There's been research from Empowerdex which indicates that 80 percent of Black Economic Empowerment (BEE) wealth is with public-sector pension funds. Assuming that this statistic is more or less accurate, aren't the various charters (in particular the Financial Sector Charter) giving too much weight on their scorecards to direct black shareholdings and too little to indirect? Put differently, isn't this encouraging precisely the elitism you'd prefer to avoid?

Certainly indirect ownership by historically disadvantaged communities is important, as it more widely distributes the fruits of economic success. However, driving this economic success depends deeply on placing direct ownership of the economy in the hands of black business leaders who can drive corporate South Africa forward in the coming decades.

Having said this, I am on record as having stated a number of times that broad-based BEE cannot be about simply rotating ownership among a small elite group of black entrepreneurs. What is required is a multi-dimensional view of what is meant by BEE.

Having linked the investment of public-sector funds with the Financial Sector Charter, I find it appropriate to provide clarification in this regard. In particular, I would like to specifically deal with the issue of PIC investments, which have been topical recently. It is important to note that the PIC makes investments predominantly on behalf of the Government Employees Pension Fund (GEPF). Given that the GEPF is a DB fund, it would be inappropriate to consider any returns accruing from such investments to be benefiting the beneficiaries. This is simply because the pension benefits are predetermined. In that regard, such investments are essential to the extent that the returns ensure that the employer is able to meet its obligations to its employees (who are the beneficiaries). Following this argument, it would be incorrect to conclude that PIC investments made on behalf of the GEPF qualify to be classified as indirect ownership. These funds would only qualify to be classified as indirect ownership if, and only if, they were DC funds.

Further, the sheer size of the GEPF and its participation would render the empowerment objectives irrelevant, firstly because it would render government as an empowerment partner, which is clearly inappropriate, and, secondly, would make it trivial for businesses to realise targets.

Having said this, government remains committed to broad-based economic empowerment, in particular, promoting economic transformation in order to enable meaningful participation of black people in the economy;

  • Achieving a substantial change in the racial composition of ownership and management structures;
  • Increasing the extent to which communities, workers, cooperatives and other collective enterprises own and manage existing and new enterprises;
  • Promoting investment programmes that lead to broad-based and meaningful participation in the economy by black people in order to achieve sustainable development and general prosperity;
  • Empowering rural and local communities by enabling access to economic activities, land, infrastructure, ownership and skills; and
  • Promoting access to finance for BEE.

If we work together in trying to achieve the above objective, the concern of elitism would not arise. It is essential that this responsibility ought not lie with Government alone.

In talking about the public-sector funds, we're talking mainly about the Public Investment Commissioners, which reports to you. Possibly, such other huge funds as those of Telkom, Transnet and Eskom are not entirely outside your sphere of influence either. What should they be doing, through their muscle as shareholders in JSE-listed companies, to promote consistency with government objectives on broad-based BEE, skills development and job creation?

The mandate of the public-sector funds must, in the first instance, ensure long-term value for the pensioners whose money is invested in them. Ensuring long-term value must be looked at in the broader context of promoting economic growth, improving corporate governance and advancing broad-based BEE. These objectives feed on each other. Good corporate governance, sound BEE investments and investments that raise the level of economic growth all contribute towards better returns for investors in the long term.

Public-sector pension funds have the added responsibility that they must ensure best practice in their own governance and must follow prudent investment guidelines so as not to transfer risk to tax payers.

Public-sector pension funds must show that by investing in growth in South Africa, they can provide better returns, both in monetary terms and in prospects for the children of the people invested in these funds. We must lead by example.

An apparent contradiction, when it comes to representivity of fund members, is that decisions of the PIC don't always meet with approval of Cosatu. With corporatisation of the PIC, which Cosatu opposes, how can the unions feel assured that they won't have less influence over the investment of their members' savings?

As the Minister of Finance I am currently the sole trustee of the GEPF. This is set to change when the board of trustees of the GEPF is constituted in early 2005. [The board of trustees has not been constituted because of a hold up in finalising the employee representatives from the Security Sector].

The GEPF provides the PIC with a broad mandate to invest in bonds, equities, property, unlisted companies and Social Responsibility Investment. As mentioned above, the GEPF as trustee should not involve itself with the duties of fund managers, in this case the PIC. This in no way diminishes the role of the union as trustee representative on the board of trustees of the GEPF.

According to the Government Employees Pension Law, the board as constituted will be 50 percent employee representative bodies and 50 percent employer representation. As Minister of Finance, I will continue to play a central role, with the board of trustees reporting directly to me.

Your budget is reaching the end of its rope on welfare spending, so government lacks capacity to extend pension benefits. With the widespread changeover from defined-benefit to defined-contribution funds, which saw a chunk of retirement savings converted for consumption, employers are off the hook on benefits. If the state can't provide, and employers needn't, and employees haven't, what advice or comfort can you offer over the future of retirement funding?

It is important that we create a culture of saving in South Africa and the role of the state is to provide an enabling environment that can facilitate savings, especially savings for retirement.

This is over and above the limited social security net that we can offer.

Part of our strategy involves mobilising for the provision of appropriate savings vehicles. Government has put forward the retail bond, which is proving to be a successful and cost-effective vehicle through which people can save.

This has also led to banks and other financial institutions offering more competitive rates for savings instruments. In the arena of banking, the Mzansi account has also proved that the low income sector can be successfully provided for if people actively apply their minds to the task of appropriate design.

In a similar vein, it is proposed that a National Savings Fund be created to enable low-income individuals, who may not be able to make regular contributions to a pension fund, to save for retirement. At this stage this is merely a concept, but we have invited all parties to think positively and creatively to come up with an optimal solution.

The future of South African retirement funding is certainly not dark and gloomy. We are moving into an exciting new era of trustee education, transparency to members, improved fund governance, more effective regulation and the extension of retirement saving vehicles to a whole sector of the South African population who were previously denied access.

In that regard, the shift away from DB to DC arrangements does not pose insurmountable risks for either beneficiaries or government. Improved trustee and beneficiary awareness would enhance investment decisions and ensure that funds are managed in a sustainable manner.