Issue: December 2007/February 2008
Editorials

MEGAFUNDS

Baby in the bathwater

Is there to be a policy reversal on member representation on the boards of retirement funds? Implicitly, it would seem so. But whether it’s desirable is another question altogether.

Marcus... 1996 and all that

Democracy is being steadied for a backwards leap. Much as centralisation in government is increasing, so consolidation in retirement funds is inevitable.

The arguments for both are similar: to promote cost efficiencies by greater economies of scale and so on. Their flip-side is to reduce participation at grassroots level and to lengthen lines of communication, in turn distancing the representatives from the represented and diminishing the scope for accountability.

Initial estimates suggest that, should the National Treasury proposals for retirement-fund reform be implemented as envisaged, the number of retirement funds will fuse from about 14 000 into around 100 megafunds. The largest will be the national savings fund, presumably complemented by a gathering of industry funds and a stampede of private occupational funds into umbrella funds.

What is government really trying to do? Is the proposed consolidation, certainly not without merit, to be achieved at the expense of fund democratisation that a critical 1996 amendment to the Pension Funds Act was intended to promote?

National Treasury’s discussion document highlights the role of fund trustees and the need for them to be properly trained. This resonates similarly in the Financial Sector Charter and in the recent circular PF130 of the Financial Services Board (TT Sept-Oct ’07). But viewed from a practical perspective, were the 14 000 existing funds collapsed into 100 megafunds, it seems all these trustees in need of training and lecturing on fiduciary duties would pretty much fall away.

Taking one of the better and larger umbrella funds as an example, fund members don’t nominate trustees as they want. Instead, they are presented by the fund administrator with a slate of trustees for election. These trustees fulfil those beloved criteria of independence, skill and professionalism (for which they’re paid, unlike most other trustees). This sounds good, except for two defects: first, the nomination process is top down as opposed to bottom up; second, the trustee of a million-member fund is necessarily more remote from members than the trustee of a 10 000-member fund.

When it comes, say, to the formulation of investment policy statements and mandates, or queries on benefits, the communication lines will extend into a bureaucrat’s heaven. Paradoxically, too, an argument for megafunds implicitly defeats the argument that occasioned the 1996 amendment. Megafunds are favoured partially in recognition of the need to draw skilled trustees; the amendment was effected partially in recognition of the need for unskilled trustees to become skilled.

The amendment was introduced by Gill Marcus, then deputy minister of finance, who then argued:

  • “The key proposal is that workers will have the right to elect at least 50 percent of board members. Concerns expressed . . . that workers’ representatives do not have the experience or expertise are not adequate grounds for negating this proposal. Rather, it is an ideal vehicle to ensure that such trustees are empowered and trained, so that they can make effective, informed decisions. After all, it is their future they are deciding on.”
  • “Part of building South Africa, enhancing the ideal of a new patriotism, is skills development. The challenge to business and the retirement-fund industry is not simply to bemoan the lack of skills, but to seize the opportunity to ensure that training takes place . . . A better flow of information (will) itself help the democratic process.”
  • The bill enhances “the capacity of members to influence the overall direction of the investment of those funds and . . . to encourage greater participation in the management of the affairs of funds by members”.

If there are to be 100 megafunds without intermediate tiers of “federal” representation, these ideals will be jettisoned before they’ve been given a decent chance to work.