Issue: September/November 2008


The next wave

Politicisation of retirement fund reform has an eerie inevitability. There’s so much at stake that another post-Polokwane battleground must be avoided.

Comfortably over a trillion rand is invested in SA’s retirement funds. Being such a huge pot of money, they’re also a huge pot for power. Fund members might not appreciate it, but politicians do. A power play over the future of retirement funds, like so much else in this post-Polokwane dispensation, tempts another source of political conflict that SA doesn’t need. For fund members, it can end in tears; for fund reformists, in frustration of good intentions.

This is what happened with two previous waves of politically motivated change. In the 1970s and 1980s, largely because of trades union-inspired pressure, there was massive conversion from defined-benefit (DB) to defined-contribution (DC) funds. It was part of the anti-apartheid activism of the time, on the argument that fund members should have control over their money. The subtext was for United Democratic Front constituents, notably the unions, to use this control for political muscle.

Abetted by consultants, who foresaw volumes of work for themselves in the conversion, the National Party government acquiesced in the unions’ demand. Employers on the line for DB benefits couldn’t believe their luck in escaping the liabilities and the risks being passed to fund members. An unanticipated upshot was that retirement savings were denuded and retirement benefits eroded, contributing to the calamity in retirement funding now all too evident.

The other landmark union-inspired change was the 1996 amendment to the Pension Funds Act, providing for the boards of funds to comprise employer nominees and member-elected representatives in equal measure. Again, there was a noble intent for such democratisation to advance member participation and social influence.

It has not worked as well as originally hoped. The reason partly relates to the paucity of trustees – not only from the member-elected, and not only from the unions – to assume fiduciary duties that require high standards of professional competence in terms of technical knowledge. There’s been a capacity constraint, accentuated by inadequate training for the “new-generation” trustees. In turn, this has exacerbated an over-reliance on consultants and other service providers, with adverse cost implications for funds and their members.

The problem has been worsened by independence and integrity sometimes being compromised. Last year, for instance, the High Court intervened to prevent a fund’s union-elected trustees from being disciplined by their union for using their discretion in the interests of the fund rather than accepting mandates from the union.

Also last year, the Financial Services Board stepped in with circular PF130. An objective is to prevent the corruption that appears to have proliferated from trustees receiving gifts from service providers. Let it be noted that this affects all trustees, not only unionists who might be more vulnerable to requesting and receiving because they usually get no other recompense.

An implicit acknowledgment of these systemic deficiencies is in the reform proposals respectively from National Treasury and the Department of Social Development. Both envisage the wholesale consolidation of retirement funds, from the present number of around 14 000 to perhaps 1 000. This implies fewer trustees – presumably, more competent and professional – controlling larger and hence more powerful funds.

There are several points of departure between the proposals of the two government departments. Significantly among them, National Treasury wants a National Social Security Fund (NSSF). It promotes the “social solidarity” aspect of cross-subsidisation, by wealthier contributors of the poorer, with compulsory membership of all formal-sector income earners. Mandatory contributions would be at around 13% to 18% of each person’s after-tax wages up to a R60 000 annual earnings threshold.

For its part, Social Development wants government to sponsor a retirement fund where the mandatory contribution would be 15% of annual income, possibly split equally into DB (pay-as-you-go) and DC portions. Critically, it proposes that individuals be able to opt out of the DC tier and instead participate in large funds that meet prescribed accreditation standards. This opt-out provision can significantly undermine the “social solidarity” that National Treasury emblazons.

The more potent for having been on the winning side at Polokwane is the Cosatu trades union federation. The rallying cry of Jan Mahlangu, its policy coordinator for retirement funds, is “one sector, one fund”. Speaking recently at the Institute of Retirement Funds, he identified the target date for introduction of industry-sector funds (ISFs) as 2011. This roughly coincides with the rollout of government’s proposed reforms.

How this will align with the National Treasury recommendation for the NSSF isn’t clear. ISFs will only be possible if Parliament agrees, along the lines of Social Development’s recommendation, to the opt-out from a national fund.

If the opt-out is allowed, it can be assumed that ISFs will qualify. Since they would embrace lower-paid wage earners, the bottom would be knocked from the NSSF. The ‘‘social solidarity” that the NSSF intends – by cross-subsidisation of retirement-savings costs and risk-benefits cover – would be undermined.

For instance, an ISF for the banking sector (more highly paid white collars) will have a risk profile much better than the national average. By contrast, an ISF for the mining sector (more lower-paid black workers) would be unable to average beyond its sector.

When the opt-out is considered, large funds would also include multi-employer umbrella funds under the aegis of life assurers (who’d profit from services provided) and union-managed ISFs (where profit for management and administration is eschewed). On the Australian model, as Rob Rusconi points out elsewhere in this TT edition, union-originated industry funds don’t have intermediaries and usually don’t pay commissions.

 This makes them much cheaper to operate than profit-making alternatives. ISFs offer advantages of scale, allow workers to participate more actively in the direction of capital, and disperse the concentration of savings from a single national fund into other large funds for peer competition on relative after-costs performance. But what works admirably elsewhere, where ISFs have evolved, might not be immediately suited to SA.

In theory, fund members are better off where fund management seeks to reduce costs by minimising service-provider profits. In practice, not to allow profits is the easy part; not to incur wasted costs through managerial inexperience and inefficiencies is the difficult part.

Mahlangu is hardly the most vigorous proponent of the profit ethic. The question then to arise is whether, at this stage, union-managed funds have the track records to induce sufficient confidence that members will ultimately gain. To date, their records are inconsistent. There have been contentious diversions of fund monies into unions’ investment companies and temptations for funds to be used in pursuit of unions’ workplace agendas rather than members’ retirement benefits.

This in turn raises questions over the democratisation of funds that Mahlangu espouses. In principle, it’s not to be faulted. In practice, it’s a matter of checks and balances. This particularly applies in an environment as politicised as SA.

Take an industry – virtually any industry – where unionised workers predominate numerically. What is there to prevent the union’s head office from putting up for election a slate of trustees who will do its bidding? On what justification is a winner-takes-all scenario to be avoided, if it is to be avoided, so that unions don’t effectively assert dominance over ISFs and the billions of rand, invested in SA companies, under their control?

Will employers, where they are obliged to make contributions, have the right to appoint trustees? If so, in what proportions?

Consider as a possible precedent the Chemical Industries National Provident Fund, especially pertinent because for many years Mahlangu was involved with it. The fund’s rules provide for the appointment of trustees through shop-steward structures. Yet more than half the fund’s members are not amongst members of the 62 000-strong Chemical, Energy, Paper, Printing, Wood & Allied Workers Union (Ceppwawu) that established and now effectively controls the fund. So, although in they’re in the majority, non-union members of the provident fund have no right to stand for election or even to elect trustees.

At least with umbrella funds, usually sponsored by life assurers, there is now a balance. The Register requires that sponsors appoint independent trustees to the funds’ boards. No longer will he register fund rules where, by tying funds to sponsors, choices of product and service providers are limited. Various sponsors are also moving to have independent trustees elected by members and they embrace the role of participating employers.

The real and present danger to retirement fund reform is in its potential for politicisation, where the need to provide for pensions is subordinated to control over national savings. To date, the reform process has been led primarily by National Treasury, which reports to Finance Minister Trevor Manuel. Into the future, it may no longer be so. Subsequent to Polokwane, Cosatu is more forcefully positioned to swing debates its way; not only debates but also, come the next state president, key appointments including the finance minister.

If the dust-up earlier this year between Mahlangu and Manuel is any guide – Mahlangu publicly accused Manuel of supporting the “intransigence of the financial sector” over the level of financial institutions’ direct black ownership – there isn’t the best of ideological blood between them. Recent publication by National Treasury of recommendations from a Harvard-led team of international academics to promote economic growth, much to the chagrin of Cosatu, adds toxin to the cocktail.

The prospects of a new finance minister in the mould of Manuel, rather more beloved by “the financial sector” than Mahlangu, cannot be too sanguine. On the retirement funds landscape, the effects might run deep. For the finance minister (whoever he might be, given that Manuel must someday move on) is persuasive in nominating half of trustees on the board of the Government Employees Pension Fund, selecting the chief executive of the Public Investment Corporation, deciding on top management of the Financial Services Board, positioning the National Social Security Fund . . .

Power plays are the ingredients of ructions. Hope that they won’t happen. Or hope beyond hope that the future of retirement funding will be the better for them.

Allan Greenblo
Editorial Director