Issue: March 2013 / May 2013
Editorials

CURRENTS

Much ado about not so much

Rockland might not be quite the scandal as it was originally depicted.

To hand is the report of provisional curator Pierre Kriel into the affairs of Rockland group companies. On the basis of Kriel’s findings to date, it seems that the six union-related pension funds can relax a little. They’d together put something like R450m into Rockland projects
(TT Dec ’12-Feb ’13).

The report was produced last December when the Western Cape High Court ordered the final curatorship of Rockland Asset Management & Consulting, Rockland Group Holdings and Rockland Targeted Development Investment Fund (TDIF). Applicant was the Financial Services Board with the Mine Employees Pension Fund and Sentinel Mining Industry Retirement Fund joined as intervening parties.

First up, the order itself is unusual. It provides for an “investors’ committee” comprising the curator and one dedicated representative appointed by each of the six investors. Amongst other things, the committee must “consider the possibility” of amending the TDIF trust deed and the management agreements with Rockland Investment Managers. It must also agree on the terms for retention, development, acquisition or disposal of TDIF assets.

Second, the report is into the Rockland “collective investment scheme”. Moot is whether the investments weren’t rather in the private-equity category.

Third, although Kriel consideredthe original FSB report to be a “fair reflection of the factual circumstances”, he did notice exceptions. Critically, the FSB had concluded that R151m in TDIF could not be accounted for. Having investigated this matter closely, Kriel reported that it could be accounted for.

Fourth is the business’ underlying investment in Aspen Pharmaceuticals that was to have been terminated. The initial R3,3m capital contribution “has grown phenomenally since inception”, said Kriel, “and would provide a very good return even if reduced by the early exit provisions”.

Most importantly, while there might well be argy-bargy over conflicts in the director/trustee roles of Rockland founder WentzelOaker, the overriding concern of the pension funds is the security of their investments and the likely returns from it. This depends largely on the valuation and potential of the Schaap Kraal property, totalling about 486 hectares adjacent to the huge Mitchell’s Plain township some 1,2 km from the False Bay coast.

There’s been an awful hullabaloo about this property, from the prices at which it was assembled to the valuations at which it was sold to TDIF investors and to its worth on ultimate development. Presently zoned as agricultural, it requires rezoning for residential, commercial and industrial purposes.

“It is difficult to assess when this will occur and, if possible, how this will be financed,” says Kriel. However, he reckons that this “ambitious project” could “possibly be viable” and so far he is satisfied with the “thorough job” to obtain approval for township development. Independent valuations of the property, excluding its mineral sands, have more than trebled between February 2007 and May 2012.

All is not lost. Far from it.

Adding up

Last October, the FSB reported that it had approved surplus distributions for eight “Ghavalas funds” that had been stripped. Their assets total R400m, their liabilities R176m, their reserves R34m and their surpluses at the apportionment dates R190m.

Why so little? Aside from recoveries through plea-bargainand other settlements, some years ago Alexander Forbes and Sanlam had alone paid almost R800m between them.

FSB chief actuary Marius du Toit explains: “The reason that the numbers appear not to add up is due to the time value of money. The figures are as at the respective surplus apportionment dates, all around 2003-04, whereas the recoveries mostly took place in 2006-10.”

In order to determine a surplus position as at the surplus apportionment dates, he adds, the relevant valuators discounted the later cash flows (including recoveries) to determine a surplus position as at these dates. He further notes that the surplus scheme of the Power Pack pension fund was not included in the October circular since its scheme had not yet been submitted.

The scheme documents, excluding Power Pack, put the total number of stakeholders in these funds at 26 620. The stakeholders are former members, active members, pensioners and deferred pensioners. It implies that each will receive slightly over R7 000 of the R190m.

It’s nice for the stakeholders, but not an awful lot of money considering its time value since the funds were stripped in the mid-1990s. Of course, it must assume that the stakeholders are still around and traceable after all these years. Otherwise, the biggest recipient will be the Unclaimed Benefits Fund.

Be that as it may, contrast it with a May 2011 report in Personal Finance that R730m (of the R953m recovered by the curator) would be paid to stakeholders within six months. “I cannot comment on the number given in Personal Finance,” says Du Toit.

As you were


Masilela...costs containment

Far from outrage at the argument that the Public Investment Corporation be collapsed into the Government Employees Pension Fund or privatised (TT Sept-Nov ’12), all is sweetness and light. Its response was an invitation to tea with senior management under chief executive Elias Masilela.

Amongst the points made:

  • The fee structure of the PIC is lower than asset managers in the private sector. This is because the PIC is not for profit but run on a cost-recovery basis. Its underlying interest is that the GEPF does not pay fees that are too high because ultimately, the GEPF being a defined-benefit fund with government as the employer, high fees will go back to the taxpayer;
  • The GEPF should be able to meet its pension promises without resorting to taxpayers. This it does by ensuring that its contribution rates are sufficiently pitched, its returns complement its objectives, and that costs are managed to avoid excessive leakages. The role of the PIC is integral;
  • Legally and technically, government (not the GEPF) owns the PIC. If you are both employer and underwriter, which government is, you must ensure that the employer is not opened to future liabilities i.e. returns must be managed optimally;
  • The PIC is liabilities-driven, for the GEPF to meet its promises. The private sector is profits-driven, with mandates given in terms of benchmarks. If the PIC wanted, 0,1% of its R650bn in equities could be used over the short term to move prices for window dressing and beating benchmarks more easily than any private-sector manager. The PIC doesn’t mind outperforming benchmarks, but more important is that the GEPF client can honour its liabilities;
  • If you are a principal (GEPF), you must exercise oversight over your agent (PIC). To do so optimally, you need capability. This seems like duplication of effort, but isn’t. The PIC’s policies on environmental, social and governance criteria were part and parcel of the GEPF leadership in creating the Code for Responsible Investing in SA;
  • The GEPF is an active client. It interrogates and asks hard questions, unlike most others which take what they get. Such collaboration is especially necessary with a client the size of GEPF. The only danger is where the client thinks it’s cleverer, giving instructions without taking ownership responsibility;
  • The PIC received a licence to run unit trusts because smallish pots of cash, mainly from the former homeland governments, are more efficiently managed by unitisation. The money, which belongs to National Treasury, can benefit from the PIC’s bulk-buying power.

Says Masilela: “At this stage it is not our intention to do retail business. We’ve taken it upon ourselves to influence economic efficiency, to contribute to social security and to retirement reform. Our contribution is to provide cheaper serves into the market, to signal that some services can be provided cheaper, and possibly to have a major impact by showing that one of the biggest constraints to financial access is costs.”

Overburdened

To hear Sanlam chief executive Johan van Zyl tell it, life offices are bombarded with what he describes as a “regulation rampage”.


Van Zyl...a rampage

On and on it goes, regulators missing the point that the heavier the raft the more difficult it becomes for life offices to make the profits still expected of them. The raft is ostensibly intended to protect consumers, but paradoxically it’s these same consumers who’ll pay for it one way or another; no profits, no business.

The list, forcefully presented by Van Zyl to a conference at law firm Norton Rose, is extensive. The sheer volume and complexity come at “huge cost”. Consider, by way of a few examples, the higher capital requirements that followed the overseas banking crisis and which aren’t necessarily appropriate for SA insurers. Or the ‘treating customers fairly’ campaign launched by the FSB. Or the need to act as corporate citizens. Or tax uncertainties. Or the impact of retirement reform, particularly with introduction of a state-owned national fund.

On top come advances in technology and the social media, with their ways to influence marketing and distribution. Add the pressure to earn sufficient investment income in flattening markets. Pile on the ever-present skills shortage to manage the quick-fire landscape changes, let alone the existing business.

None of this is a suggestion that regulation, in and of itself, is altogether bad. But, amidst the public applause at regulators’ attempts to advance consumer interests, there is an argument that the flip side should not be ignored.

Insured or not

Trustees might be blissfully unaware of holes in their liability cover. If so, they could be shocked to discover just how exposed they might be. Under the new financial omnibus legislation, even the late payment of pension-fund contributions can be construed as criminal – with implications for their cover.

They should carefully read their policies for the commonly included “subrogation” (substitution) clause, such as “When a loss has been made good by the insurers, a discharge thereof shall be made by the insured and the insured shall ... assign to the insurers (such) claims and rights of action competent to the insured against the persons concerned in respect of the loss
sustained ....”

Certain exceptions are allowed where’s there’s been negligence on the part of fund officers indemnified by the policy. But where does negligence stop and criminality begin?

A letter from an underwriter to the principal officer of a large fund confirms that, notwithstanding indemnities, the insurer has the right (under a different section) to recover losses from to the fund from any principal officer or trustee whose “criminal act” causes loss to the fund irrespective of whether they’ve been identified for negligence.

The principal officer contends that, particularly in light of what’s now proposed as criminal, this is an example of how “these underwriters deliberately make things vague in order to avoid paying”.

Prestige publication

It’s a feather in the cap of SA’s advances on responsible investment that the annual yearbook of the International Corporate Governance Network has published an article, by David Couldridge of Element Investment Managers, headed “Top of the world”. Up in lights, it summarises that “SA’s reaction to the financial crisis has created a world-beating governance regime”.


Van Zyl...a rampage

Yet the article doesn’t contain only boasts. It also asks whether trustee awareness will translate into service providers taking a responsible-investment approach to deploying capital into markets. Although SA has 41 signatories to the UN Principles for Responsible Investment, only five are asset managers. So mandates requiring this approach have been slow. But CRISA and the revised Reg 28 should play an important role in guiding trustees, consultants and investment managers.

“Much more needs to be done to build an even greater global reputation for being a safe investment environment if the majority of institutional investors required the integration of sustainability, and actively engaged the companies that have poor systems of governance,” he argues.

Happy merger

NMG Benefits and Jacques Malan Consultants & Actuaries – both in actuarial and employee-benefits advice -- have merged. The combined firm will employ almost 400 people in Johannesburg, Cape Town, Durban and Port Elizabeth.

“The complementary nature of our two businesses will provide for extensive cross-selling opportunities and enhanced access to resources in all geographical areas,” believes JMCA chief executive JacoSmit.