Issue: June - Aug 2013


Say their pay

It’s kept discreetly secretive, but perhaps not for much longer. The issue is burning abroad, and National Treasury is about to pronounce on pension-fund costs.

In the five years since its formation, the stature of the Association of Savings & Investment SA (ASISA) has grown hugely. No longer a mere bolting together of the lobbyist-orientated associations that originally comprised it – the life offices, investment managers, linked-investment service providers and managers of collective investments –it has earned authority for the coherence of its policy contributions.

Some of these contributions might ultimately be dismissed, but they can never be ignored. It’s because they’re backed by research and argument, from the best minds the SA savings and investment industry, prepared to slaughter cows the industry once held sacred. Impact derives from the extent that national interest is seen as complementary to the self-interest of the association’s vigorously competitive constituents.

There’s probably no better way, with lawmakers and regulators perpetually present, to promote the industry’s interests. Were it otherwise, ASISA would not command the respectful attention of National Treasury, the Financial Services Board and the major trades-union federations.

It’s a consensus-seeking dialogue cutting both ways. That much is evident, once again, from the representative attendance and high-level panel discussions at the most recent ASISA conference. Yet, given the conference theme of “Regaining confidence in the financial services industry”, a certain omission was glaringly noticeable.

Nobody raised, even obliquely, the issue of remuneration levels. Abroad, following the taxpayer-funded rescues of institutions held to have caused a global financial crash and the egregious pay packages that have persisted regardless, there’re few issues more burning in the attempts to restore confidence.

That’s why, for instance, the European Union is looking to crack down on fund managers’ fees. It’s also why, on both sides of the Atlantic, the broader questions of public companies’ executive remuneration are subjected to a “shareholder spring” of resistance to obscenities. No adherents to the free-market ethic would welcome regulatory intervention.

Crisply, however, there’s a dichotomy. Fund managers are in the forefront of shareholders entitled to vote, as representatives of such investors as pension funds, on the remuneration of investee companies’ directors. At the same time, their respective practices can be contradictory.

They can hardly disprove when their own pay either isn’t disclosed or when it’s at such extreme levels as those of Mohamed El-Erian, chief executive of California-based bond trader Pimco, who is said by the New York Times to have last year have picked up $100m; or an unnamed executive of Pimco Europe said by the Financial Times to have taken £29,9m. In contrast, the £4,5m paid to Investec Asset Management chief executive Hendrik Toit (also according to the FT) glows with modesty.

Fees of SA fund managers will need to be debated, sooner than later, in ASISA. They’re pertinent to imminent publication by National Treasury of the final discussion document in its series of papers on retirement-fund reform. It will focus on proposals to drive down costs for members of pension funds or, put differently, to improve their net after-costs returns.

This implies an analysis of how costs are dissected and computed at their various layers. Amongst them are the fees for fund management and justifications for them, necessarily embracing managers’ pay (a component of fees) in relation to value created.

At the ASISA conference, National Treasury’s Ismail Momoniat described costs as “scandalous” and David McCarthy smacked “outperformance” as often being driven by inappropriate benchmarks to inflate fees. There’s a “disconnect” between the financial and real economies, noted Old Mutual Emerging Markets chief executive Ralph Mupita in searching to understand the lack of trust.

They set the tone for the forthcoming National Treasury paper, inevitably to incite heated controversy. It’s impossible to generalise broadly on whether fees are too high or too low except within a context that facilitates reasonable judgment. Outrage is not a context.

Should a fund manager be paid more than a doctor or engineer, or the head of an industrial company consistently delivering on strategy and profits? Are his incentives aligned to short-term performance or long, thus impacting on the time horizons of pension funds?

Momoniat . . . scandalous

How is he rewarded for compliance with the Code for Responsible Investing (CRISA), and penalised for non-compliance? Is his bonus, even his job, likely to be jeopardised if he votes against a shareholder resolution proposed by a client of his firm’s corporate finance division or employee-benefits entity?

Attraction and retention of top talent unavoidably demands top remuneration. Upper echelons of the financial sector, which embrace the better fund managers, cannot complain of penury. At risk of comparing apples with pears, and purely for illustration, the total 2012 compensation of larger institutions’ chief executives commonly topped R20m e.g. Sizwe Nxasana of FirstRand at R22,5m, Bruce Hemphill of Liberty at R23,7m and Julian Roberts of Old Mutual at £2,4m (roughly half, apparently, of IAM’s Du Toit).

To rank SA fund managers in this mix is pure guesswork. Comparisons are the more complex when variable pay (bonuses and share options) is matched with stipulated deliverables. And there can be no comparison at all when, contrary to King III, there’s institutional silence on the three most highly paid non-director employees.

Remuneration of fund managers  - there could be instances where they approach or exceed those of their chief executives - cannot be gleaned from financial-sector annual reports. It might have been hoped that Coronation, being a standalone fund manager listed on the JSE, would prove the exception. Not so.

Mupita . . . disconnect

The only glimmer in its report is that, for the year to end-September, chief executive Hugo Nelson was paid R14,9m inclusive of salary, benefits and bonus. Coronation discloses neither its remuneration policy nor the remuneration of its three most highly paid employees.

Similarly with listed Peregrine, although its services extend beyond fund management. Its most highly paid executive directors are Sean Melnick (R12,3m) and Mandy Yachad (R13,3m). The report, showing “key management remuneration” at R177,4m but offering no breakdown, admits to being “partially compliant” with King.

In the pension-fund context, there are at least three basic reasons that the remuneration of fund managers has relevance:

  • They’re critical to costs and a component of fees that are up for negotiation;
  • They’re the basis for credibility in voting on the remuneration policies of investee companies;
  • They can counter, or be part of, what the UK government-commissioned Kay Review described as a “misalignment of incentives” (warning that the asset-management industry has become dominated by short-term thinking).

Why, for example, should a fund manager support a company’s share buy back or asset strip that will hike dividends rather than investment in control of carbon emissions? Where, as Momoniat asked at ASISA, is the “social benefit”?

In the national context, marked by exacerbating income inequalities, pay packages at the most senior levels of commerce and industry are closely scrutinised. They’re benchmarked from company to company, and spiral from the private sector into the public. They fuel salary expectations and provoke destabilising wage demands. They must also be cognisant of peer competition, not least from abroad.

Sweet reason gets lost. A role of fund managers is to restore it, at least to the extent of being heard on the fairness of remuneration policies. As representatives of shareholders, they can vote at meetings of investee companies. As signatories to CRISA, they’ve voluntarily committed themselves to shareholder engagement.

So far, the start seems uninspired. The Public Investment Corporation, purportedly the trendsetter in these matters for the Government Employees Pension Fund, has set out its considerations to disapprove an investee company’s remuneration policy by way of a non-binding advisory vote: “The policy appears to be inconsistent with best practice, which requires that performance targets must be stretching, verifiable and relevant. There are no specific performance conditions disclosed, and there is a lack of transparency.”

According to the PIC’s public disclosure of its voting record to end-September, in the many prior months the PIC did not vote against a single remuneration policy. However, earlier this year there were significant votes recorded against the pay policies of Lonmin and Anglo American. It’s thought that the PIC/GEPF were amongst them.

The process was recently advanced when the PIC updated its voting record to end-March. Now it elaborates on particular reasons for having voted no (see Currents). This will stimulate attention and enable the evolution of criteria for other investors’ guidance.

Why leadership from the PIC/GEPF? Because the PIC, with the GEPF as its client, is SA’s largest asset manager. Because the GEPF has been the driving force of CRISA, so is expected to lead by example. And because, between the pair, there’s an implicit endorsement of their boards representing government, trade unions and over a million members.

Equally, the converse applies where they support remuneration policies. Incidentally, the PIC might have less of a credibility problem than most in defending its own fund-manager remuneration. For the year to end-March 2012, the inclusive package of listed-equities head Maq Dlamini was R3,2m (compared with the R2,5m paid to chief executive Elias Masilela).


A cap on bonuses (by the European parliament) may not be the best way to tackle fund managers’ pay but shining a light on fund managers’ remuneration practices, which have previously been “obscure to end investors and even pension fund trustees”, is a step in the right direction, says Christine Berry, head of policy and research at Share action, a campaign group for responsible investment.

She believes a public debate on fund managers’ pay is timely in an industry that “appears to thrive almost regardless on the outcomes for end investors”.

“Asset managers are being looked to by policy makers as the guardians of responsible remuneration practice at the listed companies (in which they invest), but until now there has been little or no scrutiny of the industry’s own pay practices and the ways this may impede their ability to take a strong line with investee companies,” she points out.

-- Financial Times, March 20.

Nelson . . . quiet

Remuneration disclosure was introduced by the first King report 11 years ago. Then confined to directors only, it was intended that transparency would curb excess. Instead, it appears subsequently to have had the opposite effect. Few remuneration committees will conclude that their directors shouldn’t be in the first quartile (is there a second?). If they weren’t worth it, they wouldn’t be worth keeping in their jobs.

So the upper benchmarks are ratcheted ever upward, from sector to sector and company to company. It’s only shareholders – specifically fund managers, acting on client mandates or on their own appraisals – who’re able contain them.

But they can’t merely go on gut feel. There’d need to be a consistency that comes from engagement with companies and the development of criteria for assessing adherence to the environmental, social and governance factors that comprise “sustainability”

For they have obligations, in terms of codes and regulations (King III, CRISA, Reg 28 and PF130), as well as rights under the new Companies Act. The latter provides that a 75% majority of voting shareholders must pre-approve directors’ remuneration. This vote is binding.

However, it’s only in respect of their “services as directors”. It does not preclude an advisory vote on their services as executives.

Fund managers, who demand transparency from others, are in the thick of it. Let’s see how these governance overseers emerge from the first-year review of CRISA implementation, expected within the next few months. And roll on the 2014 ASISA assembly for inclusion or omission of a key agenda item, in response to National Treasury, that goes to the heart of confidence and trust. It’s not too late to expect pleasant surprises.