Issue: Sep - Nov 2013


From emerging to submerging

While the JSE continues to hit new highs in rand terms, it’s a different story in dollar terms.

There’s an unfortunate touch of irony in the timing of National Treasury’s proposals to attack retirement fund costs. They coincide with a widely-held view that the best years of the JSE’s bull run are behind it, and that prices of equities have yet to reflect underlying tensions in the broader economy.

Any fund would be better off paying higher charges for investment in a roaring market than lower charges for entry into a market that, were it not for the rand hedges, could quite conceivably be flattish for an extended period ahead.

Rather pay 3% in costs for an equities portfolio annually increasing at say 12% than pay 2% for nominal appreciation at 5%. Computations based on the last 10 years’ performance, to make projections for the next 10, might need to be reworked in tandem with the Reserve Bank’s downward adjustments of growth forecasts.

There’s no escape from market cycles. Under any circumstances, lower charges are obviously preferable for investors than higher charges. If anything, revised projections help to emphasise the need for the former. They’d also help funds to adapt their investment strategies.

Quite suddenly, the flavour of BRICS (Brazil, Russia, India, China and SA) has diminished. Relative to developed markets, their currencies commenced a sharp decline. There are reasons peculiar to each, but there’s also an emerging-markets “contagion” that has distant echoes of 1998 when investors turned to the bond and equity exits.

Were it not for the heavy weighting in the JSE index of such rand hedges as Billiton, SABMiller, Richemont and BAT, its dollar-denominated performance would look wonkier (see graph). Still, it should invite bargain hunters once they have cause to feel more comfortable on SA scenarios.

While hoping for the best, like improved labour stability, prepare for the worst, like continued rand weakening.

Mort . . . strong case

Manco posers

Being close to the coalface, the Financial Planning Institute is not at all keen on Treasury’s proposal for employer-level management committees. It’s “fraught with difficulty,” cautions the FPI, “if their remit reaches beyond being a vehicle for helping fund trustees in the distribution of death benefits, distributing benefit statements and fund literature, monitoring payment of monthly contributions etc.”

The FPI insists that, to avoid “chaos”, mancos must not be given any executive authority presently devolved to trustees. It calls for measures to ensure that:

  • All these mancos actually meet;
  • Formal minutes are taken, and possibly copied to trustees, which means extra staff for funds and extra costs for members.

But then there’s the argument of pensions lawyer Jonathan Mort. He’s compiled a checklist of what “you” should look for when assessing the governance arrangements in umbrella funds. Five checks particularly stand out:

  • Are the independent trustees genuinely independent?
  • How does the sponsor benefit from the investment arrangements?
  • Is there a captive investment arrangement?
  • Are the investment charges fully disclosed and benchmarked?
  • Are the costs capable of comparison with other umbrella funds?

To ask these questions, then to require and assess the answers, seems alone to be more than sufficient justification for mancos. The “you” must surely be recognised formal structures, not a few curious odd bods taking it upon themselves to pester trustees.

Umbrella costs

Surprise, surprise that even larger funds can be better off in umbrellas than by remaining as standalones. At any rate, this is the conclusion of Mark de Klerk from his own experience as principal officer of the big Amplats retirement funds.

De Klerk, who is also vice chair of the Principal Officers Association, has illustrated it by a case study – presented to a POA seminar – of the Amplats funds before they decided to enter an umbrella. Working on fixed fees and no commissions, it showed:

  • The Amplats-chosen umbrella provided a 33% saving for members and a further 12% saving for the employer;
  • The Amplats funds are able to use their existing asset managers and investment policy statements (an option that most other umbrellas couldn’t offer), albeit at additional cost;
  • Communication with members via the umbrella was favourably compared with communication via the standalone, except that qualified financial statements of umbrellas are not necessarily communicated down to participating employers;
  • Larger umbrellas are more cost-effective than smaller.

There’re umbrellas and umbrellas, not differentiated only in terms of size. They might also differ, for example, in the efficiency of their operating systems. Umbrellas are complex to administer, and participating employers won’t want to be lumbered with such costs as data rebuilds.

‘Ghavalas funds’ hit

Now that the Constitutional Court has dismissed with costs the appeal of Tony Mostert, acting as curator of seven pension funds in the surplus-stripping ‘Ghavalas scheme’, those costs against the funds will need to be calculated.

The matter concerned an exception under the Apportionment of Damages Act for alleged wrongdoers to pay the funds some R600m (TTJune-Aug). Instead, the appeal having been unsuccessful and prescription having extinguished any further claim, the funds stand to get nothing except a bill for legal fees.

Considering that the action has dragged from the South Gauteng High Court to the Supreme Court of Appeal and ultimately to the ConCourt, these costs would be considerable. It involved senior counsel for each of six law firms, representing the defendants, as well as Mostert’s own firm and counsel.

At an estimate based on the bill of one defendant, the costs for them all appear to be slightly over R3m. But these bills have to be “taxed”, thus probably indicating about R2m as the defendants’ contribution. To this must be added the fees of Mostert’s legal team.

Some cheer

The annual Old Mutual savings monitor, published in July, has come up with stats no less depressing for being expected. For instance, of those people surveyed:

  • 38% of the main sample and 45% of youth have no pension fund, provident fund or retirement annuity;
  • 35% believe that government will support them if they cannot take care of themselves;
  • 50% have never seen a financial advisor.

But it is heartening that 88% now have access to the internet, opening great opportunities for financial education to start putting right the depressing stuff.

Carbon tax smack

If a carbon tax is introduced from 2015 on the basis that government has proposed, the fiscus could reap as much as R3,4bn a year from 70 of the top 100 companies on the JSE Alsi. Research by Mergence Investments indicates that, on an absolute basis, Sasol is potentially
the largest contributor with an annual carbon tax bill of R2,2bn.

As a percentage of pre-tax profit, Mergence calculates that the companies to be hit hardest by the tax are probably Anglo American (20,3%), PPC (6,2%), Sasol (5,7%), Sappi (3,4%) and Grindrod (1,5%).

To the 70 listed companies must be added the unlisted Eskom. Based on its 2012 emissions data, it would be by far the largest contributor with an annual bill somewhere between R8,7bn and R11,6bn. No need to guess who’ll ultimately pay.

Getting the message out

Amodel in the use of technology is by 10X Investments. Having concluded a stimulating seminar on retirement reform – in the seemingly endless proliferation of these seminars – it dispatched via email hyperlink the full presentations on videos and made them available on the company website. So those who attended can be refreshed, and those who didn’t make it personally can still do so virtually.

Jensen . . . hard numbers

They’d be able to get the inexhaustible Dave McCarthy of National Treasury (at last on an easily-accessible record) and the renowned John Bogle of Vanguard, amongst others. Bogle’s was a taped interview with 10X founder Steve Nathan, entertainingly extolling the virtues of passive investment and long-term saving.

Amongst the others was Tracy Jensen, the company’s maths whizz, on the vexed topic of guaranteed versus living annuities as pension funds’ default option. Overturning conventional wisdom, nobody paying fees of 3% on a “conservative” low-equities portfolio has a chance of reaching a desired replacement-ratio goal.

To get the arguments, check the website.

Mostert v Nash

On and on go the scraps between curator Tony Mostert/Financial Services Board and fraud accused Simon Nash. This one, in the South Gauteng High Court before Justice Caroline Nicolls, was over an application brought by Cadac pension fund not to have Mostert as its curator.

Without trying to summarise the arguments – they defy summary because a hearing that was supposed to have lasted one day took four – it now seems agreed that the Sable fund has no claim against the Cadac fund.

Mostert is curator of the Sable and the Cadac funds, while Nash has been involved with both. Alleged interest conflicts seem to bristle, not least for Mostert. Conflicts on the part of Nash, whose criminal trial is about to resume, relate to this claim.

But if there is no longer a claim by the Sable fund against the Cadac fund, allegedly for illegal transfers of some R130m, then how might it affect the criminal charges against Nash? And could it cause Alexander Forbes to review a portion of the R340m it had paid the curator in a civil settlement for its role in the ‘Ghavalas funds’?

Much of the argument before Justice Nicolls concerned who’ll bear the litigation costs. Whichever way she decides, the Supreme Court of Appeal probably beckons. At some point, to identify the relative beneficiaries of the fights, there’d need to be a comparison between the recoveries to the funds and the costs in effecting them.

Budlender . . . public interest

Transparent curators

Thanks to FSB executive officer Dube Tshidi, a 2009 judgment by Acting Justice Geoff Budlender in the Western Cape High Court has been brought toTT’s attention. It was in an action launched by the FSB against the Ovation companies and funds, but the ruling clearly has wider application.

“There is public interest involved in the matter,” said Budlender. “The public interest is focused primarily but not exclusively on the interests of investors. It is appropriate that information about the developing situation with regard to the curatorship be made available to members of the public, through being made a matter of public record.”

Making this information a matter of public record enables the media to inform the public of what is happening, the judge added: “The public information function gives effect to the culture of transparency and accountability which the Constitution seeks to create.”

Budlender continued in similar vein: “Investors are entitled to know what part of their funds has been consumed in the costs of curatorship . . . It seems to me that the ‘accountability’ purpose of the reporting requires at least that the public (which includes the investors) should be informed of the extent to which the costs of curatorship have had to be carried from the assets of the investors.”

The FSB should surely ensure such disclosure as a matter of policy, not of discretion, by insisting that curators provide it with regular written reports for immediate publication on its website; not oral reports, as sometimes happens, or belated publication, as recently with the Fidentia curators. The FSB would thus do a huge favour to its public-relations image and, as Budlender held, advance the right of the public to know.

All the FSB need so, when applying to court for curatorship orders, is insist on it.

Untransparent curators

Further to illustrate the importance of the Budlender judgment, herewith an extract from a 2007 letter by lawyers for the Living Hands Trust to the FSB about the Fidentia curators:

It is . . . inexplicable that the Curators have persisted, in their management of Fidentia, in Fidentia’s breaches of the Investment Agreement (with LHT) and have failed to consult our clients (the principal creditors of Fidentia) or to report to our clients as to the investigations and findings, or to furnish information to our clients, as required by . . . the Investment Agreement, or to liaise in any meaningful manner with our clients concerning the restoration to the Trust of its assets.”

Were there prompt and public disclosure, much of the subsequent pain in the conduct and costs of the curatorship could conceivably have been avoided.


Letjane . . . Akani clear

In a box which accompanied the editorial “The IRF should RIP” (TT March-May), reference was made to Akani Retirement Fund Administrators having been under investigation in Swaziland and to Akani managing director Zamani Letjane also being president of the Institute of Retirement Funds in SA.

Lawyers for Akani and Letjane have written to say:

“The significant factual error in your article is the omission to state that the investigation was in relation to a joint venture in Akani Swaziland Retirement Fund Administrators, that the investigation was completed in the early part of 2012 and that it was found that our client was not responsible for the matters that gave rise to the investigation.

“You chose not to publish these facts, creating a false impression of our client. The authorities declined to provide our client with a copy of the report.

“In the circumstances, our client is entitled to require publication of the statement to the effect that our client was found not to be liable of the matters giving rise to the investigation.”

There were no “facts” thatTT “chose not to publish”. We can only publish “facts” of which we’re aware, in this case being a statement put into the public domain by the Registrar of Insurance & Retirement Funds in Swaziland.TTinvited comment from Letjane, by email on October 24 and again on November 12. However, although Letjane contended to his lawyers that he had responded,TT received no such response.

When this was pointed out to the lawyers for Akani/Letjane, they replied:

“Our clients have instructed us that they have nothing further to add save to state that it was always apparent that the company concerned was a company registered in Swaziland and not our client. Further, it was a matter of public record that our client was found not to be involved in matters giving rise to the investigation.”

It isn’t clear why this was “always apparent” or where such a “public record” was supposed to be accessed. Neither is it clear why no response from Letjane was received. It would obviously be contradictory for TT to request a response only to ignore it when it arrived.