Edition: Dec 2013 - Feb 2014
THE BIG ISSUE
From time to time, a quarterly magazine is severely handicapped. It happens when there’s an event so important to the magazine’s purpose that it begs immediate coverage and consequential comment.
This happened with TT when the GEPF announced that John Oliphant had been suspended. Fortunately, Moneyweb wanted and was able to publish the TT articles within moments of receiving them. It turned into something of an ‘Elephant series’. The articles are republished here, in their sequence, and seem not to have dated.
It’s hoped that a worthwhile debate has been sparked. Oliphant’s disciplinary hearing was scheduled to have taken place in mid-November. By the time that this TT edition went to press, its outcome – if it took place as scheduled, or at all – remained unknown. The forensic report and the charges against Oliphant had still not been made public.
There was a temptation to have entitled this article “White elephant”, an idiom referring to “a valuable but burdensome possession of which its owner cannot dispose and whose cost (particularly cost of upkeep) is out of proportion to its usefulness”. But that would have been premature and could have been misinterpreted.
Elephant in the room
The suspension of GEPF principal officer John Oliphant is too serious for the reasons to remain obscure. There must be no cover-up.
To force a public servant from office on grounds of corruption is laudable. To do so on grounds that he isn’t corrupt is unconscionable. Shot into the spotlight is last week’s announcement that John Oliphant has been suspended from his position as principal executive officer of the Government Employees Pension Fund.
It’s hard to believe that Africa’s largest pension fund, which operates under a board charter and rigid controls, is vulnerable to abuse as a slush fund. By the same token, those who’ve dealt with Oliphant will have observed with admiration his rise to prominence in the worldwide pension-fund industry. They’ll find horrifying the allegation that he has a dishonest bone in his body.
Given his role and profile, as South Africa’s recognised champion of responsible investment, it’s imperative that justice is seen to be done. The mere announcement of his suspension – “pending the finalisation of a disciplinary process pending the outcome of a forensic investigation” – already tarnishes his reputation to the extent that it becomes extraordinarily problematic for him again to hold his head high in the circles where once he did.
There’s unfairness to disciplinary processes, kept internal, where a pre-hearing public announcement taints the accused individual. The accusers being colleagues, it’s unlikely that he’d be particularly keen to re-join them even in the event of ultimate exoneration. The temptation for accusers and accused, wanting to obviate the testing of evidence when the employee’s departure is virtually inevitable, is for them quietly to agree a golden handshake.
This is a temptation to which Oliphant dare not succumb, both for his own sake and for the sake of an industry that’s put its trust in him. A confidential settlement invites the inference that he sought to avoid a guilty finding and the consequences rightly to follow. It will not clear his name, no matter how diplomatically it’s worded. His best chance, presuming that he has a viable defence, is to challenge the suspension (or dismissal, should it come to that) in open court.
Still in his early 30s, Oliphant pulled himself up by dint of personal effort. His education – culminating in Wits University degrees for actuarial science, advanced maths and finance – was achieved in the face of formidable disadvantage. Being from a poor family in a rural Free State township, he stands as a role model for youngsters of similar background. He still has an enormous amount to contribute.
Professionally, he led and continues to chair the Code for Responsible Investment in South Africa (CRISA) to which the major financial institutions are signatories. Wherever there’s a responsible-investment initiative, there’s Oliphant. The number of domestic and international awards he’s received, unprecedented amongst principal officers of South African pension funds, is testament to his prestige.
Earlier this month, the eyes of over 300 delegates were focused on Oliphant when he addressed and chaired sessions of the United Nations-backed ‘Principles for Responsible Investment’ conference. Held in Cape Town under the main sponsorship of the GEPF and opened by Finance Minister Pravin Gordhan, the predominantly international delegates included representatives of pension funds and asset managers cumulatively responsible for investments of some $34 trillion. Their eyes will now be focused acutely on what happens with Oliphant, not least as an indicator of South Africa as a well-governed investment destination.
First up is whether the decision to act against Oliphant was taken by the old board of trustees or the new. The term of the old board, chaired by ANC MP Arthur Moloto, expired on September 22. Moloto, who also chairs the new board, announced the suspension on October 25. His statement mentions that the disciplinary process requires “finalisation”. So which board launched the process and which board approved the suspension, or were decisions taken during an interregnum when no board was in place?
Second is the subject of the investigation, suggesting that Oliphant has thrown away his career by fiddling with supply-chain management. A contrary suggestion stalks the grapevine. It’s that Oliphant had met with the displeasure of certain politically-orientated interest groups because he resisted black economic-empowerment transactions that he considered unlikely to show sustainable long-term returns suitable for pension-fund investment.
As a possible example, take the Sekunjalo-led consortium’s R2bn takeover of Independent News & Media. The GEPF invested R500m for a 25% stake in the largest company of a declining newspaper industry. Details related to the capital exposure and loan commitments of other consortium participants aren’t in the public domain.
There’d doubtless be a spate of chancers applying for ‘empowerment’ finance. To frustrate a lobby which sees the GEPF as a honeypot for the extension of government patronage is to provoke its hostility.
Third is the nature of the GEPF itself. Not being subject to the Pension Funds Act, it isn’t supervised by the Financial Services Board and needn’t comply with the Regulation 28 guidelines for prudential investment. The GEPF falls under its own legislation, the Government Employees Pension Law.
Another difference is that other pension funds are overwhelmingly of the defined-contribution variety. Members carry the investment risk, prompting the plethora of legal requirements related to trustees’ fiduciary responsibility.
The GEPF, on the other hand, is a defined-benefit fund. It means that government as the employer must make good any deficit to the member’s pension promise. Should the GEPF’s investment performance fall short of its liability to members, the obligation is on government and hence taxpayers to top up.
Moreover, and most directly impacting on members, the GEPF seeks annually to increase members’ benefits at least to keep pace with inflation. The amount of increase is discretionary, again dependent on investment performance. The better the performance, the greater the scope for benefit increases and stability of contribution rates. It’s a constraint, additional to the GEPF’s own rules, to playing fast and loose with members’ money.
The odd investment, which might be considered less than prudential on strict pension-fund criteria, will hardly dent a portfolio as massive as the R1,2 trillion under GEPF management. A knock here and there won’t noticeably affect any particular individual amongst the GEPF’s 1,5m members and pensioners. Were these investments to mount, however, it becomes a different story.
The GPE Law provides that the GEPF board, “acting in consultation” with the Minister of Finance, shall determine the fund’s investment policy. A similar limitation on trustees of funds governed by the Pension Funds Act, to work out investment policies in consultation with employers, would be outrageous. Their responsibility is purely to act in the best interests of their respective funds under a defined set of regulatory requirements.
The GEPF, for its part, has a four-pillar investment policy. The fourth pillar is on enterprise development, black economic empowerment and job creation. It seeks a return, says the 2013 annual report, “in sectors, firms and exchanges – especially small and medium enterprises – and selected sectors in which enterprise growth and development and the creation of new jobs are likely and in B-B BEE transactions”.
This paragraph is open to sceptical interpretation. It mentions a return, but not an acceptable level of return. If operation of the policy was an area where Oliphant clashed, all the more reason for it to be spelled out.
Finally up is the desirability or otherwise of a sitting politician from the ruling party being appointed to chair the GEPF trustee board. However competent Molopo is, he must have a devil of a time manoeuvring the conflict between party and pension-fund interests; for instance, when B-B BEE proposals are before him.
In 1996, when the GEP Law took effect, the sole trustee on the GEPF board was the Minister of Finance. From 2005, this structure was replaced by a 16-person board equally representative of government (as the employer) and fund stakeholders (including trade unions). Initial chair of the restructured board was Martin Kuscus, chief executive at the SA Bureau of Standards.
It looked like a move to depoliticise the fund from government control; for instance, to speak independently on prescribed assets and to be independently accountable for the success or otherwise of its investment policies.
Provided he emerges with credibility intact – a big proviso – an Oliphant freed of GEPF encumbrance can offer valuable insight on what works and what doesn’t for a fund at the JSE’s core. It will take courage, not sour grapes.
As a matter of course, the Minister of Finance reports to Parliament on the GEPF. Normally, it’s a formality. Next time round, what Pravin Gordhan has to say could be an event.
Published on Moneyweb, Oct 28.
What happened at SARS should also happen at the GEPF
The sooner that Finance Minister Pravin Gordhan appoints a committee to investigate the controversy around the suspension of Government Employees Pension Fund principal executive officer John Oliphant, the better. Gordhan had set the perfect precedent in the exercise of executive authority with the way that he acted earlier this year over SARS then-commissioner Oupa Magashula.
Now Gordhan should do the same thing for the same reasons. They relate not only to Oliphant’s guilt or innocence, for the allegations against him to be tested in a way that satisfies the public interest, but also to the credibility of the institution he heads. There are further ramifications for his international reputation in the pension-fund industry, for the GEPF’s internal morale and for its worldwide standing as the JSE’s single-largest institutional investor; not to forget the GEPF’s 1,5 million members and pensioners.
To all who propound good governance and are affected by it, the nitty-gritty of this example must be laid bare; not as token theory but as demonstrable practice. The obligation is on Gordhan, unfortunately yet again, to initiate its exposure.
As with SARS, he reports to Parliament on the GEPF. More than this, with the GEPF he designates half of the 16-member board to serve as nominees of the employer (government). The other half is elected by pensioners and members, six of whom are drawn from organised labour in the Public Service Coordinating Bargaining Council.
Once appointed, their fiduciary duty is to the fund and not to the constituencies which put them there. Whether there were political shenanigans behind Gordhan’s back needs to be exposed too.
A committee along the Magashula lines is fundamentally different from the “disciplinary process relating to the outcome of a forensic investigation” that GEPF chairman Arthur Moloto has announced for Oliphant.
A disciplinary process is internal. An appeal against its ruling can then be taken to the Commission for Conciliation, Mediation & Arbitration (CCMA), also heard behind closed doors, and from there to the courts, at an unforeseeable cost to be borne by the fund on the one hand and Oliphant personally on the other. The process, taken to its conclusion, can be costly and protracted.
Contrast this with the Gordhan-appointed committee on Magashula:
Gordhan launched the SARS inquiry, he explained, “to protect the integrity of this vital fiscal institution, reassure the South African public and ensure a rapid process of establishing the facts”. These objectives were achieved.
What applied to SARS and Magashula surely applies equally to the GEPF and Oliphant.
• Published on Moneyweb, Nov 1.
Even the PIC and GEPF must be accountable. But to whom?
Two seemingly unrelated events happen to coincide. One is the opposition of the Public Investment Corporation to the R12,6bn bid by a Chilean company for SA industrial giant Adcock Ingram. The other is the disciplinary hearing of suspended Government Employees Pension Fund principal executive officer John Oliphant.
The timing overlap is fortuitous but fortunate. It gives both the PIC and the GEPF the opportunity to demonstrate their adherence to the good-governance principles of transparency and accountability that they demand of others. In particular, it concerns the criteria on which these foremost institutions make investment decisions.
On the Chilean bid, it’s suspected that the PIC’s opposition has less to do with price than politics i.e. for control of a leading South African corporate not to fall into foreign hands. On the Oliphant matter, it’s speculated that the GEPF motivation has less to do with internal procedures breached than political programmes obstructed i.e. on the funding of BEE-type transactions unsuitable for pension funds.
The PIC and the GEPF are joined at the hip. As manager of the R1,2 trillion in GEPF assets, the PIC invests under a mandate from the GEPF. What the GEPF wants and the PIC does must therefore reconcile. Up for discussion is whether the mandate terms are sufficiently clear and consistent to obviate confusion on where the buck actually stops.
Here’s the occasion to let it all hang out, right down to the dynamics of interaction between the PIC and the GEPF; more than this, between their respective board members and their respective executive teams.
The PIC board of directors is chaired by Deputy Finance Minister Nhlanhla Nene, an ANC member of parliament. The GEPF board of trustees is chaired by Arthur Moloto, an ANC member of parliament. Their political roles either complement or conflict with their board roles. Neither is ideal.
Ultimately, of course, the buck stops with government as the employer of GEPF members. If the PIC makes investments for the GEPF that are politically correct but prudentially vulnerable (recall the AfriSam impairment in the GEPF’s Isibaya fund), it impacts aversely on the discretionary inflation-adjusted annual benefit increases for the GEPF’s 1,5m members and pensioners. If the investment performance is so poor that the GEPF cannot honour its obligatory defined-benefit pension promises, the fiscus must make up the difference.
That’s why the Adcock Ingram and Oliphant controversies are matters for the public domain. The two institutions cannot be surreptitiously converted to arms for implementation of ANC or government policy without the public being told.
For instance, the PIC and GEPF propound policies for socially-responsible investment. But SRI is about securing improved risk-adjusted returns over the long term on measurable national-interest principles. It’s not necessarily consistent with what ANC factions might consider in the national interest, such as keeping out foreign investors (unsuccessfully attempted in the case of Wal-Mart) or taking strategic stakes in newspaper groups (as in Sekunjalo News & Media and Times Media).
In time, the PIC will doubtless have to elaborate on its Adcock Ingram stance. In time, once he moves to clear his name, the GEPF will have to defend its stance on Oliphant. There are mountains to be explored.
At the GEPF, Finance Minister Pravin Gordhan could still short-circuit the disciplinary process by appointing a committee of inquiry as he did at Sars on then commissioner Oupa Magashula. It’s been suggested that Gordhan cannot do this because he has direct powers over Sars that he doesn’t have over the GEPF, which operates under its own board and law.
Presuming this to be so, it would surely be competent for the GEPF board to request (on a nudge from Gordhan, if necessary) that he acts similarly on Oliphant. Gordhan reports to parliament on the GEPF and nominates half of its board.
Without intrinsic transparency, the Oliphant process can be closed and contentious. And long. There must at least be a possibility that, before adjudicating the merits and before reaching the courts, the GEPF inquiry will have to address a dispute over procedures; not internal procedures that Oliphant might wilfully or negligently have breached, and so serious as to justify the humiliation of pre-hearing suspension, but procedures related to the purported authority of the board itself.
The board’s term of office expired on September 22. Oliphant’s suspension was announced three weeks later.
However, on September 5 there appeared in the Government Gazette a general notice that the rules of the GEPF had been amended. It was published under the name of Moloto as “chairperson of the board of trustees” and “on behalf of the board of trustees”. The amendment had been made “in terms of s29 of the Government Employees Pension Law”.
The amendment substitutes rule 4.1.2 with this: “Subject to the provisions of rule 4.1.7, the term of office of a trustee shall be four years. In the event that a new trustee or substitute trustee has not been appointed at the expiration of such term of the office, the term of office of the existing trustee or substitute trustee would automatically be extended until the day before the date of the appointment of the new or substitute trustee”. (Italics used for new words.)
Obvious questions arise:
Now check s29 of the Law. Headed “Duty and power of the Board to make rules”, it deals with matters specific to the status and contributions of fund members. Try to find anything here empowering the board to extend its own term of office, limited by the Law to four years.
Then go to rule 4.1.7. It relates to the service of individual trustees, not to the entire board. For instance, it provides that a person ceases to be a trustee when he or she resigns, is sequestrated or becomes mentally unfit.
It also says that the trustee’s service period ends when “his or her term of office expires”. Logically, the individual trustee’s term must expire when the board’s term expires after four years. On a common-sense interpretation, the individual’s term could not then be “extended” because his or her continued service becomes dependent on his or her appointment to a new board.
Look next at rule 4.1.2. Prior to the amendment, it restricts a trustee’s term to four years. Consequent to the amendment, it allows for the term (of the individual, not the board) to be extended.
This is all rather curious. First, the legislature must have had a reason for the four-year restriction. Second, the restriction and the extension appear to contradict one another. Third, for a trustee’s term to extend onto a board whose term has expired is incoherent.
• Published on Moneyweb, Nov 11.