Edition: Mar - May 2014
TRUSTEES’ CRUCIAL ROLE
In our most recent edition (TT Dec ’13-Feb ’14), the main editorial argued that pension funds, being a unique vehicle through which the interests of millions of South Africans come together, “are the critical component to build a social compact” on which the success of the National Development Plan relies. A number of responses were received.
Masilela . . . strategically positioned
Elias Masilela, NDP commissioner and chief executive of the Public Investment Corporation:
In the SA context, what is a social contract i.e. who should be the parties to it and with what objectives?
I do not think there is a SA-specific definition of a social contract. It’s a universal concept, premised on joint decision-making and commitment to the decisions jointly arrived at, by stakeholders in an economy or society. It is also known as a social compact or accord. The terms are used interchangeably.
It can be described as an agreement among the members of an organised society or between the governed and the government defining and limiting the rights and duties of each. While the definition will hold stable across space and time, differences across societies will be informed by their historic, political, economic and social contexts. These different circumstances may not change the definition, but they may influence how the objectives are arrived at.
The concept of a social contract is premised on an underlying understanding that the success of any government is rooted in its partnership with society and the upholding of the values and demands of society.
In principle, the modern understanding of social compacts is an attempt to address problems in the economy’s growth path that are best resolved through collective action and agreements amongst various interest groups. Chief amongst these are the tripartite social accords in the Netherlands, Ireland and Spain.
SA embraced and institutionalised the relationship amongst social partners in what is now known as NEDLAC. Of course, there are other fora outside NEDLAC with the same intent. The character of SA’s social “partnership” (note deliberate use of the term) is its intention to deal urgently with issues of poverty, unemployment and inequality.
Parties to the compact should be all stakeholders in a society. This ranges from government, to corporates, to organised labour, to NGOs and to households.
Why is there such emphasis on it in the NDP?
First, appreciate what is intended by the NDP. It proposes critical solutions to big national issues in SA, predominantly of a structural nature. These can be summarised as:
With these in mind, the NDP therefore proposes responses that will yield outcomes to:
These are with the aim of delivering “A better life for all”, combating poverty and inequality as well as inculcating a psyche of long-term national development objectives. They will be underpinned by enhanced policy coherence and coordination.
With the magnitude and complexity of the task at hand, it is clear that government – doing it alone – would never ever be able to deliver to SA’s satisfaction. It has to be a shared responsibility; thus, the need for partnerships (and in the context of this subject, a SA social accord).
However, the emphasis should be one that focuses society on the understanding that such a social compact cannot be ideas in a document somewhere. It has to be a compact that changes hearts, minds and the entire psyche of our society.
It needs a society that has a sense of belonging, of ownership, and is ready to roll up its sleeves to be part of a long-term solution.
Therefore, the NDP is call to action for all South Africans. We each need to identify our respective roles and commit to contributing to change, without looking up to government to lead. We have to lead.
So, the success of the NDP lies entirely on a real and functional social compact.
What are the obstacles to a social contract? Through NEDLAC, should it not already have been developed?
NEDLAC, as an institution, is founded on the concept of a social compact. The questions are: How formalised is it? How committed are we to it? How effective is it?
To deliver on the NDP, answering these questions will be critical. The triple crises – of poverty, unemployment and inequality – should swiftly spur us in the right direction and at the right pace towards a more formal and virtuous compact.
In all countries that have dealt and implemented social accords, consistently, all these processes were triggered by some form of crisis. But of course, arriving at a compact without a crisis would be less painful.
What role could be played by trustees of pension funds in helping to bring it about?
Given the long-termist framework of the NDP and structural challenges we are faced with, pension-fund trustees are critical in delivering against our hopes as well as making effective a SA social compact. Trustees oversee the management of long-term money.
The nature of the mandates is such that they must make investments that have a long-term impact on the economy, rather than chasing short-term returns. This is key in tackling infrastructural backlogs that pull back the economy’s ability to grow faster and generate more jobs, to reduce poverty.
Increasingly, we need trustees who fully understand the relationship between the macro economy and the performance of the assets they manage. We need trustees that are able to invest in such a way that they influence the domestic economy positively and in a sustainable manner.
With their strategic positioning in the economy, they are inherent key role players in crafting and implementing lasting solutions, with patient capital in their control.
Having said this, it is essential to note that the NDP does not emphasise funding in turning around our fortunes. This is because the NDP commission believes the biggest challenges lie first and foremost in resource allocation. The structural and behavioral changes are much more important for achieving the vision and aspirations of South Africans. Financial resources, on their own, will not deliver the vision.
We need to learn to achieve more with the resources at our disposal.
Bell . . . changed approach
Terry Bell, labour specialist and columnist:
The first solid steps are being taken for SA’s trade unions to exercise influence, as shareholders in JSE-listed companies, through the billions of rand invested by their members in pension and provident funds. It’s happening through the putative Batseta Council of Retirement Funds for SA. Why has it taken so long?
It’s a crucial question. The reasons for lack of action over the years need to be analysed if mistakes of the past are not to be repeated. One critical oversight has already been identified by the steering committee of Batseta. It’s education.
Widespread financial illiteracy remains one of SA’s major problems. When it’s prevalent amongst trustees of union-backed retirement funds, whose lack of appropriate knowledge can be exploited, it’s particularly disastrous. That’s why Batseta has its sights on the training of 26 000 incumbent and aspirant trustees.
There’s another potent factor to explain the labour unions’ failure to move faster in taking full advantage of their authority on funds’ boards. It’s ideological rigidity.
In the late 1980s and into the 1990s, the eyes of organised labour were focused on a single political prize: the move to, if not seizure of, parliamentary power. The “one person, one vote” slogan was as far as it went for many. Once “our people” were in power, all would be solved. For others, this was a mere step toward a new society that would not have to deal and compromise with the capitalist order. So there was no need to have anything to do with it.
At the same time, only a few among the union leaders were aware of the potential economic power that resided in the massive pension and provident funds of union members; that many billions of rand ultimately belonging to workers could be used to leverage reforms and — who knew? — even more radical changes. But there was not much coherent policy and little debate about the issue.
However, various unions did set up investment companies (with union money) that have had varying degrees of success. An early move was from the SA Clothing & Textile Workers’ Union (Sactwu) in 1989, although it only started seriously operating several years later.
By 1995, Sactwu was joined by the National Union of Mineworkers’ (NUM) investment company in Hosken Consolidated Investments (HCI), a company with diverse holdings that has made billionaires of former Sactwu and NUM officials Johnny Copelyn, Marcel Golding and Irene Charnley. It has also provided a welcome fillip to unions in these sectors that had been heavily hit by job losses.
But 20 years ago such “arm’s length” moves into the marketplace were anathema to a probable majority within the labour movement. And the movement today, at various levels, still remains deeply suspicious of the economic system.
This suspicion was even more intense 20 years back. A purist ideological strain demanded that unions should have nothing to do with “the system”; that their role was to overthrow what existed. Something of this thinking seems to have been behind the rejection of one quite carefully thought-out “ethical investment” proposal.
Moeletsi Mbeki, a journalist and trade unionist when he returned to SA from exile, was aware of the potential for pension funds on the JSE. He also understood that there was an inherent contradiction between union principles and investment in the capitalist system.
The core union principle is solidarity, that “an injury to one is an injury to all”. No worker should knowingly exploit another. The principle was taken to mean that investment in almost any company within the market system represented profiting from the labour of other workers.
This conundrum led, over the years, to occasional demands that union money be channelled only into “ethical investments”. Mbeki thought he had the answer. He proposed that unions press to invest the savings wealth of their members into property, into buying up the then inexpensive apartment blocks in areas such as Hillbrow.
These buildings could be renovated and maintained, so creating sustainable jobs, and the flats could be rented or sold to union members, with mortgage bonds provided by pension fund investment. Bond and rental income should provide an adequate – and “ethical” – income.
There were obviously many details to be worked out. But the proposal hit an ideological brick wall. Although it had the support of the National Union of Metalworkers and its then general secretary, Moses Mayekiso, it was turned down flat by Cosatu. “Too capitalistic”, was the reason given.
At the same time, individual unions and especially those officials concerned with pension funds were being assiduously wooed by various service providers. If anything, the wooing intensified when legislation in 1996 ended employers’ domination of trustee boards. Unions and their federations came to rely on the apparent largesse of institutions keen to win their pensions business.
These service providers offered not only the T-shirts and the track suits, the conference bags and the caps, bearing their logos, but also other perks to individuals that have sometimes dishonoured the labour movement. Such companies also offered – and sometimes provided – free training to the trustees of pension funds.
Presented as altruistic, this training was increasingly seen within the labour movement as part of a marketing strategy to win friends and influence people so that the service providers could gain greater leverage on how and where all that pension money should be invested.
Along the way, there has been scandal and corruption. One extreme example is bad governance at the SA Commercial Catering & Allied Workers’ Union (Saccawu) provident fund, now into its twelth year of curatorship. Another is at Sactwu where over R200m disappeared from fund coffers by the trustees having allowed free reign to investment manager Trilinear.
For context, however, there are numerous industrial and other union-backed funds at which no accusatory fingers can be levelled. There are also unionists on the boards of huge funds, such as the GEPF, where their contributions are lauded.
Perhaps it’s this gathering of experience that has also helped prompt the tipping point.
Mncube . . . catch a wake-up
Mehluli Mncube, managing director of proxy-voting advisor InkunziESG:
As the drive for responsible share ownership accelerates, SA pension funds have been called sleeping giants. Many efforts to shake these giants from their slumber have been fruitless. Why – after so many regulation changes, conferences, toolkits and talks around responsible ownership – has it not been easier or quicker to awaken them?
On face value, given their sheer size, pension funds are well positioned to drive change and assert control in capital markets. Including the mammoth GEPF, pension funds hold at least 21% in every company of the JSE’s Top 40. With foreign ownership excluded, the percentage is considerably higher.
The recent Today’s Trustee editorial illustrated the reach of pension funds to their beneficiaries: eight million members, each with an average household of three, impact on 24m people. This estimate is conservative.
Internationally, particularly in the US, pension funds and retirement schemes have often succeeded in leveraging their influence on the companies where they’re invested. This activism started back in the 1980s and has since gathered pace. Locally, despite their size, most pension funds remain non-activist. Notable exceptions are the GEPF, the Eskom Pension & Provident Fund and the mining industry’s Sentinel Retirement Fund.
There are challenges and hurdles for pension funds to unlock the massive power they can hold through proxy voting.
First is the fact that many funds – especially those of smaller and middle size – invest through collective schemes and pooled portfolios. This ownership is held in the nominee accounts of assurance companies and asset managers. So it’s insufficiently direct to drive and influence investee corporates.
Also, some of the investments are in policy wrappers. It will take deep see-through analysis to reach to the actual shareholding structures. In essence, while pension-fund beneficiaries are owners of the investments, they only have “empty” economic benefit but not the share ownership.
It then begs the question of whether the sleeping giants are real giants? The assurance companies and asset managers are wary to engage or vote against managements of corporates where it might jeopardize their future business prospects. Also, asset managers are mostly motivated by the price of the stock rather than challenging management on sustainability issues.
Regulation 28 under the Pension Funds Act, which promotes ESG (environmental, social and governance issues), and the voluntary Code for Responsible Investing (CRISA), are credible efforts to get asset managers and corporate institutions to account for this shareholding and report accordingly to the pension funds. But bigger sticks are needed to ensure compliance.
Further, there’s the control and influence of investment consultants. These gatekeepers play a critical role in educating and informing the trustees of pension funds. There is still an information gap, usually bridged by consultants, at trustee boards. So it is difficult for trustees to drive active share ownership if their consultants’ interest in it is remote.
Even for those funds interested in being active owners, the challenge is in implementation. Active ownership requires resources to engage with companies and to vote at shareholder meetings. The ‘responsible investing toolkit’, released last year, is a useful guide. But smaller to medium-sized funds lack the staffing resources of the GEPFs, EPPFs and Sentinels. It is then left to consultants or asset managers to drive the process, some with more enthusiasm than others.
This could be resolved by the creation of a common platform where resources are pooled to enable engagement with companies. For example, talks have been held for union-backed pension funds in the mining and metal industries to collate their efforts in shareholder activism. This is in a bid to take the fight with corporates “from the picket lines into the boardroom”.
With close to R500bn in assets, the mining, metal, and construction-related pension funds have muscle hitherto unflexed. With their voting power, they can influence the remuneration of executives, drive sustainability issues and hold corporate boards to account on key issues.
This is not a reinvention of the wheel. In the US, seven union-backed pension funds in the CTW (Change to Win) coalition are well known for their joint activism.
In SA, given the will, the hurdles can be overcome.