Edition: Sep - Nov 2014


Power imbalances

Consider the possible advantages -- to members, consumers and taxpayers -- in reconstituting the Eskom pension fund. The sooner it’s done, the better.

Brown...need to intervene

Some years ago there was a proposal, later dropped, that the Eskom Pension & Provident Fund be converted from defined-benefit (DB) to defined-contribution (DC). Revival of the proposal, if theoretically implemented today, could immediately release some R10bn to help in financing the generation and supply of electricity.

Coincidentally, the R10bn equates roughly to the amount that municipalities owe Eskom. Having trebled in the past nine months, Cooperative Governance Minister Pravin Gordhan recently warned that this debt threatens to spiral. With Eskom allowed by the regulator to recoup an unbudgeted R7,8bn, for next year the 8% tariff increase previously granted to Eskom can rise sharply.

Prior to the revelation on municipalities’ debts, Eskom had already requested government for R50bn to relieve its cash-flow shortage. That would have to come from taxpayers. It begs the question of whether Eskom can afford to continue running its pension fund as presently constituted. Conversion to DC won’t be Eskom’s panacea, but it will provide relief for consumers and taxpayers even with a generous sweetener offered to members.

Look at the fund’s latest actuarial report, for the year to end-June 2013:

  • Actuarial value of net assets for comparison with accrued liabilities – R90bn;
  • Actuarial present value of promised retirement benefits – R60,9bn (all vested, none non-vested);
  • Contingency reserve account balances (to provide additional certainty that the fund can pay the benefits) – R20,6bn.

It might therefore be argued that:

  • Conversion from a DB to a DC fund can safely provide members with an average 33% benefits increase as an incentive to switch;
  • Thereafter, there’d still be a surplus of R10bn to assist Eskom’s operational requirements.

Moreover, the report discloses that members contribute 7,3% of pensionable salaries and the employer contributes 13,5% to the fund. This 20,8% is high by industry standards. It raises questions of whether:

  • New employees should continue to be hired on a basis out of sync with similarly large companies whose pension funds are overwhelmingly DC;
  • Trustees of the fund, on both the employer and employee sides, have interest conflicts (as members of the fund) that might influence their negotiations on the fund’s restructure.

So it’s over to new Public Enterprises Minister Lynne Brown. Were further reasons needed, they’re in the golden parachute paid to former chief executive Brian Dames.

Government is Eskom’s sole shareholder. This is the same government that sounds off on pay disparities between executives and workers, that found itself in the thick of a Numsa/NUM strike and that gets it in the neck for escalating electricity prices. But when it can act as shareholder to contain executive remuneration, which inflates the Eskom overheads that must be recouped, it seems reticent.

Witness the back-dated remuneration to Dames of R15,4m for 2013-14, up from R8,5m the previous year. This is even more generous than it appears. As a member of Eskom’s DB fund, the value to him of the backdated pay is probably worth another R10m excluding perhaps an additional one-third top-up on the fund’s surplus distribution.

Dames is aged 50 and had 27 years’ service at Eskom. Based on rough calculations – accrual x salary x service x annuity with discounting – his actuarial reserve in the pension fund looks to be some R50m. For ease of calculation, it assumes pre-backdated pay of “only” R8m for his last year of service.

Nice work if you can get it. Nice fuel, too, for striking members of the metal and mineworkers’ unions.

  • Asked to comment, Eskom responded: “Mr Brian Dames’ remuneration package consisted of back-dated salary increases (after former Public Enterprises Minister Malusi Gigaba had earlier put a moratorium on salary increases of chief executives of state-owned companies), accumulated leave, long-term incentives, as well as his normal pay.”