Edition: March - May 2015
Editorials

CURRENTS

Fund members prejudiced

A ruling in favour of one will reduce the benefits of others.

Does the Municipal Employees Pension Fund have no shame for continued flouting of its own rules? And when punitive costs are awarded against it by the Pension Funds Adjudicator, out of sheer frustration and annoyance, isn’t there something wrong when those costs must effectively be paid by fund members while the MEPF trustees and fund administrator Akani escape liability?

It’s academic to suggest that fund members seek recourse either from the fund trustees in their personal capacities or from the administrator, or both. It’s just not the sort of thing that fund members are inclined to do, especially when the amounts spread between them are relatively small and likely to be eclipsed by legal expenses. But perhaps the Adjudicator could in future consider, in making such rulings, whether blameless fund members are the correct parties ultimately to be penalised.

Clearly, Adjudicator Muvhango Lukhaimane has had it in spades with the MEPF. Having singled it out in her office’s 2013-14 annual report for ignoring its registered rules when computing a withdrawal benefit, the undeterred MEPF has done it again.

Criticising the fund’s perpetual non-compliance with an applicable rule, she has ordered that it pay complainant M A Hobe his withdrawal benefit at three times his contribution although the rule had subsequently been amended to allow for multiplication by only 1,5. She further ordered that punitive interest at an annual rate of 15,5% -- from February 2014 to date of payment -- be added to the outstanding amount.

Responding for the MEPF as its administrator, Akani submitted that Hobe had been a fund member until August 2013. Benefits reflected in the benefit statements were for illustrative purposes only. They did not represent a guarantee. Hobe’s benefit had been calculated by a multiplication factor of 1,5, following a rule amendment with effect from April 2013, based on the actuary’s advice that the fund would fail to meet its future liabilities if the fund continued to apply a factor of three.

Lukhaimane was having none of it: “This tribunal must point out that it has to date issued several determinations in terms of which it was found that (the rule amendment) cannot be applied to benefits which accrued before its approval and registration by the Registrar. Nevertheless, it continues to apply this rule amendment to benefits which accrued before its approval and registration. In the absence of any indication that it took steps to set aside the said determinations...it follows that these determinations are binding.”

The punitive interest is occasioned by continued flouting of these determinations. MEPF members are entitled to an explanation from trustees of the fund and its administrator. It’s their behaviour that has caused the members’ loss. The amount might be small but the principle isn’t.

McCarthy’s move

From the front line in research and presentations of the National Treasury retirement-fund reform initiatives, Dave McCarthy has moved to academia. He’s been appointed a professor of actuarial science at Wits.

McCarthy McCarthy . . . now a prof

The change enables McCarthy to complete a book he’s writing and to concentrate on the academic research he enjoys. However, as he remains a consultant to National Treasury, it will still have access to his expertise.

RDR expense

Please let this not be a forerunner to implementation in SA of the Retail Distribution Review, but UK regulator Financial Conduct Authority is about to pay over 200 000 (approx. R3,7m) for two reports on the effects of RDR.

It’s a lot of money considering what was produced. One report, from Europe Economics, concluded that the RDR had initiated a move towards professionalism amongst advisors and that a ban on third-party commissions had reduced product bias. The other report, from Towers Watson, found no “advice gap” resulting from an overall shortage of advisors but noted anecdotal evidence of reduced capacity for advisors serving less affluent clients.

Since both reports are publicly available, there’s perhaps little need for a similar splurge locally. Circumstances here are unlikely to be much different.

But then there’s also a “highly sensitive” report from law firm Clifford Chance, also available on the web, on a press briefing by the Financial Conduct Authority about its 2014-15 business plan. Costing £3,15m before vat, the report was a 226-page inquiry into how price-sensitive had leaked beforehand.

A problem was that the leaks – in the reputable Telegraph, no less – got it wrong. The newspaper said on its front page that the FCA was planning an inquiry into 30m policies and that savers in them could be given free exits or moved to better deals. When the markets opened next day, the shares prices in a number of insurance companies dropped substantially. Only when the FCA put out a correction did the prices begin to recover.

Apparently, the newspaper had been exclusively briefed prior to the intended press conference. There must be a lesson in this about being too clever with the media in the vexed area of financial communication.

System’s saviour

The cover story in a recent edition of The Economist says it all, much as the ANC Gauteng might recoil at the idea being an unlikely hero of capitalism. But activist investors are certainly being encouraged.

The Economist applauds what hedge funds are doing. The ANC Gauteng is on a mission about what retirement funds should be doing.

economist  

No matter. What matters is the good of the public company, although in SA the initiative from the ANC Gauteng could cause more than a few incumbent directors to recoil. Hopefully not.

Kid on the block

As a focused arm of “responsible investing” comes “impact investing”, a catchphrase intended to embrace a competitive financial return with social impact. The concept, fairly new to SA, has been given legs at a conference hosted in February by the Southern African Impact Investing Network.

The importance of the conference, for purposes of local traction, was illustrated by profiles of the speakers. Heavyweights amongst them were Sir Ronald Cohen, founder director of the British Venture Capital Association and of Social Finance UK, and Bobby Godsell, chair of Business Leadership SA. Sponsors from the UCT GSB, Greater Capital, Genesis and the Aspen Network of Development Entrepreneurs which has an active SA chapter working to support small and growing businesses.

Much of the content was of the how-to interactive variety; for example, on due-diligence issues and applying the correct metrics. There was also a debate on whether impact investing was more hype than substance. Because the conference took place as TT went to press, coverage will need to await our next edition.

In SA meanwhile, already prominent in impact investing is Mergence Investment Managers. Of the group’s R21bn under management, R6bn is in housing, education, SME development, transport, rural retail projects and renewable energy. All the investments are in unlisted vehicles.

On the spectrum of returns, Mergence director Mark van Wyk notes that the group’s suite of debt funds lie higher up the curve than other income assets but below growth assets – “somewhere between mortgage and corporate bonds in terms of risk and capital liability”, he says. Over the past year these funds have produced an average cpi+5% for institutional clients.

As elsewhere in the world, impact investing has gained currency amongst retirement funds. Provided they get the returns, they’re well positioned to help in the long-term financing of infrastructure and to stimulate social upliftment simultaneously.

No CRISA crisis

Not yet, anyway, following the departure of John Oliphant from the Government Employees Pension Fund. Oliphant was a main driver of the Code for Responsible Investing in SA and chair of the CRISA committee.

Mulder Mulder . . . into the breach

Oliphant will remain on the committee and is prepared to continue as its chair. But until a decision is finally made, deputy chair Sunette Mulder of ASISA is perfectly capable of keeping the ship afloat.

Members’ hearts are in the right place. So perhaps it’s partially a question of waiting to know more about the circumstances of Oliphant’s departure from the GEPF and partially of wanting to work out whether his clout is diminished by no longer being the fund’s principal executive officer.

Or perhaps there’s also a subtext. Most of the CRISA signatories, and members of the committee, are asset managers. They can be at the receiving end, or not, of investment allocations from the GEPF and Public Investment Corporation.

In making a decision on the chair, will there be some quiet second-guessing of their views?

Brown judge censured

Few tears will be shed for Fidentia’s J Arthur Brown, his sentence of a fine by the Cape High Court having been set aside and substituted for 15 years’ imprisonment by the Supreme Court of Appeal. Using harsh terms and tone to shred the findings of Cape judge Anton Veldhuizen, the SCA views were revealing on how courts should reveal plea bargains.

Veldhuizen had emphasised that he could only sentence Brown on the charges to which he’d pleaded guilty under an agreement with the National Prosecuting Authority (TT June-Aug ’13). Since the NPA had dropped the more serious charges, Veldhuizen felt obliged to accept that Brown had merely caused potential but not actual prejudice. He was nevertheless pretty scathing about the way that the NPA had conducted the prosecution.

For its part, however, the SCA was almost as scathing of Veldhuizen; particularly for “the number and nature of (his) interventions in favour of Brown”. They were “antagonistic to the state’s case” and various passages cited were “deserving of censure”.

When it came to the law in matters of fraud, the SCA was explicit: “The unlawful and intentional making of a misrepresentation does not have to cause actual loss to constitute fraud. That fact eluded (Veldhuizen). In respect of each of the transactions in question, Brown committed fraud involving tens of millions of rand, way beyond the R500 000 threshold...that triggers the minimum-sentence provisions. Those assets were at risk and the potential prejudice has to be viewed from that perspective.”

Even if the Cape court was correct in its conclusion that the minimum-sentence legislation didn’t apply, added Appeal Judge Navsa in a unanimous decision, it “ought to have considered whether, given the objective gravity of the offences, a custodial sentence was nonetheless called for. That it did not do.”

Crocodile jaws

In a presentation late last year, Investment Solutions chief investment officer Glenn Silverman produced this graph:

graph-1  

He used it to illustrate the disconnect between share markets and economic indicators. The disconnect he described as “problematic” and “unsustainable”.

That was suitably lacking in hysteria, except when it comes to the imagery of a crocodile’s jaws. They’re inclined not to close gently, but to snap. The expanding gap between the trend lines suggests either that the markets are anticipating a rapid pick-up in economic recovery or something altogether less cheerful.