Edition: December 2015 / February 2016
Editorials

CURRENTS

Gaia moves into gear

Listed vehicle for direct investment in infrastructure projects.
R500m raised to begin acquisitions.

Oliphant . . . modest charges

The successful listing of Gaia Infrastructure Capital, on the JSE’s main board, presents the opportunity especially for smaller pension funds and individuals to invest directly in an asset class that’s growing exponentially. Listed shares offer liquidity, important for pension funds in meeting liabilities as members withdraw, and tradability in denominations suited to retail investors.

Because of their scale, direct investment in infrastructure projects is predominantly the domain of large institutions. With Gaia, it’ll be different because it enables investment in a company that invests directly. Listed as a special-purpose acquisition company (Spac), for the raising of R500m in primary capital, Gaia will start with a pipeline of “viable assets” in renewable energy.

The market price for Gaia shares will turn on investor assessments of the portfolio being built. Until then, basically a cash shell, it reflects confidence or otherwise in management. That the book-build went smoothly, inclusive of R200m from the Public Investment Corporation, speaks for itself. Managing director is John Oliphant, former Government Employees Pension Fund principal executive officer, supported by a board that includes four former PSG Group executives.

Gaia, according to its pre-listing statement, aims to be a diversified infrastructure investment company that “will directly invest in large-scale energy, transport and water-related infrastructure projects with a value in excess of R1bn”. It will target low-risk investments that are operational or close to operational, that will generate returns of cpi plus 6%, and that promise “visible environmental, social and governance policy appreciation”.

For portfolio spread, it will make respective investments of not less that R200m where the assets have not previously been evaluated and not less R100m where they have been. Once accumulated, within 24 months, Gaia will apply for reclassification from the JSE’s “non-equity investment instruments” sector. As the foundational R500m depletes, the listing offers the platform to raise further capital.

Such is the magnitude of infrastructure requirements that government cannot finance them on its own. It’s reckoned that to date over R160bn has been raised from the private sector for specific projects. The opportunities are virtually open-ended. Gaia could be the first of several companies that seek similarly to enter the field.

Oliphant, who led infrastructure initiatives in his GEPF capacity, reckons that the environment has been a “bit too chunky” for smaller pension funds. Direct investment would have taken up too high a proportion of their assets, so they’ve tended to enter though private equity funds that typically charge fees of 2% for assets under management plus a 20% “carry” or performance fee.

Gaia, however, will charge a management fee of only 0,8% and no carry. “The activist in me had to answer the question of what’s fair for our scheme,” explains Oliphant. After all, as chair of the Code for Responsible Investing in SA committee, he must set an example.

How long is a string?

Remuneration levels for trustees are all over the place. From where are retirement funds to get guidelines when they don’t exist?

Problem is that pay levles can range from zero, where a company or trade union views trusteeship as part of an employee’s job, to amounts that might be considered as rewarding but perhaps still ungenerous when compared with executive directors charged with similar responsibilities in terms of human and financial assets under their stewardship.

Rarely do companies disclose trustee remuneration. A good exception is the latest Naspers annual report. It shows that trustees of its Media24 pension fund will each receive R76 365, paid by the company and not by fund, in the year ahead.

Compare this with the Government Employees Pension Fund, much larger than the still-large Media24. Its latest annual report – for 2013-14 being late indeed – can receive around R250 000 a year depending on certain variables such as time spent in committees. Trustees get a meeting fee and a retainer fee, policy being that all trustees “must receive the same level of remuneration regardless of experience and expertise”.

The standard reference is the PwC trustee remuneration survey, not updated since 2014 when the burdens on trustees weren’t quite as formidable– relatively speaking – than what National Treasury now intends (TT Sept-Nov).

The survey found, for instance, that only 28% of standalone funds remunerated trustees. The median range for “professional trustees” was anywhere between R50 000 and R100 000 per year. What’s fair? Who knows?

Fair play

Dominant competitors for the administration of beneficiary funds are Fairheads and FedGroup, the former long established and the latter trying its damnedest to make inroads. Only they will know how the marketing war between them is panning out.

Field . . . family business

Trying to separate their respective claims and counter-claims on costs and service — as well as the most effective means to trace beneficiaries (Fairheads is more personal and FedGroup technological) — is best left for potential clients to interrogate themselves. To that extent, the rivalry can only be healthy. At least it helps to focus the minds of retirement funds on why they should use specialist administrators rather than act as do-ityourself operators when effective interaction with guardians and minor children is of the essence.

One objective point of departure is a JSE listing. Fairheads, now part of Vunani, believes that it enhances transparency and peer-group comparability. FedGroup, director Scott Field affirms, has no similar intention.

FedGroup is family-controlled and high-profile in many financial offerings additional to beneficiary funds. Field can be scathing about the vulnerability of policyholders compared with shareholders: “In good times, their interests are aligned. But when backs are against the wall, it’s policyholders who get screwed.”

That’s a general argument most intensely played out in years prior to the Old Mutual and Sanlam demutualisations, when they were pooh-poohing the rivalry from JSE-listed Liberty Life. We know how that resolved.

In the case of FedGroup, says Field, there’s no need to raise capital: “We’re self-funded and have no outside borrowings. On transparency, we comply with King III and have a representative on the committee of King IV to focus on unlisted businesses. Some of the best businesses abroad, several banks and vehicle manufacturers amongst them, are unlisted and family-owned. It’s perfectly acceptable there as we also consider it to be here.”

Then ask about things, in the Fairheads versus FedGroup battle, like BEE credentials at company level and tracing of beneficiaries at fund level. Go ahead. Ask them. It’ll be good for the choices that retirement funds should be making.

Trustee challenge

Simply as a report on progress, or lack of it, a High Court date has yet to be set for the appeal of four umbrella-fund trustees against the Pension Fund Adjudicator’s determination that they be held personally liable for the rebuild of fund databases. Having dragged on for more than two years (TT Dec ’13-Feb ’14), the matter will probably be set down for hearing sometime in 2016.

The outcome is critical for trustees generally because it will indicate whether their own pockets should be hit. The determination was that they should be, for want of an alternative, and the trustees will contend that it must be set aside, arguing around ownership of fund assets and whether trustees could lawfully debit the credits of fund members.

Meanwhile, earlier this year, the affected IF funds and the Dynam-ique fund were placed in liquidation. Liquidator Francois Rosslee of Argen Actuarial Solutions reported that, to ensure a fast and fair resolution for all stakeholders, the trustees had prioritised the completion of the funds’ database rebuilds and other matters before the funds would be finally liquidated.

Good and bad

There are pension funds and there are pension funds. Outstanding amongst the good, for receiving creditable awards in recent months, are the Natal Joint Municipal Pension Fund and the Sentinel Retirement Fund.

Bottom of the class, for being censured yet again by the Pension Funds Adjudicator, is the Municipal Employees Pension Fund for its “unending noncompliance with existing registered rules when computing a withdrawal benefit”. Adjudicator Muvhango Lukhaimane ordered that the fund pay the member, who’d successfully complained, a withdrawal benefit amounting to three times his contribution (although the rule was subsequently changed to allow for only 1,5 times) plus interest at 15,5% a year as a punitive measure.

The award shows that Lukhaimane has grown sick and tired of the MEPF’s misbehaviour. The award being against the fund, however, it’s innocent members who’re penalised.

Lukhaimane . . . MEPF undeterred

A way should surely be found to smack the guilty parties in their own pockets. Are all the trustees really “fit and proper” for their jobs, and should questions not also be asked of administrator Akani that operates under licence from the Financial Services Board?

As in previous years, the Adjudicator’s report for 2014-2015 is informative and attractively presented. A general comment worth noting is Lukhaimane’s concern that, for the most part, members and beneficiaries are paid out only after they’ve lodged complaints.

These complaints might be negligible when compared to the number of benefits that the pension-funds industry pays out annually, she says, but it is nevertheless disconcerting: “The financial distress that might befall a complainant, whilst waiting for his or her benefit, may be irreparable.”

Against the world

By comparison with other major pension systems, SA does not rate terribly well in the 2015 Melbourne Mercer Global Pension Index. It’s graded with a C – an index value of 50-60 out of 100 – together with France, the US, Poland, Brazil, Austria, Mexico and Italy.

This grading represents “a system that has some good features, but also has major risks and/or shortcomings that should be addressed,” the study finds. “Without these improvements, its efficacy and/or long-term sustainability can be questioned.”

In the A category, with an index value of over 80, are Denmark and the Netherlands. Both have “a first-class and reliable system that delivers good benefits, is sustainable and has a high level of integrity”. Australia gets a B+ while Sweden, Canada, Chile and the UK are amongst those graded at B.

The overall value for each of the 25 countries’ systems MEPF undeterred represents the weighted average of three sub-indices: 40% for adequacy; 35% for sustainability and 25% for integrity. Grading appears to be based on rules and not necessarily on their implementation.

The overall index value for the SA system, says the survey, could be improved by:

  • Increasing the minimum level of support for the poorest aged individuals;
  • Increasing the coverage of employees in occupational pension schemes, thereby increasing the level of contributions and assets;
  • Introducing a minimum level of mandatory contributions into a retirement savings fund.

Against standardisation

In the UK the Financial Conduct Authority has decided not to standardise how fees of advisers and wealth managers are disclosed. This isn’t exactly music to the ears of SA regulators.

Earlier this year the European Union issued its second MiFID (Markets in Financial Instruments Directive), requiring advisory and discretionary firms to provide a full breakdown of all costs and charges from January 2017. It does not prescribe how this information should be presented but allows member states to opt for a standardised format.

Although supported in the UK by the Investment Association, which had urged the FCA to standardise disclosure “in order to assist consumers to make meaningful comparisons across all investment products and services”, the FCA is concerned that it couldn’t develop a standardised approach that would work for all consumers and all business models – and that it could actually impair innovation in this market.

FT Adviser quotes a spokesperson for the FCA watchdog in responding to the Investment Association: “Instead, we want to give firms the freedom and flexibility to design that disclosure with information provided to your clients around your business model and the needs of your clients.”

RI index anomalies

Literally moments too late for the launch of the JSE/FTSE Responsible Investment index series came the announcement of MTN’s debacle in Nigeria. MTN is included in the index. Compare this with the prompt removal of VW, following revelations of manipulated emissions tests, from the Dow Jones Sustainability Indices.

Then compare these with the MSCI, a leader in the field of sustainability indices, which focuses on forward-looking measures. It had de-rated VW prior the emissions announcement. The MSCI team on ESG (environmental, social and governance) looks, for example, at a company’s carbon footprint and governance practices to assess likely impacts on its future profitability.

The team has discovered “tremendous value”, reports RisCura’s Malcolm Fair, in using big-data techniques to scour the web for backwards-looking negative press and worldwide regulatory findings. It was through this process that misdemeanours at VW had been picked up early. “I found this to be an interesting use of big data in risk management emanating from an ESG screening process,” he says.

As for screening processes, there are horses for courses in considerations of “responsible investment”. On ethical criteria, BAT (tobacco) and SABMiller (alcohol) are automatically excluded from certain FTSE4Good series. Both, however, are in the top 30 of the JSE/FTSE RI series. Because of their huge JSE market capitalisations and free floats, relative to other shares on the local bourse, the index wouldn’t hold much appeal without them.