Edition: October / December 2016
Editorials

CREDIT RATINGS

Risks of a R2,7 trillion wipe-out

Effects of the Gordhan showdown in hard numbers. Mass mobilisation needed.

It seems ages ago, although it was only in late July, that the Association of Savings & Investment SA (ASISA) had put together a presentation setting out the likely consequences were SA sovereign debt downgraded to junk in the rating agencies’ December review. Back then, when Finance Minister Pravin Gordhan still seemed firmly ensconced and the downgrade looked avoidable, the presentation was a timely warning.

Since then, such have been the pressures on Gordhan and National Treasury – partly extending even to the SA Reserve Bank – that revisiting the presentation should trigger a panic attack. Barring an infusion of President Jacob Zuma-led cabinet coherence, a downgrade is marching towards inevitability.

Make no mistake that members of pension and provident funds will be severely impacted. By the time they realise it, and they will realise it when the many millions of fund members receive their subsequent benefit statements, speaking out on their behalf will be too late (see Cover Story).

The missing link in the communications chain is a collective voice for retirement funds; not for financial institutions to speak alone as fiduciary bodies, because this can be perceived by those trying to score a political points as shareholder-owned big businesses protecting their own interests, but for trustees to scream in their fund members’ interests, cutting right across party-political lines.

Pressure from the bottom up is lacking because member education is lacking. Members of funds, and perhaps also a preponderance of trustees, are simply unaware of the influence that their mass mobilisation can assert. Support of Gordhan at this time is critical not only for them directly and immediately but also for the nation as a whole. There’s no more representative cross-section of SA’s demographic, black and white, on the scale of retirement funds.

These funds are obliged by regulation to invest in SA government and government-backed bonds. The more the yield on them rises, to attract foreign and domestic investment, the more their prices fall. Falling prices obviously mean falls in retirement funds’ portfolio values. They also mean that government and state-owned enterprises will have to pay more to service their debts, leaving less money available for anything else; such as, heaven forbid, social grants.

The consequences of junk status go much deeper. As the ASISA presentation put it: “If SA loses its investment-grade rating, foreign investors, many of which are pension funds, would be forced to withdraw their money from SA. Given that 39% of JSE-listed stocks is owned by foreign investors, such a mass withdrawal could result in outflows of up to R2,7 trillion. This would have a hugely negative impact on ordinary South Africans who are the majority in the 39% black shareholding on the JSE via pension and provident funds, community savings schemes and black staff share schemes.”

FUNDAMENTAL FACTS

Without a properly-functioning National Treasury and SA Reserve Bank, ASISA predicts:

  • SA economic growth will continue to deteriorate (even from its present rate of close to zero);
  • Tax collections will disappoint, necessitating more borrowing;
  • Interest rates as a share of government revenue will rise to pre-1994 levels when SA faced bankruptcy. (In fact, prime reached 24% in May 1985 and again in July 1998);
  • Government services will be scaled back;
  • An exchange rate of R25/$1 (R14,70/$1 at time of writing) is plausible;
  • Petrol and food inflation will surge.

The poor and working classes will be hurt the worst. Unquantifiable are the resultant consequences for social stability.

In other words, a sell-off by foreign investors won’t be restricted to bonds. It will extend to equities also, further damaging the value of retirement funds’ portfolios. The effect will be felt in reduced benefits for all fund members; in fact, for all savers invested directly or indirectly on the JSE, and further for the country as a whole (see box).

The renewed hammering of the rand, significantly self-inflicted, must also hit all consumers and workers because it will effectively cut their real incomes. SA must pay in foreign currency for imports used both for finished products and local manufacture. Thus prices of goods will rise faster than salaries and wages can keep pace.

That ASISA warns of a ZAR25/USD1 exchange rate is frightening. That there isn’t proactive mass outrage and mobilisation at the prospect, like there is in reactions to retrenchments that surely beckon, reflects woeful levels of financial awareness.

A paradox is that all this comes to a head when National Treasury, in a bid to make the structures for long-term savings more attractive, is battling for retirement-fund reform to progress. Tax incentives, improved fund governance, better-qualified trustees, measures to contain fees and the like are rendered peripheral by the overarching issue.

It’s how to strengthen the hand of National Treasury so that job-creating economic growth becomes feasible and the relegation to junk is avoided, not merely as a patchwork for the here-and-now but for the longer term as a prerequisite for a restoration of the investor confidence on which SA depends.

FLASHBACK AND FAST FORWARD TO FUTUREGROWTH

No prizes for correctly guessing the bearded speaker in the photo. It’s a reminder of the 1980s’ protests led by the United Democratic Front, a facade for the banned ANC, in support of such actions as sports boycotts and foreign disinvestment. On both counts, the UDF eventually succeeded.

Which marks two present-day ironies: first, that a relegation of SA’s sovereign credit to junk will again spark disinvestment; second, that powers achieved by one generation are blunted when the next generation is lethargic to use them. This applies specifically in relation to pension and provident funds.

A plank in the UDF campaign was for worker’s savings not to be used for the purchase of bonds issued by the National Party government. This led to shifts in the tectonic plates of the whole SA retirement-fund industry.

There were wholesale switches from defined-benefit to defined-contribution funds. Attempts to introduce mandatory preservation were stopped in their tracks and members’ withdrawals were rife. In the face of mass action, provoked by opposition to the use of retirement funds’ monies without the consent of members, government was forced to bend.

Roll on the 1990s and former UDF activists, Trevor Manuel amongst them, were appointed to Nelson Mandela’s cabinet. So too was Gill Marcus, a returned ANC exile. As deputy finance minister, she piloted through parliament the amendment to the Pension Funds Act that members of occupational retirement funds could elect up to 50% of trustees on funds’ boards.

Effectively, this gave employers and employees equal authority in a fund’s decision making. Obviously, it included decisions on investments; for instance, on the weightings to be given government and government-backed bonds and which to buy – say Treasuries relative to Eskoms – for their portfolios.

Into the present century, trustee empowerment was taken considerably further. An early itineration of the King governance code recognised that pension funds had become the largest single category of shareholders in JSE-listed companies and encouraged the funds to become active investors. Regulation 28, under the Pension Funds Act, provided that the funds consider environmental, social and governance (ESG) when deciding on their investments. Implicitly, this applied not only to equities but also to bonds.

To underpin it all was the Financial Services Board requirement that trustees compile investment-policy statements to inform the mandates for their funds’ asset managers. These too needed ESG considerations with which the managers had to comply. Thus were the roles of managers and consultants accentuated.

On top of these came the UN Principles for Responsible Investment and its subsequent adjunct, the Code for Responsible Investing in SA. Both defined responsible investment in terms of “sustainability”, related to ESG, and both sought to advance stakeholder activism. Both were signed by SA’s heavyweight asset managers, such as Futuregrowth, and some of the largest asset owners, such as the Government Employees Pension Fund and the Eskom Pension & Provident Fund.

Futuregrowth, part of Old Mutual (whose chairman happens to be Trevor Manuel), is SA’s largest investor in government and government-backed bonds. It has decided, because of “governance concerns”, to hold back on future investment in state-owned enterprises such as Eskom. In response, citing a lack of “transformation”, the EPPF has decided to hold back on the channelling of its assets for investment by Futuregrowth.

In terms of their commitments to CRISA, which is about to be endorsed by King IV, can both be right? And if only Futuregrowth is right, will its lead be followed by other asset managers similarly prepared to risk the loss of business from public-sector funds? What’s the view, for the record, of private-sector funds and assets managers? Or, for that matter, of the GEPF and the Public Investment Corporation?

There’s a deafening silence. As an English colloquialism has it, applicable to retirement funds’ vaunted governance codes and fiduciary responsibilities, there comes a time to pee or get off the pot.