Edition: June / Aug 2017


Requirements for redress

To a greater or lesser degree, every society has economic inequalities.
In SA they cannot be allowed to continue at current levels,
let alone to worsen.

Enough already with the bewailing of SA’s deeply-ingrained inequalities. They’re as readily visible as they’re pervasive and explosive. Politicians hammer on, inclined not only to speak in clichés but also to think in them. Left to their own devices, little good can come from populist bombast.

By contrast, because of their pools of capital available for investment, there is much that retirement funds can do; that they should do in the interests of those who supply the capital, being just about everybody who tries to save money for future use of themselves and their dependents. A recent discussion paper of the UN-backed Principles for Responsible Investment, authored by David Wood of the Harvard Kennedy School, set out three basic reasons:

  • Inequality, and its growth, might have negative consequences to investors’ long-term investment performance;
  • The emergence of inequality as a topic of domestic and global concern may change the risks and opportunities that affect the available universe of investment opportunities;
  • Inequality might negatively affect the financial system in which investors participate and in which beneficiaries live.

All this seems screamingly obvious. But if economic growth is the prerequisite for inequality to be redressed, which must surely be accepted, then the mechanisms by which inequality can negatively affect growth bear emphasis (see box). They resonate in SA.

What’s to be done?

Masilela . . . social compact essential.

Now, one can become bogged down in arguing over wealth and income disparities. The former are more complex and contentious because they often relate to an historical build-up of assets. This leads back to legacy issues, such as superior education and estate inheritances, that aren’t peculiar to SA. To seek the redress of inequalities by a wealth tax, being mooted, invites a backlash similar to land expropriation without compensation, also being mooted; both risking consequences predictably more adverse than benign.

Income disparities have more to do with remuneration differentials in the current environment. There can also be dispute over veracity of the much-quoted Gini coefficient, a measure of inequality that might embrace only people in formal employment (where SA doesn’t shape too badly, relatively, on the Gini scale) or in society as a whole (where the extent of joblessness causes it to shape horribly).

The point is made because these issues should not be allowed to detract from the practicalities of what’s within the remit of retirement funds to address. Specifically, as an alternative to the conventional concentration on listed securities, they can look more aggressively to support for infrastructure, entrepreneurship and job-creation investments.

At the recent UNPRI seminar in Johannesburg, guest speaker Wood of Harvard was strong on how economic inequality was a drag on economic growth. Citing IMF research, he noted: “If the income share of the top 20% (the rich) increases, then gdp growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% (the poor) is associated with higher gdp growth.”

He’s concerned about poor linkages between the financial system and the real economy, hence about the impact of “responsible investment”. When it comes to ESG (environmental, social and governance) performance of companies, neither they nor investors were paying nearly as much attention to the S in risks of inequalities as to the E in risks of climate change.

Jackson . . . better multipliers

In a turbulent political and economic environment, it’s difficult for trustees of retirement funds to think in the long term. But, contended Wood, they simply had to initiate a much more lucid discourse about long-termism right down to the dividend policies of investee companies.

Support came from Heather Jackson of Ashburton Investments. Having set an example with her launch of the Jobs Fund (TT Dec ’14-Feb ’15), she was critical of most investors seeing listed equities as linked to economic growth. Over 60% of aggregate investment portfolios are in JSE-listed equities, two-thirds of which have revenues from offshore.

“Other assets classes are more aligned to economic development and resultant multiplier effects,” she argued. “Developmental requirements should be injected into investment mandates and push reporting requirements for the impact of investments tackling hard issues.”

Some don’t need such requirements, one being Futuregrowth which has established a record of solid returns from investment in social enterprises. Several other asset managers will also be looking keenly, for instance, at opportunities presented by Gauteng’s infrastructure programme.

Gauteng is wanting to raise R1,8 trillion over the next 15 years. “Investment in state-of-the-art infrastructure is not a luxury but a necessity,” urged premier David Makhura at the province’s May summit for institutional investors. The R46bn to be sought over the next three years would be spent on a variety of projects-- including human settlements, public transport and industrial nodes – that would improve citizens’ lives and “contribute significantly to radical economic transformation”.


Reduced consumer demand: The wealthy tend to save more than other consumers, so wage stagnation and the resulting inequality many reduce the spending power of the poor and middle classes; in addition to reduced ability to save for retirement.

Increased economic instability: Inequality may drive bubbles as those without economic resources take on debt for consumption.

Rent-seeking and political power: Concentration of wealth may lead to increased political power and influence, capturing economic rents at the expense of productive activity.

Exacerbation of social uncertainty: As the gap grows between the haves and have-nots, so might social tension as well as political and social instability. Inequality can even directly harm human wellbeing, being linked for instance to poor health outcomes, and reduced investment in education and development.

– UNPRI discussion paper, 2016.

Back at the UNPRI seminar, it was keynote speaker Elias Masilela whose outspokenness stole the show. A commissioner on the National Development Plan and former chief executive of the Public Investment Corporation, the chair of DNA Economics is clearly frustrated by a reticence to focus on “the real issues”.

Unemployment, poverty and inequality were “mere symptoms” of a problem lying elsewhere in the economy. Time was being wasted in talking about symptoms, not sources, of the problem. It had to be resolved by households, corporates and pension funds taking collective responsibility.

It is fashionable to highlight growth and unemployment, he said, because that was what poor people wanted to hear: “But it is not fashionable to talk about building the right governance systems and building the right infrastructure for gaining access to good quality services.”

With the 1994 advent of democracy, South Africans were looking for better housing, education, health and transport. Today, education is bottom of the pile. People are more focused on such immediacies as food, water and energy. This told him that SA has regressed socially.

Structural inequality is illustrated by the poorest 20% of South Africans accounting for less than 3% of total expenditure while the wealthiest 20% consumed 65%. Also, unemployment amongst black matrics and graduates was disproportionately high. The same applies to skills in the workplace where there were four times more whites than blacks.

The common thread across inequality indicators is education and skills, Masilela stressed. After unemployment, according to StatsSA, inadequate years of schooling was the highest driver of poverty. Education, at the heart of SA’s inequality complex, should be part of the “social wage” in enhanced service delivery. That’s what organised labour wants, but paradoxically counters.

The “social wage” is being compromised in education by teachers’ strikes. The same applies in healthcare, affecting patients, and transport, affecting productivity. How to enliven the “social wage”, part of the “social compact” central to the National Development Plan, Masilela considers essential to the conversations that should be held if the prevailing psyche is to change.

The redress of inequalities, he insists, is premised on good governance. It involves a capable state, professional public service and policy certainty. All actions should be judged by “how sustainable they are and whether they contribute to or deduct from good governance”.

In this, pension funds are critical participants by sheer weight of their capital and common interests of their mass memberships. They’re the glue for a social compact, provided they use their influence for the purpose.