Edition: February/April 2018
PIC and choose
Great improvement in transparency of unlisted investments but not on identification of external managers.
It’s hard for an outsider to imagine the difficulties of the Public Investment Corporation, by far SA’s largest asset manager, simultaneously to reconcile its objectives. Amongst them are increasing benefits mainly for members of the Government Employees Pension Fund, being an activist shareholder usually holding substantial stakes in most major JSE-listed corporates, engaging with these corporates on their behaviour and performance, exercising proxy votes, advancing ESG (environmental, social and governance) as investment criteria, and promoting black economic empowerment.
Additionally, the PIC is the biggest holder of government bonds. Being owned by the state, it’s hardly in a position to withhold support from badly managed state-owned enterprises. Also, with its board appointed by government and falling under the chairmanship of the deputy finance minister, it might not be as free as it would like from political pressures that complicate pristine investment objectives.
To date, the PIC has been coy in publicly revealing details of its unlisted investments. Those days are over. To its credit, the information now published on its website could not be more comprehensive. If that’s where political favouritism could be applied, such transparency is the antidote. Disclosure of respective directors, were their connections to be explored, would offer clues.
A particular investment, long tracked by TT, is in Independent News & Media SA. The schedule, for the year to end-March 2017, shows that the PIC had funded a BEE consortium to acquire a 55% equity stake in INMSA as well as a direct 25% equity stake for the PIC itself. The total for the equity purchase was R166m and there’s debt of R285m to be paid by 2021.
So far, the schedule records, the investment has shown a 7,5% internal rate of return. However, it is reported to be “underperforming” and is described as an ESG “laggard”. Noted are its “poor governance operating framework”, its “lack of proper leadership” and its “constant restructuring”.
Is it conceivable that none of this was foreseen? If it was, why did the PIC invest anyway? A little imagination might provide the answers.
The full list of 109 companies illustrates a mixed bag. Some performed horribly, some were up to expectations and some exceeded them. So be it. The portfolio is tiny in the PIC’s overall scheme of things and can be argued that there’s justification for allocating a small proportion of assets to unlisted companies offering potentially higher risk and reward than constituents of the JSE’s top 40, like Naspers is and Steinhoff was.
While the PIC has improved disclosure on the one hand, its latest annual report is stuck in the mud on another. Challenged to name the black-owned firms to which the PIC has allocated assets for external management (TT Sept-Nov’17), it has again identified them anonymously by number only. This is strange in itself. It’s even stranger that no explanation is offered.
But a confident prediction can be made for the year ahead. It’s that the pressures on PIC chief executive Dan Matjila won’t dissipate.
In a stinging determination late last year, Pension Funds Adjudicator Muvhango Lukhaimane called on the Financial Services Board to apply “remedial action“ against the Municipal Employees Pension Fund and Akani Retirement Fund Administrators following yet another complaint against them. She wants to the FSB to appreciate the “gravity of the problem posed by the conduct“ of the MEPF and Akani after they had repeatedly failed to provided requested information.
Complaints against Akani go way back to 2015 and extend to funds other than the MEPF (TT June-Aug’17). They’d even led Lukhaimane to recommend that Akani’s licensing conditions be reviewed (TT March-May’17). Asked what’s happening, the FSB responded:
We have noted the complaints received and determinations issued by the Adjudicator as well as (her) concerns expressed in those determinations. Whilst mindful of drawing adverse inferences from individual complaints, we recognise that complaints against a pension fund or benefits administrator may be indicative of more serious governance breaches that may be systemic.
The number of complaints against a fund or administrator is one of the factors that feeds into the Registrar’s risk-based supervisory model which we use to determine the level of scrutiny required in respect of every pension fund and administrator registered with the FSB.
As regards the specific complaints pertaining to funds that employ Akani as their benefits administrator, we did actually note with concern the allegations against (Akani) and have already met with a director of the administrator to discuss the issues raised in the Adjudicator’s determinations and get a better understanding as to why there appeared to be several complaints to the Adjudicator involving funds which Akani administers.
Several questions were raised during this meeting and further documentation was requested from Akani. We have now received a response from Akani and are currently considering these latest submissions in order to determine whether or not further regulatory action is required. (It) could include and on-site visit on the funds and/or the administrator, or a request for an inspection (under) the Financial Institutions Act.
The Pension Funds Act provides at s14 for the transfer of one fund’s business to another, for example with the absorption of a standalone fund into an umbrella arrangement. Sounds simple, but it isn’t when the FSB information circular of last July is applied.
The circular points to changes in Income Tax Act schedules that “have resulted in a fund being required to apply for a tax directive for all transferring members”. It deals with the timing of transfers and offers some flexibility to overcome practical difficulties.
Nonetheless, serious difficulties are apparent. Kobus Hanekom, principal officer of the Sanlam umbrella funds, highlights several. Amongst them:
Hanekom comments: “so far in our tranches we’ve included only those members for whom we have tax records. This is costly and time consuming. The fund and administrator have no leverage on many aspects of this arrangement. We are concerned that it may frustrate all stakeholders and cause unnecessary tensions as many employers and members find it difficult to understand the delays and the reasons for all the complexity.”
Cadac is a gas
While the criminal trial of Simon Nash now enters its eighth year, for alleged stripping of the surplus in Cadac’s pension fund, there is a change in the direction of the wind. Not only is Tony Mostert no longer still the fund’s sole liquidator, having been joined with attorney Johan Esterhuizen as a co-liquidator, but a third co-liquidator must be added following the withdrawal of Norman Klein.
The Supreme Court of Appeal has ordered by agreement that the chairman of the Johannesburg Bar Council will appoint an independent liquidator with at least 20 years’ experience. The liquidator is to have no “direct or indirect relationship” with either Mostert or the FSB.
Since two liquidators can overrule a third, fun and games might lie ahead. The SCA expects a report by May 31.
The final retirement-fund default regulations, published by the Finance Minister, prescribe a set of strategies that funds must implement for members. Mandatory are the default investment portfolio, default annuity and default preservation strategies to be managed within the confines of the Regulation 28 guidelines for prudential investment, intended to ensure a broad spread of asset classes.
But default options aren’t a one-size-fits-all solution, argues Shreekanth Singh of PSG Wealth. Pension providers usually offer a wide range of funds, he points out, so the member can make broad choices. Defaults should be suitable for most, although not necessarily optimal for all: “For example, some investors might have a higher risk appetite and might want to chose a more aggressive fund.”
Katherine Barker, head of Momentum FundsAtWork, believes that the cost of implementing the default regulations – and the additional trustee responsibilities they introduce – will accelerate the move to umbrella funds. These funds have cost efficiencies and flexibility that can significantly increase replacement ratios.
A complication with the defaults is that ‘average members’ don’t exist. Funds will need to offer sufficient flexibility to ensure that solutions are offered around different members’ different needs.
A good starting point, she suggests, is greater flexibility in contribution levels: “This involves creating the functionality for members automatically to increase their contribution rate or make additional contributions voluntarily. Such an approach will enable members to improve their replacement ratios while deriving optimal value from the tax deductibility of retirement-fund contributions.”
While on the subject of the defaults, perhaps it’s time for Reg 28 itself to be overhauled. While the Reg 28 guidelines have the best intentions – to diversify investment risk – they restrict asset allocations for members as if their needs and objectives were similar.
They cannot be. For a younger fund member, with 30 years of work ahead, an aggressive portfolio is clearly more appropriate than the conservative portfolio for a member approaching retirement. Further, high weightings allowed for cash and SA government debt instruments are counter-intuitive for diversification. Also, the guidelines constrain fund managers from offering best advice particularly to younger members.
Then there’s the cost of Reg 28 implementation. Too often ignored, it’s ultimately borne by members.