Edition: May/July 2018


Due for retirement

The existing Pension Funds Act – running to more than 400 pages, with regulations, constantly amended – deserves to be placed in a home for the aged.

In 1956, Elvis Presley topped the hit parade with ‘Heartbreak Hotel’. On Broadway, the musical ‘My Fair Lady’ opened. Egyptian president Gamal Nasser nationalised the Suez Canal, Nikita Krushchev denounced Stalin and a Springbok rugby team toured New Zealand under management of Danie Craven.

The landmark event in SA, with J G Strijdom as prime minister, was the ANC women’s march on the Union Buildings in protest against the carrying of ‘passes’. It was also the year in which the Pension Funds Act was promulgated.

The antiquity of the Act is illustrated by its historical context. In the 62 years that have elapsed since birth, its former self has been patched so many times that it’s a quilt of confusion between erstwhile intent and modern-day requirement.

No better example suffices than the present move to consolidate standalone funds into umbrella arrangements. Until a few years ago, the Act covered over 14 000 standalones mainly of the definedcontribution variety but also having several of the defined-benefit model that prevailed during a generation of distant memory.

Now, as Retirement Funds Deputy Registrar Olano Makhubela told the annual conference of the Pension Lawyers Association, National Treasury wants the present number of some 1 650 active funds reduced to about 200. “We are trying to nudge the smaller funds into umbrellas,” he said.

It isn’t likely to be quite so straightforward. A sample of some basic issues to be considered:

Back in the day . . . things were different
Back in the day . . . things were different
  • The independence of umbrellas’ trustees from their institutional sponsors with attendant cost implications;
  • The rights, from which umbrellas are exempt, of employers to nominate and for members to elect up to 50% of fund trustees;
  • The premise that there’s ready availability of ‘fit and proper’ aspirant trustees willing to serve only at hourly rates for attendance at meetings;
  • The distancing of employers from employees as umbrellas’ participating employers incline to abdicate their workplace accountability and communication interactions;
  • The desirability of objective research on cost comparisons between umbrellas and standalones, rather than the broad-brush assumptions that all umbrellas (which operate dissimilarly) are necessarily cheaper by virtue of critical mass alone;
  • The preferences of funds themselves because there do exist members and trustees of smaller standalones who insist that they’re better off where they are;
  • The payment of penalties, whether by trustees personally or fund members indirectly, for late submission of funds’ audited financials;
  • The revolutionary displacement of paper-based reporting by information technology that brings with it the digital capture of records and instantaneous means of communication between funds, members and the regulator.

There are solid reasons – largely to do with anticipated cost benefits, administrative ease and improved supervision – that National Treasury is supportive of consolidation. Makhubela also looks askance at the high volumes of litigation in the industry. Perhaps this too is a function of the Act’s ambiguities.

Given the tectonic shifts in industry structures, and the advent of the Financial Sector Conduct Authority, the time has arrived for a completely reworked piece of legislation. Elvis, Krushchev and Strijdom are long gone. The Pension Funds Act of 1956 should go too.

Mountain of litigation

In its latest annual report, the Pension Funds Registrar refers to five pending appeals and 17 new appeals against his decisions. High Court applications have been made.

Three of the applications seek to challenge the validity of the regulation pertaining to the allocations of surplus in pension funds. In another matter “a pension fund is claiming damages of some R70m from the Financial Services Board and the Registrar...for losses suffered due to alleged failure by the FSB to fulfil its duties in terms of investment activities in a fund managed by Trilinear Asset Management”.

Although the report doesn’t identify the applicant, it’s known to be the Pepkor fund following the debacle at Trilinear (TT Sept-Nov ’12 and June-Aug ’13). Once the FSB had completed an inspection in 2008, it had nonetheless allowed Trilinear to continue trading and had not warned investors of the risks.

FSC stimulus

A critical element of the recently-gazetted Financial Sector Code (TT Feb-April) is Black Business Growth Funding (BBGF). It’s an innovative and constructive way for financial-sector participants, as allocators of capital, to accelerate SA’s transformation and simultaneously to stimulate improved productivity.

The revised FSC encourages participants to reach their scorecard requirements by extending finance to black-owned and black women-owned companies. It also provides for the capital to be distributed by black investment managers, so helping in transformation of the SA private equity industry.

Under the Ownership pillar, banks and life offices can top up their BEE ownership shortfall through this scheme as an ‘equity equivalent’. For those financial institutions which had previously concluded empowerment deals to bring in black ownership and where the empowerment partners have sold their shares, these institutions now have a mechanism that won’t further dilute such existing shareholders as pension funds.

In addition, participants can score points under the Empowerment Financing pillar by allocating capital to black businesses and providing the money to help other businesses transform.businesses transform.

Potentially worth more than R100bn, BBGF is envisioned to channel the flow of funds from the financial sector through black private equity funds into the real economy. This level of investment will help to drive growth and job creation as well as transformation. Applied as intended, it should be highly positive for the economy as a whole.

What makes this mechanism smart is the way it will run. BBGF leverages existing mechanisms for capital deployment, tweaking them to achieve empowerment objectives. It can operate within many existing legislative and prudential rules to ensure effective and efficient deployment of capital. Using the established private equity sector, while ensuring that black private equity managers handle the deployment, is an example.

The private sector is already responding. Investment manager 27four, owned by black women, is setting up the Black Business Growth Fund in partnership with industry body ASISA.

Job changes

Tsiane . . . new Cosatu offcial

Two should be noted as both involve prominent personalities in the retirement-fund industry:

  • In a fallout at the National Union of Metalworks, now part of the SA Federation of Trade Unions, long-serving social security coordinator Sam Tsiane has become an official at Cosatu. He’d taken his dismissal from Numsa to the Commission for Conciliation, Mediation & Arbitration (TT March-May ’17), concerned amongst other things that he could no longer be a trustee of the various pension and provident funds where Numsa is a sponsor;
  • After 24 years as in-house lawyer at Alexander Forbes, Leanne van Wyk has joined David Weil’s Investment Consulting & Trustee Services. Some colleagues from her team might follow.

Mr Clean

Although invited, there’s been no response from Cosatu funds coordinator Jan Mahlangu to an article questioning his ‘fit and proper’ credentials for appointment to the boards of the SA Local Authorities Pension Fund and the Municipal Councillors Pension Fund (TT Feb-April). However, the Financial Services Board has provided some background.

It says that his appointments were based on his technical abilities. These had been proven to include his years-long services at Cosatu and Nedlac as well as a board member of the Financial Sector Charter Council and roles within the Association for Savings & Investment SA.

Mahlangu . . . MCPF exposed
Mahlangu . . . MCPF exposed

He’s shown his worth at the MCPF, placed under curatorship in December. During his tenure, he not only sought to lay formal charges against former officials but also brought to light the investigations by auditor Ngubane Inc and Integrity Retirement Fund Administrators. Amongst others, for law firm Maluleke Seriti Makume Matlala and administrator Akani a lot of answering lies ahead. The report of curators Juanito Damons and Sophie- Thabang Kekana (available on the FSB website) is hair-raising. They describe irregularities (and worse) that presage possibly one of SA’s ugliest pension-fund scandals, in turn raising questions over the supervisory capacity of the regulator to have pre-empted them.

The timing of Mahlangu’s appointment to the MCPF board has enabled him to emerge with colours flying, as they will be too with the SA Local Authorities Pension Fund.

Transnet funds advance

It’s hailed as a victory for 60 000 pensioner members of the Transport Pension Fund and Transnet Second Defined Benefit Fund. But the judgment of the Constitutional Court, in favour of their two class-action representatives, is a significant yet only another step in a long haul.

The scrap has continued for ages, one skirmish following another (TT Jul-Sept ’16). May the pensionermembers live long enough to see its finality.

The representatives made three claims: for a 1989 promise made during a run-up to the establishment of Transnet to be honoured by it; for the obligations of Transnet to maintain the funds in sound financial condition, paying into them if necessary, and for reversal of an “unlawful donation” made by one of the funds to Transnet.

Previously, in the High Court, Transnet has raised several exceptions. Some were upheld and others dismissed. The Supreme Court of Appeal had refused leave to appeal against the orders upholding exceptions and refused conditional leave to cross-appeal against the orders rejecting the exceptions.

Now the Concourt has granted the funds’ representatives leave to appeal against the orders that upheld the Transnet exceptions. They’d argued that the effect of the High Court order would deprive them of the opportunity to pursue two constitutional causes of action in class-action proceedings.

Concourt judge Johan Froneman held that the 1989 promise had been clearly set out and the parties were bound by its contractual terms: “There is nothing vague or embarrassing that prevents (the pension funds and Transnet) from knowing what case they have to meet.”

ESG prod

The Financial Services Board (now the Financial Sector Conduct Authority) has published for comment a draft directive on “sustainability reporting” by retirement funds. It really is a fine piece of work, filled with intent to promote the social good, and clearly designed to push along Regulation 28 for consideration of ESG (environmental, social and governance) factors in the application of funds’ investment policies.

It is an incremental move for better supervision and transparency. It’s also significant for insisting that trustees apply their minds, not merely leaving it all to asset managers or consultants, and to stimulate active ownership as in proxy voting.

Inevitably, the devil is in the detail and particularly in jumping the chasm from the theoretical nice-to-have to the practical how-to-do-it. More later.

Security breaches

Hunter . . . for the poor
Hunter . . . for the poor

Deeply troubled, as evidenced by the high volume of members’ complaints, is the Private Sector Security Provident Fund. Adjudicator Muvhango has suggested that its problems could be addressed by more effective regulatory action. Not entirely, insists pensions lawyer Rosemary Hunter, back in practice and ever the agitator.

Of the half-million registered security officers, slightly fewer than a quarter million are PSSPF members considered “active” (where contributions are paid). Another 80 000 are “inactive” (no contributions received for more than 24 months). Unless exempted from the obligation, all employers conducting security business in the private sector are required by law to enrol their employees (such as guards) in the fund.

However, Hunter points out, there are thousands of under-resourced employers with small numbers of employees and high rates of non-compliance. Wage rates are low and employment is intermittent.

Members are led to believe that fund contributions are regularly deducted from their wages. But, when members claim their benefits, they discover that the contributions haven’t been paid. Amongst numerous other factors, there’s also the cost in obtaining and processing sometimes incomplete or inaccurate information provided in a range of different formats.

Clearly, says Hunter, “impediments to the proper functioning of the PSSPF are not limited to the acts or omissions of its office bearers or administrator and so they cannot be remedied simply by regulatory or enforcement action against them”.