Issue: April/June 2010


Going backward to go forward

Mutual on the Thames

Mutual on the Thames...lovely views from HQ, but none about freeing SA

In his March presentation to analysts of preliminary results for the year to end-December 2009, Old Mutual Plc chief executive Julian Roberts has only the nicest things to say about SA. As well he might.

Of the group’s total revenues, the 10bn contribution from SA was almost as much as from every other country combined. Far from international expansion helping the SA operations, the reverse applies. Cost savings of over 1bn have come from SA. Skills in product development and distribution come from SA. The “efficient cost base” (Roberts’ words) being used is in SA.

So where, or how, does the internationalisation of Old Mutual add value? Of its previous offshore acquisitions, it’s been closing and cutting all over the place. The former regime, which includes some prominent members of the present board and management, is left to shoulder the blame for decisions and “lack of oversight” (Roberts’ words) that had disastrous consequences.

In 2008, SA effectively contributed the group’s entire profit. For 2009, the proportion will doubtless be overwhelming too. The preliminaries show that SA constitutes roughly 94% of the adjusted operating profit in “our emerging markets business unit”.

Arguments have been forcefully presented for control of Old Mutual to return to SA (TT June-Aug and Sept-Nov ’09). It’s not on the agenda. The group’s strategy, Roberts stated, is “to build a cohesive... group by leveraging the strength of our capabilities in SA and around the world”.

This is despite the view of Cevian Capital, a Swedish investment company, reportedly the largest single shareholder. It had helped Old Mutual buy Skandia four years ago.

In June last year, amidst fanfare that immediately bumped up the Old Mutual share price by 5,3%, Cevian announced that it had bought a 4,1% stake in support of the strategy set out by Roberts. In February this year, however, Cevian said that it and “other shareholders” wanted the Old Mutual strategy to change “radically”.

One option, it believes, is for Old Mutual to return to being a “pure” SA company.

Smoothed from the rough

Back home, Old Mutual has won a vital victory for the insurance industry in a long-standing dispute with two policyholders over the market-value adjuster (mva) that is used for payouts on smoothed-bonus policies. What began with the Adjudicator finding in favour of the policyholders (TT Sept-Oct ’06) eventually went to the High Court, which found against the policyholders, and finally was heard in the Supreme Court of Appeal which upheld the High Court decision and found in favour of Old Mutual.

The mva is deducted from the value of pension benefits when a member withdraws early from an underwritten fund, such as a retirement annuity of preservation fund, where the market value of the assets is lower than the face value. This deduction is in addition to the normal surrender penalties.

Appeal Judge Robert Nugent noted: “Permeating all the arguments advanced by the (policyholders) is the fallacy that the declaration of a bonus vests in the policyholder an unconditional right to receive the bonus. The right that vests in the policyholder is one that is conditional upon a defined event occurring. The accumulation account is not to be likened to an ordinary creditors’ account. It is an account that records contingent liabilities. And the contingencies that will give rise to the liabilities, at least in this case, do not include early termination of the policy.” Importantly too:

  • Karin MacKenzie, a former Assistant Adjudicator and now a director of law firm Herold Gie, points out that the SCA judgment has reversed a trend in the High Court which suggested the Adjudicator lacked jurisdiction to investigate complaints relating to the value of benefits in underwritten funds. It confirmed that the Adjudicator does indeed have jurisdiction over these complaints;
  • Because this case has wider implications, Old Mutual did not seek costs against the defeated policyholders. The court felt it had acted “graciously”.

Boring into the board

NBC, fired as benefits administrator of the 150 000- member Private Security Sector Provident Fund, has had a change of heart. Threatened with legal action, it eventually handed over the fund’s files to Absa Consultants & Actuaries which the new PSSPF board had appointed as administrator.

AC&A has carted something like 400 boxes from the NBC premises. The paper files and computer data appear to be in good order, reckons pensions lawyer Jonathan Mort who chairs the new board.

According to NBC, AC&A had been appointed by trustees when they weren’t authorised to make decisions. According to Mort, any doubt was avoided by the new board confirming the AC&A appointment and giving NBC notice to cooperate in the administration transfer.

If the records are in such good order, it begs questions about NBC’s shoddy record over the payment of benefits to PSSPF members. NBC has been frequently criticised by the Adjudicator for its administration.

A compliance inspection by the Financial Services Board had revealed numerous governance failures and administrative inadequacies. FSB chief executive Dube Tshidi then appointed a new PSSPF board.

Now the old board has lodged an appeal with the FSB Appeal Board against Tshidi’s appointment of a new board. The old board requested interim relief, meaning that it would have stayed in control pending the outcome of the appeal.

No, said retired Judge of Appeal Howie. He wants the whole matter to be decided in one hearing, once and for all, meaning that the new board remains in place until or unless the Appeal Board decides otherwise.

Boost for ESG

Graham Sinclair (Right)

Sinclair (right)...focus on private equity

Asset consultancy RisCura and the company headed by Graham Sinclair, an experienced proponent of environmental, social and governance (ESG) issues in investment decision-making, are putting the finishing touches their report on sustainable investment (SI) in sub-Saharan Africa. A public version of the report, commissioned by the World Bank’s International Finance Corporation, will probably be released in May at the IFC’s global conference on private equity.

It is based on research, literature reviews and analysis including 50 interviews with investment practitioners inside and outside SA, Nigeria and Kenya, explains Malcolm Fair of RisCura. For purposes of the project, SI is defined as investment strategies and processes that integrate ESG factors.

This report will be the fourth in an IFC annual series. Previous reports have been on SI in Brazil, India and China.

Two objectives are to:

  • Determine the current state and trajectory of SI mainly in SA but also in Nigeria and Kenya. It will focus primarily on private equity;
  • Clarify the drivers and barriers for SI specific to these countries, then make recommendations to stimulate SI development.

“We look forward to the impact the study may have on investors in the region,” says Government Employees Pension Fund investments head John Oliphant. “Our interest is to understand the level at which investment managers are implementing SI within their investment processes.”