Issue: March 2012 / May 2012
Editorials

COVER STORY

Mobilise Now!

Trade unions are kicking at an open door. None is better positioned than they to participate, through pension funds, in corporate SA. This would be to their own advantage and at the same time help to build a more inclusive society.

The question to be asked and answered bluntly is whether the participative model for the composition of pension-fund boards has failed.

If it has, then the follow-up questions are why and whether it’s too late for anything to be done about it.

The blunt answer to the first question is yes; it has failed to the extent that the model has been lamely exploited. When the Pension Funds Act was amended in 1996, to provide for boards to comprise at least four trustees of whom no fewer than half could be elected by fund members, the explicit intention of government was for workers’ voices to be heard in trustee deliberations.

No longer were these boards simply to be nominated and dominated by employer-appointed trustees. For the first time, employees had an equal right to choose those responsible for managing their retirement savings.

The move came at the behest of trade unions. Just as three decades previously they had agitated successfully for the widespread switch from defined-benefit to defined-contribution pension funds, now irreversible to the remorse of many, they might come also to rue a neglect in seizing the levers that the amendment sought to provide.

Vavi . . . missing a trick

Vavi . . . missing a trick

Sadly, 16 years on, the reality of member participation in the governance of retirement funds has fallen short of the expectation of what this “democratisation” was supposed to achieve. Survey after survey has shown pathetically poor turnouts by employees to vote for trustees, sometimes knowing neither that they can vote nor often who the elected candidates actually are, and caring for nothing beyond their benefit statements.

Neither can it be claimed that trustee elections, as a general practice, are vigorously contested. Nor that fund members are falling over themselves to become trustees at all.

Were there similar disinterest in parliamentary elections, SA’s democratisation would similarly flop. In fact, it might well be argued, the 1996 amendment logically complemented the thinking and spirit of the 1994 constitution that introduced SA democracy.

Back then, over 15 000 pension funds were registered with the Financial Services Board. Today, the number has halved and is rapidly contracting. In part, this is because it makes sense from administrative and cost perspectives for smaller funds to consolidate into umbrellas. In part also, what with the complexity of duties and obligations on trustees, it’s because there’s simply too much hassle in running standalone funds; better to outsource the whole palaver to institutional arrangements.

Either way, decision-making is incrementally removed from the shop floor. Once the national savings scheme is introduced, decision-making will become centralised still further. Since the opportunities offered by the 1996 amendment have evidently not been grasped, why bother if they fade away?

There are several reasons. As the role and rights of pension funds evolve, they should be factored by the unions’ leadership. Cosatu general secretary Zwelinzima Vavi, often vociferous in his criticisms of corporate SA, can play a particularly creative role.

Start with opportunities lost. For example, black members of pension funds could have enjoyed rather than paid for BEE transactions in major JSE-listed companies where their funds were already invested.

Black members of pension funds could have been formed into vehicles that shared in BEE. Or, better still, pension funds could have been given BEE ratings based on the proportion of fund assets attributable to black members and then for those with higher ratings to be treated as BEE entities. Instead, trade unions sat on their hands and complained after the event about inequitable distributions to a select few.

Another example is in the take-up of training, envisaged from the outset as essential for the new generation of trustees to become effective. Numerous financial institutions have, and continue, to offer programmes. They bust a gut to attract attendance. In relation to the numbers required, usual response is discouragingly paltry.

While there have been real difficulties, such as time off work, these programmes have been tarnished by unions’ suspicion that they were being abused as platforms for service providers’ product promotion. Whereas institutions have commonly been at pains to ensure objectivity of the material – in compliance with their obligations under the 2004 Financial Sector Charter, as it happens – the taint has spread and stuck.

It has dissuaded attendance from training programmes to the detriment of trustee education, the prerequisite for trustee and hence stakeholder empowerment. In this, there’s a sharp irony. Contrast it with the queues standing for hours in the hope of gaining university admission, as they did tragically in Johannesburg earlier this year. But when quality educational programmes are offered at nominal or no charge, there are few takers.

Conceivably, the Fidentia and Trilinear debacles could have been averted by the active supervision of better-equipped trustees. Mineworker funds lost perilously from Fidentia, as did clothing and textile workers from Trilinear.

What’s to be done? It’s for the unions to go all-out in encouraging their members to vote in trustee elections, to stand for election, and to embark on the necessary training that will strengthen their authority.

What will be the advantages? Skills development is one. Formulation of appropriate mandates to service providers is another. Lessened reliance on consultants is a third. Enhanced independence is a fourth. The list goes on, right down to the basics of improved financial literacy and a sense of participation rather than alienation in money management.

There’s also a broader agenda. It’s for pension funds, inclusive of strong union representation, more aggressively to assert their rights in companies where they’re invested. For pension funds, cumulatively the largest category of beneficial shareholders on the JSE, are entitled to act as owners.

Through mandates to registered shareholders, in whose names pension funds’ assets are held, they can nominate and elect company directors; pre-approve their pay packages, and vote on remuneration policies. And this is amongst other things, like engaging on social and employment practices.

As TT has frequently pointed out, pension funds are where there’s a coalescence of capital with labour and owners with managers. Get this right and SA will take a giant leap towards bridging the economic and perceptual divides of interdependent communities.

Of course, union members on fund boards make them no less accountable to the fund alone than directors of a company are accountable only to the company irrespective of the constituencies which elected them. But it nevertheless implies that, at board level of fund or company, decisions benefit from a life-experience diversity of representatives kept on their toes by contests for re-election.

It also means that popularised protest from the touchlines can switch into playing the corporate game on the main field, from bemoaning abuse to preventing it. Stakeholder involvement, which reaches into the nitty-gritty of governance and oversight, makes the difference between whinging and winning.

Remonstration on what should be done with other people’s money – more than R2 trillion of national capital invested by pension funds – becomes replaced by the recognition that at stake is one’s own.

Widening income disparities, threatening social stability and lacking moral legitimacy, have risen to the forefront of soul-searching in the US and UK. No less in SA. Underutilised are SA’s readily-available tools to address them.

They aren’t in additional layers of government intervention and regulation. They’re in the corporate influence of pension funds exercising stewardship to the advantage of their many millions of members and dependents, embracing society as a whole. Obligations and opportunities are one and the same.

DARKER SIDES

Let’s be frank about certain realities:

  • Far too many trustees, whether employer-appointed or member-elected, focus primarily on selecting asset managers by their rankings in such surveys as the ‘Large Manager Watch’ or the ‘Raging Bull’ awards. This drives short-termism. It bedevils investment decision-making, undermining pension funds’ long-term nature and objectives;
  • There aren’t many incentives to become the trustee of a pension fund. By contrast, there’s no shortage of responsibilities (attracting personal liability) and sacrifice (in terms of time) required of trustees. Questions of payment remain vexed, as do the perks sought from or offered by service providers;
  • Trustees don’t need to be investment experts, but they do need sufficient confidence to hold reasonably informed discussions with service providers. They also need to familiarise themselves with the implications of such critical guidance as the revised Regulation 28 on prudential investment; the FSB’s circular PF 130 on good governance, and principles of the Code for Responsible Investment on formulation of mandates for stakeholder engagement. If they aren’t up to speed, they shouldn’t be trustees.