Issue: December 2011 / February 2012
Editorials

CURRENTS

Sparse on savings

No, NDP isn’t an acronym for National Development Platitudes. It tells us what
must be done, not enough on how to do it.

Saying little that isn’t glaringly obvious, the report of the National Planning Commission takes over 400 pages to say it beautifully. But then it’s merely a “vision” for the next 20 years. Were the plethora of plans which preceded it and overlap with it any more successful in their deliverables, there probably wouldn’t be much need for this new National Development Plan to have been produced at all.

Its value is in helping to frame the formulation of economic policy in a manner that only consummate politicians like Trevor Manuel and Cyril Ramaphosa, respectively the commission’s chair and deputy chair,could have expressed it. Good ANC men both, their skill and stature – supported by a host of technocratic commissioners no less politically astute – give it the physical and metaphorical weight to land with a thump on the top table.

Setting out prerequisites for growth, jobs and stability, the NDP could hardly be more frank or comprehensive. Hotheads must surely be cooled, should they take the trouble to read it (which some apparently haven’t) before challenging it.

 
Manuel and Ramaphosa . . . punch of the savvy heavyweights

For all that, the trouble with visions is that they don’t require nuts and bolts. It’s like looking at the satellite version of a Google map, showing a lovely picture but requiring a different search for directions from point A to point B. How do you click, in the NDP’s instance, from observations about the lack of savings to means of getting them? On so vital a topic, the report merely says:

  • SA will need to balance savings and consumption;
  • Given the country’s low savings ratio, capital is relatively scarce. SA has to be careful about what and how it builds;
  • Successful countries with a “future orientation” generally prefer investment over consumption and have high savings rates. They continuously invest in their financial resources through high rates of saving;
  • SA’s gross savings for the period 1994 to 2010 averaged 15,6% of gdp. It came mainly from the corporate sector (who should rather, one might have preferred, been investing). For households, the ratio of savings to disposable income was 0,6%;
  • Given the low savings rate and the need for huge capital investments, the country relies largely on capital inflows to finance capital stock expansion. A large portion of these inflows consists of short-term capital which is inherently volatile.

That’s it on savings. Well put, NDP. Now, to improve them, what’s the plan?

In to BAT

Thanks, Finance Minister Pravin Gordan, for allowing all “inward-listed” JSE shares to be classified as domestic assets and included on the JSE indices. It’s particularly significant for pension funds and other institutional investors, notes ASISA chief executive Leon Campher, in that this policy change opens the entire JSE as an investible universe without restrictions.

Companies with their primary listings on foreign stock exchanges and secondary listings on the JSE were deemed to be foreign shares. The allowable exceptions were the so-called “London Five” – Anglo American, BHP Billiton, SABMiller, Old Mutual and Investec – that are of SA origin.



Campher . . . welcome move
Under present policy, there are 32 “foreign” counters. Their inclusion in the portfolios of SA retirement funds – notably British American Tobacco, an institutional favourite – could take up big proportions of their 25% maximum asset allocation permitted by the Regulation 28 prudential guidelines for offshore investment.

The policy change, expected to take effect within a year, enables retirement funds to use the 25% for proper portfolio diversification. It also removes the threat of the “London Five” being reclassified as foreign.

A bizarre consequence of policy consistency would have been to go the other way around: to limit by fiat the stocking up of Anglos, SABMillers and the other heavies in local institutional portfolios. That as tradable and proven a performer as BAT now joins the locals is good for everybody, including the JSE and SA as a confident investment destination.

After action, satisfaction

Just as well that “responsible investing”, which the Government Employees Fund champions, is not the same as “ethical investing”, which negatively screens socially-undesirable shares from portfolios. The former focuses on sustainability, enshrined in the Code for Responsible Investment in SA (CRISA); the latter is moralistic, typically avoiding such equities as those that derive earnings from casinos, liquor, cigarettes and even armaments subjectively considered to be unrighteous.

It’s just as well because, were it otherwise, there’d be some big holes in the portfolio of the GEPF. Its annual report for 2011, released in mid-November, is worth perusing for the fund’s sheer size: the largest in the land, with accumulated funds and reserves having grown on average by 14,1% annually over the past 10 years to R914bn, for 1,2m active members and 345 500 pensioners.

The significance of the JSE policy changes, and particularly as it concerns British American Tobacco (see above), can’t be lost on the GEPF. Once the changes take effect, the classification of BAT as a domestic equity will enable the GEPF (not governed by the Pension Funds Act and hence not bound by Regulation 28) will be able considerably to extend its offshore investments from its self-imposed ceiling.

Or the fund could shoot up its investment from the 2% of BAT already owned. Over the year, with its value increasing in the GEPF portfolio from R10bn to R12bn, BAT has been a star performer. It consistently smokes out cash.

Similarly with Reinet whose primary listing is in Luxembourg. The GEPF, with 16% of the company, is the largest single shareholder in Reinet. In turn, Reinet is one of BAT’s largest shareholders and BAT comprises 86% of Reinet’s net asset value. No matter how much governments keep trying to snuff out tobacco, investors keep lighting up.

The enormity of the GEPF makes it pretty much align with the local market. In the fiscal to end-March, its return on investment was R105bn or 12,2%. By value, the largest equity holdings of companies with primary JSE listings were MTN (R45,2bn) and Sasol (R33,6bn); the largest with secondary listings were BHP Billiton (R32,2bn) and Anglo American (R26,1bn).

Those where the GEPF owns between 12% and 20% of the company are MTN, Sasol, Standard Bank, Impala Platinum, FirstRand, Remgro, Bidvest, Sanlam, Naspers, Investec and Reinet. The clout that this gives the GEPF, as a responsible investor in compliance with CRISA, need hardly be spelled out.

Rules rule

Gamedze . . . legislative overload

Gamedze . . . legislative overload
The term “fiduciary responsibilities” glides easily from the tongue. There was a time when it could be easily understood and applied as well. Apparently, this is no longer the case.

In 1990 the director of a life company would have had to comply with not more than five pieces of legislation to meet fiduciary responsibilities, Temba Gamedze pointed out to the Actuarial Society in his presidential address: “Today, just 22 years later, a responsible director is required to be aware of the provisions of well over 1 000 different pieces of legislation.”

That’s frightening enough in itself, not being of much incentive to become a director. More than this, it might be asked whether laws and trust work in tandem or whether compliance with laws has become a tickbox exercise to supersede trust.

All fine?

The Financial Services Board has hit a host of retirement-fund “administrators”, as defined by the Pension Funds Act, with hefty fines for not having maintained liquid assets equal to or greater than eight weeks’ worth of their annual expenditure.

The largest fines imposed are R300 000 on Aon SA, R158 455 on Colourfield Liability Solutions, R36 585 on Sanlam Trust and R30 263 on Citadel Administration Services. Smaller fines were imposed on a number of others including SA Quantum Employee Benefits (R18 693), Fussel & Associates, Foord Asset Managers and Hermes Asset Managers (R10 000 each).

These penalties represent settlements after the Registrar had referred cases against them to the FSB’s enforcement committee. The Registrar had taken into consideration that their respective officers had accepted responsibility and expressed remorse for the contraventions. There was no evidence of prejudice resulting from them.

The Act says that an “administrator” is anybody approved by the Registrar as a benefits or investment administrator. A schedule to the Act says that “assets in liquid form” means a money-market instrument “that can be converted into cash within seven days without prejudice to a fund . . . ”.

Examples of administrators are given in an FSB circular. They include “a professional retirement fund administrator” and “a portfolio manager”, both of whom exercise delegated powers. The former actually do administer retirement funds. The latter don’t; they spend their days managing liquid JSE equities.

In the case of asset-management agreements, note Hunter et al in their authoritative commentary on the Pension Funds Act, it’s for the “administrator” to ensure that the fund’s investments are made in compliance with the Act.

Now that the Registrar is getting tough on the relevant s13B(1), asset managers might begin to challenge whether it should rightly apply to them. On the face of it, perhaps there’s an argument that their inclusion is redundant after the obligation on the “professional retirement fund administrator”.

Confidential no longer

Not that they should ever have been “confidential” in the first place – they’re still marked as such – as TT went to press the FSB put onto its website a general circular to stakeholders of the nine “Ghavalas” funds. The information on their surplus schemes and valuation reports, long awaited, are presented in all their glory.

The screeds of documents will take a while to analyse. For the moment, because it features in Simon Nash’s criminal trial (see elsewhere in this edition), take the Sable Industries pension fund.

The actuarial surplus available for apportionment to its 1 479 former members -- there being no others with a claim to the surplus -- is R28,6m. This equates to slightly under R20 000 per former member.

However, as a prior charge against the actuarial surplus, this R28,6m falls well short of the R65,6m required to top up pensioners and former members to minimum benefit levels. Also, it’s so far been possible to trace only 551 (37%) of the former members. A contingency reserve may be created to set aside the apportionments due to the 925 (63%) former members in anticipation of them someday being traced.

The valuation report, submitted by two actuaries in November, shows that with-profit annuities had been purchased from Old Mutual to back the pensioner liabilities. In the 15 years to January 2010, the annuities had provided annual average pension increases above the inflation rate.

As at July 1 1994, the value of the fund’s assets (excluding the annuity policy for pensioners) was R95,2m variously invested at Sanlam, Liberty and Momentum. Then, between July 1994 and August 1995, three transactions by the fund took its opening balance with these institutions to zero. By September 15 2010, the market value of the fund’s assets was back up to R93,0m. These sharp changes are explained in the revenue statement.

Since June 2008 curator Tony Mostert had recovered (“from the employer and other parties”, as the report puts it) just over R122m on which R1,4m was earned as investment income. Of this R123,4m, some R30,4m went in expenses (mainly R23,4m in curator fees and R6,4m in legal costs).

Of the assets recovered by the curator, R93,4m had been invested predominantly with Investec in interest-bearing call accounts to produce an annual average net return of 7,1%. The balance of the assets was held in the trust account of Mostert Attorneys, says the report.

Putting aside the controversy about how these recoveries were achieved (TT Sept-Nov), the bald numbers speak of a job well done.

Less mess

Slowly but surely, the debacle for the Abacus umbrella funds that followed their administration by Pioneer Employee Benefits (TT Oct ’10-Jan ’11) is being unravelled. That much is apparent from information regularly provided on website www.abacus.devee.co.za, a model in trustee communication with members and participating employers.

The 2006 and 2007 audited financial statements, in respect of both the pension and provident funds, have been completed and member statements issued. The statutory valuation for 2007 is expected by end- December. Based on the four-month timeframe to complete the 2007 audits, principal officer Colin de Villiers expects all the audits up until 2012 to be completed by April 2013.

The funds’ database has had to be rebuilt. Who’ll bear the costs? Not the fund members of the participating employers, surely. According to the FSB compliance report, the fund has a claim against Santam. It was the insurer for PEB whose mismanagement “was the primary cause for the need to rebuild the fund”.

The insurance claim has proved to be “extremely problematic”, the trustees told the FSB, and they “currently have a legal team working in an attempt to get the matter finalised”. Thus, to the cost of rebuilding must be added the possibility of legal expenses.

Depending on what is paid by fidelity insurance, individual PEB directors might not be off the hook in their personal capacities. In that event, they’ll probably want to point fingers back at the trustees.

Subsequent to the 2005 audit, the trustees report, PEB experienced “severe internal administrative problems”. Its attempts to rectify these problems, by outsourcing the administration to third parties, was unsuccessful and “led to the effective collapse of both PEB and the fund administration”.

The trustees appointed Brefo Fund Administrators to rework both funds. This required that it rebuild every transaction, month by month, for both funds.

“This included obtaining supporting documentation from employers, fund managers and other entities”, the trustees say. “It also required substantial assistance from the bank to verify every transaction on the bank statements where the transaction was not suitably identifiable. There were hundreds of such transactions. Each and every one was traced back to the originator or the recipient. These investigations were complicated by the fact that they date back to 2005-06, and much of this information had already been archived by the organisations who needed to provide the data.”

Earlier this year, the total value of the two funds was put at R229m. Notwithstanding the “significant number” of exits that had been processed, the trustees were able to report that the funds “currently have more value than they’ve ever had in their entire history”. Accordingly, members were assured that their investments are entirely safe.

Registrar was right

Chametsa . . . dynamic vindication

Chanetsa...dynamic vindication
The appointment of curators must operate proactively, not retrospectively, the Supreme Court of Appeal has ruled. But, in upholding the appeal of the FSB’s Bert Chanetsa that the North Gauteng High Court had erred in not granting a curatorship order for Dynamic Wealth, the only way the SCA could correct it was by setting aside the order and awarding costs to the FSB.

This was because of the change in circumstances since the FSB had originally applied for the curatorship. Since the FSB had withdrawn the Dynamic Wealth licences to act as a provider of financial services, by the time of the appeal it was doubtful that the company continued to carry on a business.

“Even if one accepts that there is some residual business located within (Dynamic Wealth), there is insufficient reason to justify making a curatorship order in respect of that business at this stage,” said Appeal Judge Malcolm Wallis. “In effect, the curators would set out on a treasure hunt looking for the business of which they are the curators.”

The lower court had previously dismissed the FSB’s application because, for the sake of brevity, the FSB inspection report had not been attached to Chanetsa’s founding affidavit on which the application relied. However, references had been made to it in the affidavit and it was available to the court.

Conviction insufficient

De la Rey. . . deduction disallowed

De la Rey. . . deduction disallowed
An employer has failed in its attempt to recover from an employee’s pension fund the financial loss it suffered through the employee’s abuse of the company’s petrol card. Only a compensatory order granted by a court, and not a criminal conviction alone, can allow a fund to make a deduction from the withdrawal benefit

of an employee.

This has been ruled by Elmarie de la Rey, the acting Pension Funds Adjudicator. The employer had complained to the Adjudicator than an Orion provident fund and Old Mutual had failed to pay it R19 200. This was the loss suffered by the employer through abuse of the card. The employee had been disciplined and dismissed for dishonesty.

The employer also laid a criminal charge. The employee was convicted. Orion refused to accede to the employer’s request for the R19 200 to be deducted, saying it could only do so if the employee admitted liability in writing or if a judgment had been obtained against him. The employer countered that the employee would never admit liability and that the conviction satisfied the requirement of a judgment.

“Where a compensatory order has not been granted by a court in a criminal case, there is no determination of the employee’s liability to the employer,” De la Rey held. “Therefore, despite the conviction, the fund has no power to effect the deduction sought.”

Contrarian supreme

Edited quote from the paper ‘Long run se voet: Debunking the mantra of the equity cult’ by Rob Thomson, professor in the Wits School of Statistics & Actuarial Science, to the recent Actuarial Society convention:

The mantra is typically applied to ‘lifestyle strategies’ by arguing that, because “in the long run equities will outperform bonds and cash”, younger members of defined-contribution funds should be exposed to equities; and because the same will not necessarily be true in the short run, during the 10 or 15 years before retirement they should gradually be transferred to bonds and cash.

This has nothing to do with lifestyle. It depends on the level of lifestyle required and the amount of savings available to maintain it, not on the amount of risk that the member is willing to undertake in order to have some chance of maintaining the lifestyle to which he aspires.
In fact, the latter criterion would necessitate speculative investing instead of the prudence required of trustees in advising or implementing strategies.