Issue: June 2012 / August 2012


Reform refined

Another step in a long journey

As we went to press, a humdinger: National Treasury’s proposals for “strengthening retirement savings”, modestly adding that it’s an “overview of proposals announced in the 2012 Budget”. It’s actually a lot more. It sets out an agenda for changes, and their motivations, that will preoccupy stakeholders in the R2 trillion-plus industry for months to come.

A series of technical discussion papers are to be released during the course of this year:

  • A review of retirement fund costs and measures proposed to reduce them;
  • A review of retirement-income markets and measures to ensure that cost-effective, standardised and easily-accessible products are publicly available;
  • Means to strengthen retirement provisioning, long-term savings and fund governance;
  • How short to medium-term savings can be enhanced, and dependence on excessive credit reduced, through tax-preferred individual savings and investment accounts. This will include the design of incentives to encourage savings in lower-income households;
  • Proposals to harmonise the tax treatment for contributions to retirement funds in order that the tax regime around retirement-fund contributions is harmonised.

There’s no need to read between the lines for clues as to what National Treasury is attempting to achieve. They’re succinctly presented, within pointed context, spelling a major shake-up for the retirement industry and the savings landscape. The whole thrust is cheaper products (e.g. encouraging the use of passive investments), easier comparability (e.g. promoting competition on the basis of price alone), and greater consumer protection (e.g. reducing the costs and risks associated with choice).

This certainly isn’t the final word on reform of the retirement system. There’s no mention in the document of a national savings and social security fund, which would place the state as the first retirement-savings pillar, or of the “solidarity” principle which implies subsidisation by wealthier savers of poorer. But it does take much further forward the consultations launched by National Treasury eight years ago, progressing in fits and starts ever since.

For all that, it does raise an issue of potentially high political sensitivity. It relates to mandatory preservation (see First Word). National Treasury treads delicately: “This measure will be phased in over a number of years, following thorough consultation. Protection will be given to vested rights to prevent short-term disruption to retirement savings, and to minimise the impact on current workers who may view their retirement savings as precautionary or medium-term consumption smoothing.”

A major concern is clearly the pathetic level of household savings. National Treasury is trying its best, with tax incentives and the like, to turn the tide by making it more attractive to save for retirement. In the lap of the gods, however, is a turn in the national psyche.

Strange omission

On the one hand, there’s the National Treasury policy document talking about such good things as better fund governance, a “fit and proper” test for trustees and “professionalising” the role of principal officers. “The active support of both industry and union leaders to improve governance is welcomed,” it says.

On the other hand, there’s the draft Phase II of the Financial Sector Charter which entirely omits an obligation on the industry to promote awareness amongst trustees of shareholder activism and to educate them on the impact of indirect shareholding. This was specifically provided in the original Charter.

It’s also implicit in the Financial Services Board’s circular PF 130, with regard to the investment policy statement of pension funds, that National Treasury believes should “become legally enforceable by the Registrar of Pension Funds”. So why shouldn’t it be in the revised Charter too?

Pay pilloried

While on the subject of activism, it’s been fascinating to watch the successes of UK pension funds acting as shareholders in fighting executive remuneration packages they consider excessive. They even have a body, the Association of British Insurers, which puts out “red alerts” that amount to voting advice. Nothing like this here.

And these victories were merely by the exercise of non-binding votes. Now the relevant government minister proposes that in future they be binding.

There is something like this here. Under the new Companies Act, a 75% majority of voting shareholders must pre-approve directors’ remuneration. That much is binding. Not binding, however, is a vote on the remuneration policies of investee companies. Neither does the Act provide for disclosure of remuneration information “for the three most highly paid employees who aren’t directors of the company”, as King III recommended.

The anomaly is in what’s to be pre-approved. It’s only remuneration for services as a director, not for employment services to the company outside of the board; for example, as the chief executive which is really the area that attracts most controversy.

In SA, approval would only be in terms of a non-binding vote on remuneration policy. Even this is not terribly effective. Firstly, it can be ignored. Secondly, because the Act doesn’t prescribe it, few companies are so far providing information on the pay of their three most highly paid employees.

One wonders how much longer it will take for UK goings-on to land in SA, as it often does. There, it was sparked by outrage over bankers’ pay. Here, the Institute of Directors has noted, “this problem (to curb executive pay) is exacerbated by the extremely high level of income inequality in society as a whole”.

Billion here, billion there

Absa must be having a busy time with lawyers. Not only is it plaintiff against Nedbank for roughly R1bn in losses over Acc-Ross (Pinnacle Point) single-stock futures, but it’s also defendant against the curators of Corporate Money Managers for another R1bn or so.

The CMM summons was a while in coming. The curators allege that Absa hadn’t applied its mind as a CMM trustee. They’d stated in a report to the Financial Services Board that “we could pay all the investors from the proceeds of this claim” (TT March-May ’12).

One of the curators is Jean Polson of Mostert Attorneys. The firm’s senior partner, Tony Mostert, is a prominent curator with considerable experience in targeting deep pockets.

It started 11 years ago with a notable Appeal Court victory against Old Mutual when the Korsten brothers couldn’t or wouldn’t pay up over the denuded CAF Pension Fund. More recently, there were settlements in the hundreds of millions extracted from Alexander Forbes and Sanlam over funds involved in the so-called ‘Ghavalas option’.

These settlements were agreed after the FSB had warned Alexander Forbes and Sanlam that it could withdraw their licences to act as fund administrators. It remains to be seen whether the FSB might similarly assist the CMM curators against Absa. A precedent that’s controversial, to say the least, has been set.

Muslim divorce

Latest from the Pension Fund Adjudicator:

A spouse in an Islamic marriage is still entitled to the pension interest allocated to her in terms of a divorce order. This was despite the marriage, in accordance with tenets of the Islamic religion and not registered as a civil marriage, being dissolved in accordance with these tenets.

The respondent had objected to jurisdiction of the Pension Funds Adjudicator, alleging that there had been no “complainant” as defined in the Pension Funds Act and that there had been no “divorce” as defined in the Divorce Act.

But, ruled Adjudicator Elmarie de la Rey: “This is pensions business, so this tribunal has jurisdiction to adjudicate it.”

Same boat

Not only in SA are people horribly underprovided for pensions. In the UK, one in six people planning to retire this year will have to rely on the state pension fund because they have no other pension.

Research by Prudential also reveals that more than a quarter of people retiring this year either overestimate by more than £500 what the state pension pays annually, or they simply have no idea what it pays.

Sounds familiar.

Better B-B BEE

Because pension funds are “currently among the largest holders of equities in SA”, as King III has noted, many JSE-listed companies might have better credentials than they realise for broad-based black economic empowerment. All they need do is apply the provision in the draft Financial Sector Code for “exclusion of specified entities when determining ownership”.

Mandated investments, such as pension funds and other collective investment schemes, are subject at full value to the exclusion principle. In other words, when a company is determining its proportion of black shareholding, the ownership rights of these “mandated investments” may be excluded to a 40% maximum.

So say that Company X is 60%-owned by pension funds. Then 40% of this 60% would already be BEE-compliant. Alternatively, if a company prefers not to apply the exclusion principle, it could look at the entitlement values of investor funds’ black members to produce the BEE computation.

“Entities that elect not to exclude mandated investments when entitled to do so may either treat all of the ownership as non-black or obtain a competent person’s report estimating the extent of black rights of ownership,” says the draft. A company cannot choose which mandated investments to include or exclude. All must either be included or excluded.

A lot of unravelling is involved. The shares of pension funds are often held in the names of financial institutions and few funds bother with members’ race. But the exercise is doable. Institutions will know the funds they represent, and employers will know individuals’ classifications from their equity-employment records.

All the more reason that the exercise is done, not merely for making BEE targets easier to achieve but importantly for recognising members of pension funds as company owners.

The Public Investment Corporation has been given “facilitator status” and beneficiaries of the Government Employees Pension Fund are its members. They fall outside the limitation on “state organs” and shares they hold can therefore be counted by companies for BEE purposes.