Issue: June 2012 / August 2012
Editorials

FIRST WORD

When the going gets tough

It can also get terribly rough. National Treasury is fighting battles it cannot relish. E-tolling is the most recent and high profile. Others, which also happen to affect pension funds, could emerge.


Moloto...fiduciary
duty to fund

Under the first cabinet of President Nelson Mandela, then finance minister Derek Keys introduced in his Budget what came to be known as “the RDP levy”. Intended to help fund the Reconstruction & Development programme, it was basically (with some ameliorations) a levy on individual and company taxpayers at 5% of their taxable incomes.

What was the response? Euphoria! In the tide of optimism and goodwill that swept SA in 1994, taxpayers were delighted for the opportunity to contribute. They looked forward to a trade-off of higher taxes on the more-privileged few for better services to the less-privileged many, all in the spirit of reconciliation. Never before had increased taxes been met with such enthusiasm, Keys happily noted from the response.

Today, by contrast, euphoria is at the success of a taxpayers’ revolt. There’s more to it than anger at e-tolls. Undoubtedly, it reflects a deeper disillusionment at the excesses of waste, indulgence and abuse of the public purse.

Governance standards, the Auditor General recently reported, are “dire”. Incompetence, and worse, play havoc with service delivery. At the same time, there’s a proliferation of user charges that are disguised taxation increases. They’re resented because they’re imposed to overcome the deterioration in public services and to compel the adoption of privately-financed alternatives.

Outrage over e-tolls, symptomatic of frustration, represents an attitudinal tipping point. Whether or not government is forced to abandon e-tolls, after the initial High Court defeat of National Treasury and the postponement agreed behind its back with Cosatu, the roads have been built and the money has been spent. Payment awaits.

Which makes it a hollow victory. The invoice, however dressed, must eventually be presented. If government fully backs the bonds issued by the SA National Roads Agency, and bought substantially by pension funds, the bill will be for taxpayers. If it doesn’t, one of several adverse consequences will be haircuts for these pension funds’ investments.

Much play has been made of the investment in Sanral by the Public Investment Corporation on behalf of the Government Employees Pension Fund. This is neither here nor there. For one thing, the GEPF is sufficiently big and brazen to take a Sanrel knock in its stride. For another, the GEPF is of the defined-benefit variety. Benefits to departing members are guaranteed by the employer; that is, by government which means taxpayers.

On the other hand, members of defined-contribution funds in the private sector have no similar backstop. These funds include many within the ambit of trade unions. Who’ll be explaining to them how they’re impacted? The practical consolation is that, within the bond portfolio of any fund structured half-decently, a Sanral hit will be softened by asset diversification.

So much for the battle on this front. Sooner than later, however, another will rear. It’s whether (and, if so, when) National Treasury decides to proceed with the compulsory pensions preservation that it clearly favours. Its policy document, ‘A safer financial sector to serve SA better’, says: “The introduction of mandatory preservation is...critical and National Treasury plans to extensively consult with all relevant stakeholders”.

Consultation, perhaps meaning attempts at persuasion, can continue until everybody is blue in the face. The outcome of who’ll be in favour and who’ll be against is probably predictable. National Treasury is clearly aware of complicating factors that cause large-scale withdrawals from pension funds prior to retirement age. Financial hardship, retrenchments and indebtedness are identified.

It must also be aware of the violent protests, and turbulence in industrial relations, the last time that a SA government attempted to introduce compulsory preservation. That was in the late-1970s and into the 1980s.

Opposition was spurred by predominantly black trade unions. Their e-toll triumph gives the history a topical ring, notwithstanding the obvious absence in those days of a Cosatu alliance with the ruling party.

Amidst the boycotts and strikes, the life-assurance industry also came out in opposition to compulsory preservation. As late as 1985, more than six years after a government white paper had merely mentioned the term, Finance Week reported “an outcry” from the industry over a hint of its imminent introduction: “Any moves along these lines without full discussion, research and consultation could lead to a repeat of the 1980 debacle when black employees countrywide withdrew massive amounts from pension funds.” Compulsory preservation never saw the light of day.

Another challenge to National Treasury arises from a discussion document, tabled for the ANC national policy conference, which proposes that a proportion of pension-fund assets be prescribed for investment in “developmental” projects. Motivated in a political forum, as was the e-toll postponement, it will be an effective tax on pension funds (see elsewhere is this TT edition).

Should it eventuate, it too will reduce benefits for pension-fund members – investments at market-competitive rates do not require prescription – and run counter to the primary purpose of retirement savings. This is to assist savers achieve comfortable retirements, as National Treasury has noted.

Others in seats of power tend to ignore intended impacts of the Code for Responsible Investing that financial institutions have voluntarily adopted and the new Regulation 28 that underpins vital aspects of it. These others, whose identities should emerge at the ANC conference, seem more inclined to view pension funds as having the additional role of honey pots for subsidisation of favoured programmes.

They notably exclude the GEPF, recognised leader in provision of developmental finance, which reports to the Minister of Finance. Although he is a senior ANC member of parliament, GEPF chair Arthur Moloto is adamant that he can act only in the fund’s best interests; implicitly, not in accordance with a superimposed political agenda.

That’s exactly as it should be for any pension fund -- defined-benefit, defined-contribution and retirement-annuity funds alike -- not only by law as it stands but also because better investment performance allows better increases for members. The lower their taxed returns, the less attractive they’re rendered as savings vehicles. This in turn detracts from incentives to save and hence from the build-up of SA’s capital stock, neither of which are consistent with National Treasury objectives.

But then National Treasury, presumed to be spearheading retirement-fund reform, is not short of interventions from differently-prioritised Social Development and Economic Development colleagues. Some interventions are perhaps more helpful than others.

On top of these, under auspices of National Treasury, comes the omnibus bill on regulation of financial services. A contentious proposal is exemption of Financial Services Board officials from recourse when their actions are marked by bad faith and gross negligence (also discussed elsewhere in this TT edition). It’s perverse for accountability and dangerous for precedent.

Was this amendment inserted after due consideration to the rule of law? Or, with a bill so voluminous, did it slip past with little thought to its legality? Should it be invalidated as unconstitutional – a prospect which certainly exists -- the embarrassment of National Treasury defeats might compound.

There are lots of things SA cannot afford. One is a National Treasury whose credibility is undermined by bureaucratic manoeuvre and languid political support.

Allan Greenblo,
Editorial Director