Issue: September 2012 / November 2012


A formidable wish-list

May the National Development Plan only be implemented.

Zuma...perhaps he likes it

So what’s not to like in the NDP, drafted by a panel of experts chaired by Minister Trevor Manuel? The grand vision of SA in 2030, designed to take it there, says little that hasn’t been said previously, over and over again, certainly so far as SA’s abysmal savings record and gradual steps to retirement reform are concerned.

But how to apply this fine vision is a different question, inadequately addressed. There’s little substance on means to improve savings, except the hope that expansion of the consumer base will cause the savings rate to “ratchet up over time”. There’s no timetable for launch of the long-mooted National Social Security Fund, except that it “should” be in operation by 2030. There’s much store placed on a “social compact”, but in current circumstances of divisive leadership it’s an unreliable premise.

At least the package is a starting point, glowing with promise, provided there’s consensual buy-in not only from government but also from its social partners. That’s the big proviso; whether factions within the ruling alliance, particularly organised labour, will share the enthusiasm of organised business. Even then, a hard sell is required for understanding and acceptance by the broad public. Now to find the driver who can do it justice, or it will fold under the weight of political contest and bureaucratic verbiage. Too much to expect of President Jacob Zuma?

It’s hard to disagree with statements that reflect the obvious. For instance:

  • A significant number of those who contribute to private pensions withdraw their pension savings if they lose their job and therefore have no pension income on retirement. For those who preserve their pensions, there is a lack of protection against longevity and investment risks;
  • All working individuals should be making adequate provision for retirement through mandated savings. The state should provide measures to make pensions safe and sustainable;
  • It is not feasible to ask individuals to save for retirement when they are faced with immediate needs for food, housing, health care etc. This should be a priority issue to be worked out alongside the proposals made for social-security reform;
  • Whereas there is an argument that there is a low savings culture, there are also limited mechanisms and incentives to encourage people to save;
  • The state will ensure there is alignment and coordination of social protection issues and that efficiency is improved. It will develop an enabling environment, create conditions for social partners to contribute, and ensure vulnerable groups are protected. It will pilot new interventions to address the gaps in social protection.

Sounds good, the more so when read within the context of the whole. It’s merely a matter of getting from A to Z before time and money run out.

Tax stimulus

Okay, so the NPC says there are “limited mechanisms and incentives to encourage people to save”. Not all people, says the latest Sanlam benchmark survey. In fact, it points out, retirement funds are virtual tax havens.

It cites calculations by Matthew Lester, professor of tax at Rhodes, that R10 000 saved monthly in a retirement fund over 25 years produces a result more than 100% better than an investment in a vehicle which isn’t a retirement fund. Sanlam’s own calculations show that, over 35 years with maximum tax-deductible contributions on an income of R300 000, the return is 122% better than investment in a non-retirement fund.

“Group retirement funds are simply the most tax-efficient retirement vehicles available,” it asserts. “They are also the most cost effective, and from a planning perspective every member who has a shortfall in his or her retirement savings should as a first step increase their retirement-fund savings up to the maximum.”

Yet it isn’t entirely sweetness and light, for the NPC throws out a challenge. Although SA has one of the largest private retirement-fund industries with high participation and contribution rates amongst upper and middle-income earners, it notes, low-income earners are excluded from the system: “The private pension market is expensive and not adequately regulated. The costs and fees structures are high, which reduces the incentive to invest.”

PIC unpicked

Under new management

There are still a few things to be said, believe it or not, about the much-publicised bid (now successful) by the Mvela/Blackstar private-equity group for media group Avusa (now Times Media Group). They arise from the quagmire of reports suggesting that the Public Investment Corporation, which had come out in opposition to the deal, could have blocked it.

A lesson in this saga has to do with mandates to asset managers. The Government Employees Pension Fund gives the PIC a mandate to vote, and in turn the PIC uses various external asset managers for a portion of its portfolio. In their turn, they vote in accordance with mandates from the PIC. Here, it appears, something went wonky.

The offer circular for Avusa shows irrevocable undertakings of support from 63,8% of shareholders. It also shows the PIC shareholding at 17,3% and the Mvela/Blackstar/TMG shareholding (which couldn’t vote) at 21,3%. This represents a total, before any smaller minorities are taken into the calculation, of a clearly-impossible 102,4%.

The mystery deepens. It’s been suggested that the deal scraped through on a 78% majority (75% being needed) because the PIC didn’t vote all its shares. That makes no sense. Even more nonsensical, at first blush, is that some PIC shares voted in favour and some against.

Yet this is the most rational explanation: first, for double-counting to arrive at the 102,4%; second, for how the PIC shares were voted. Coronation, Kagiso, OMIGSA and Cadiz are PIC external asset managers. All had given irrevocable undertakings to vote in favour. Between them, they accounted for 42% of the irrevocable undertakings.

At least some of their Avusa shares would have been managed on behalf of the PIC. And they would have voted these shares in terms of their undertakings, not in terms of the PIC’s opposition.

Once the undertakings had been given, prior to the PIC making known its standpoint, they couldn’t be withdrawn. So blushes are in order. Now it remains to be seen whether the PIC, on its own reasoning, will take the R24 a share and get out. Or stick around as a government-owned strategic partner with more than 25% in the restructured media organisation.

A clap

Davids...unions onside

Congratulations are in order. Celebrating its twentieth birthday, the Community Growth Fund has been SA’s pioneer of socially-responsible investment and shown that SRI doesn’t come at the expense of inferior risk-adjusted returns.

The Community Growth Management Company (Comanco) is jointly owned by Unity Incorporation, which represents a group of eight trade unions, and Old Mutual Investment Group SA. Says Comanco managing director Douglas Davids: “I’m proud to be associated with an organisation that for the past 20 years has been providing investment returns while delivering on its stakeholders’ social and economic expectations.”

Its equity fund, like most which adopt a fundamental-valuation approach, has sometimes beaten its benchmarks and sometimes fallen short in an environment of unusually high volatility. Nevertheless, on a 10-year record, it shows a 15,7% return (net of fees, dividends reinvested). As at end-June, it held 48 shares in a concentrated portfolio. Largest shareholdings included BHP Billiton, Anglo American, MTN, Sasol and Naspers.

All would have passed muster by the social research and screening processes managed by the trade unions’ Unity Incorporation.

And a klap

Hard on the heels of the Trilinear debacle comes another smack for members of trade unions’ pension funds. Placed under provisional curatorship on an application by the Financial Services Board are Rockland Asset Management & Consulting, Rockland Group Holdings and Rockland Targeted Development Investment Fund. The latter, a shareholder in the black-empowerment consortium of JSE-listed Aspen, invests for retirement funds affiliated to Cosatu.

Part of the FSB investigation was into the valuation placed on a Cape land transaction. The land had apparently been purchased by Cape Town businessman Wentzel Oaker for R36m in 2005. Two years later Rockland invested six retirement funds into it at a R260m valuation and, without any development having taken place, its valuation was shown three years later at R890m.

The FSB launched an investigation after the Paper, Printing & Allied Workers Union had complained that it was unable to withdraw its R59m investment. Other pension funds invested in Rockland Group Holdings are the Metal Industries Provident Fund (R100m), Engineering Industrial Pension Fund (R200m), Mine Employees Pension Fund (R35m), Sentinel Mining Industry Retirement Fund (R65m) and the Telkom Retirement Fund (R60m).

Meanwhile, curatorship of the SACCAWU (SA Commercial Catering & Allied Workers Union) National Provident Fund is about to enter its eleventh year. It will continue pending the finalisation of litigation involving the fund. While the FSB accepts a recent court ruling, it notes that the need to plan for the future of the fund still exists: “Previous measures implemented by the Registrar and the curator, aimed at succession planning, were unsuccessful. The FSB recognises the right of fund members to elect representatives to the board of management.”

Curatorship costs and legal fees of the SACCAWU fund so far exceed R22m.

Give credit


Around the world, regulators are taking a hard look at credit rating agencies. CRAs carry enormous influence on markets, no less on governments forever fearful of sovereign-debt downgrades, yet are accountable to nobody and can be vulnerable to interest conflicts depending on who pay for their services. Having given clean bills of health to institutions up to their eyeballs in sub-prime loans, several of the most prominent didn’t emerge from the financial crisis with their own credibility flying high.

Now SA proposes a bill that will introduce legislated standards of independence, diligence, conduct codes and internal controls for CRAs. It also specifies that they bear financial liability.

Outspoken on the bill is Futuregrowth’s Andrew Canter. While generally supportive of its intent, he warns of some possible unintended consequences: “CRA’s might downgrade all issuers, perhaps unfairly, so as to be unduly conservative and raise funding costs across the economy. To prevent this outcome, before the imposition of liability there should be a burden of proof that the CRA did not follow an appropriate or diligent process, failed to fulfil its regulatory obligations, or had material conflicts that affected the rating.”

To illustrate the difficulties CRAs face on their independence, he recalls the City of Johannesburg’s public attack on Ratings Afrika for having questioned its financial strength. Debt issuers, he suggests, are often most combative at exactly the time when CRAs should be raising the alarm amongst investors.