Looming battle about SA state pension funds

Posted on October 1, 2017


South Africa’s government aligned union federation, Cosatu, backed by the Communist Party, called for a general strike last Wednesday. It was a gamble, and it certainly did not bring the country to a halt. But it did succeed in showing that the federation still has considerable support and remains an influence in the ANC-led alliance.

This was good news for deputy president Cyril Ramaphosa in his campaign to take over the top job from Jacob Zuma. But the final say will only come about in December at the ANC elective conference: a couple of months can be a lifetime in politics.

Of perhaps greater import was the Press conference called on Tuesday by finance minister Malusi Gigaba to refute rumours that the government plans to raid state pension funds. But his assurances, apparently backed by Public Investment Corporation (PIC) chief executive, Dan Matjila, did little to allay fears. This because there was much to read between the lines of what was said.

Crucially, there was the admission that there are ongoing “discussions” about the funding of state owned enterprises (SOEs) and that there had been “approaches” to the PIC about the bailing out debt burdened SA Airways. Gigaba also stressed the need for “transformation”, for greater black economic empowerment and for infrastructure investment.

And while it seems that Matjila may be secure in his job for now, concerns were voiced about the chairman of the PIC board, Sfiso Buthelezi. He was appointed deputy finance minister on March 31 in a controversial cabinet reshuffle and PIC chair six weeks later. Seen as close to President Zuma, Buthelezi faces a slew of allegations involving tenders during his tenure at the passenger rail agency, PRASA.

Gigaba, Matjila, Buthelezi. These names and the names of other individuals along with the roles of government and the PIC have featured throughout this debate, but little has been made of the critical role of the PIC clients. Yet their role could be vital.

To the forefront is the massive Government Employee Pension Fund (GEPF) that makes up the overwhelming balance of the R1.9 trillion of state pension funds administered by the PIC. The GEPF has some 1.2 million active members and more than 406 000 pensioners who together own as much as R1.6 trillion in their fund.

Trustees of this fund comprise equal numbers of employer (government) and worker representatives. They provide the mandate to the PIC, defining how their monies should be used and invested. So, theoretically, no deals could be done between the government and the PIC without the agreement of the trade union representatives.

However, as an administrator, the PIC does have a degree of autonomy. It is for this reason that union fears about the possibility of misappropriation continue to exist, especially if the chief executive is replaced or if the board is tampered with.

Over the years, there have been questions raised about several PIC investments, especially in “unlisted entities” (private companies) and SOEs. One, listed as a “strategic investment” is a 20% holding in the debt-ridden SOE, the Airports Company . This investment, via the purchase of shares from Aeroporta di Roma, seems to make no commercial sense. Another is the equity share in Independent News Media that was apparently accompanied by a large loan, a package estimated to total R1.25 billion.

Belatedly, there are now demands from within the labour movement for a comprehensive review of all investment decisions made by the PIC over the past decade. It has also been pointed out by Federation of Unions (Fedusa) general secretary Dennis George, that there is no legal requirement for the PIC to be the administrator of government pension funds.

This highlights the underlying authority of the GEPF where the labour movement, through the trustee system, has a powerful voice. It amounts to a warning shot to politicians and the managers of ailing SOEs who most certainly have their eyes on Africa’s biggest pension fund pot.

However, both the GEPF and the PIC are supposed to exercise fiduciary responsibility, which means providing maximum benefit to fund members and beneficiaries. But there are conditions and areas open to interpretation.

The GEPF, for example, supports “socially responsible investment” . In other words, investment that is geared toward the greater good and that does not harm human rights or the environment. But that does not mean that financial benefit should be sacrificed; it merely means, essentially, putting pressure on companies seeking capital to behave in a responsible or ethical way.

In line with this commitment, and along with PIC investments in equities, fixed income and property, there is the Isibaya Fund. This fund is directed to “invest in black economic empowerment and infrastructure development projects that help to create jobs, relieve poverty and transform the economy”.

Here is an area where government could make an argument for financial support from state pension funds, by introducing another element ignored so far in the debate: junk status. Because of the downgrading of the economy, loans in the marketplace are now much more expensive.

Yet the SOEs must borrow if they are to survive. Or their control — and potential as profitable businesses — can be lost through selling them off at cut prices. As a result, government may argue that the PIC, with GEPF approval, should lend the necessary funds at a profitable, but lesser rate than junk status demands. Such loans being guaranteed by the government.

This could work. But neither the PIC nor the GEPF are likely to agree unless there are clear moves to deal with the mismanagement, incompetence and corruption endemic in many SOEs. So far there is little sign of this.