Government Employees Pension Fund; Financial Services Board, 2012 Strategic Plans, with Deputy Minister

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Finance Standing Committee

01 May 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Government Employees Pension Fund, with assets of R1.043 trillion as of 29 February 2012, was the largest fund in Africa and was 7th largest in the world. Liabilities exceeded R1 trillion. It had 1.2 m active members and 340 000 pensioners and beneficiaries. It had started new initiatives, created a Development Investment Policy on its investment mandate and it had split into two parts, the Government Pension Administration Agreement (GPAA), which oversaw administrative operations and the Public Investment Corporation (PIC) which carried out GEPF’s investment mandate. The Development Investments would affect all asset classes and was a long term process. Development Investments would be focussed on improving economic and social infrastructure and they had to be environmentally sustainable and promote job creation and new enterprises. It would embark on trustee training and development, undergo a skills audit and strive for a more integrated reporting framework. Research had been commissioned on the GEPF brand. Challenges identified had been service delivery issues and a lack of perception on the GEPF/ GPAA split. It had developed a logo to promote a clear and distinct brand and corporate identity. The budget was R1.8 bn which was 0.18% of the value of the assets under control.

Members asked what impact the delay in e-tolling would have on GEPF’s investments in SANRAL bonds. How could the Committee assist in reducing delays which occurred between resignation and pay-outs?
Members asked if the GEPF had timelines for the implementation of its planned work, with special reference to the housing scheme it wanted to implement. Did it have relationships with the Department of Housing and with municipalities? Were members benefiting from investing in Retirement Annuities? What was the Human Resources strategy and vacancy rate? How GEPF intended improving communication with its members? How pension fund members would benefit from bursaries? What was the estimated percentage loss it suffered on its portfolio due to electricity supply cuts? Members were concerned that the Annual Report reflected debtor loans with no fixed repayment terms. Also, no detailed strategic plan had been submitted. Members said GEPF had 50% of the SANRAL bonds and 50% of the SANRAL bonds it owned was guaranteed by the state. Was the pension fund not exposed? Was GEPF aware of the SANRAL business model when the bonds were bought? Members asked what the actuarial surplus was and whether it was in the government’s balance sheet. The Chairperson commented that 95% of GEPF’s money was in the PIC and that it therefore had to be concerned over the governance model of the PIC.

The Deputy Minister of Finance said the
Financial Services Board, as from 1 April, took over the accounting authority of the Office of the Pension Fund Adjudicator and the Office of the Financial Advisory and Intermediary Services (FAIS) Ombud. FSB four strategic areas of operation were the empowerment of consumers of financial products and services, proactive stakeholder management, maintaining sound financial institutions and developing improved internal policies and procedures. Despite on-going topical litigation on cases such as Cadac, the FSB was determined not to be side-tracked from achieving its mandate and services to the financial services sector. The Deputy Minister said FSB would be shaped by the outcomes of the proposals contained in the ‘red book’ announced by the Minister of Finance in last year’s Budget speech which set out government’s vision for the financial sector in South Africa. The draft policy document outlined the reforms and priorities in the four policy areas of financial stability, consumer protection, market conduct and access to financial services and combating financial crimes. The FSB would change to become a market conduct regulator and share the prudential regulatory functions as outlined in the ‘twin peaks’ approach.

The FSB said it wanted to empower consumers through its “Treating Customers Fairly” (TCF) campaign. TCF would mean that the service provider had to design products with due diligence to ensuring the fairness of the product. There would be a three year rollout which would look at the outcomes of service providers from product development to after-sales service. It had identified 20 institutions to pilot the project and get feedback as to what TCF meant and embodied. The FSB would be making compliance inspection visits to 758 FAIS institutions, 240 pension funds and 54 to both the insurance companies and to Collective Investment Schemes. FSB assisted in the training of SADC member countries and was engaged with the Minister of Higher Education to do projects on financial literacy. In conjunction with the South African Council of Churches (SACC) it was engaged in a pilot project to educate communities as well as through an initiative with the South African Funeral Parlour Association. The FSB would be conducting 90 workshops on FAIS, aimed at reducing the licensee dropout rate. Planned activities might be interrupted by the ‘twin peaks’ approach whose proposed date was 1 April 2013. Operating expenditure amounted to 80% of its budget. its Information Technology system was being redesigned to provide a proactive environment to implement the knowledge management system and share institutional knowledge. On the issue of litigation, the main cases were Fidentia and Ghavallas, which involved three people, with others having entered plea bargains. There had been an application for a stay of prosecution because of a decision given earlier. Over the counter (OTC) derivatives should be regulated but this needed legislation. Hedge funds managers were currently regulated but not hedge fund portfolios.

Members asked if the regulatory exam for financial service providers had issues with language and whether the 65% pass rate was reasonable or needed to be lifted. Was the FSB considering an extension for those who did not comply in time? Members asked if there was a danger in the non-regulation of hedge funds. How were weakness and threats dealt with? What was the estimate of the surplus distribution relating from the conversion from a defined benefit to a defined contribution fund and what was the status on that distribution. Members asked whether there was a conflict of interest in Mr Tony Mostert serving on both the Sable/Cadac pension funds. Members asked if the FSB had sufficient staff capacity and a staff retention strategy. Members asked how the FSB managed the stay of curators who were intent on prolonging their stay.  Members asked which standards were used to benchmark the approach. How was the SACC project’s impact going to be assessed? Was there any feedback on the gap analysis from the King III report? The Chairperson commented that the FSB had a role to play in expanding on compliance matters and in the transformation of the sector.

Meeting report

Government Employees Pension Fund (GEPF) 2012 Strategic Plan
Mr John Oliphant, Acting GEPF Principal Officer, said that the GEPF had assets of R1.043 trillion as at the end of February 2012. It was the largest fund in Africa and 7th largest in the world. Liabilities exceeded R1 trillion. It had 1.2 m active members and 340 000 pensioners and beneficiaries. It had started new initiatives, created a Development Investment Policy on its investment mandate and it had split into two parts, the Government Pension Administration Agreement (GPAA) which oversaw administrative operations and the Public Investment Corporation (PIC) which carried out GEPF’s investment mandate. The Development Investments would affect all asset classes and was a long-term process. Development Investments would be focussed on improving economic and social infrastructure and they had to be environmentally sustainable and promote job creation and new enterprises. GEPF would be aligned with the Government Employees Pension Law and the Pension Fund Act. Its governance structure would be optimised. It would embark on trustee training and development. It would undergo a skills audit and strive for a more integrated reporting framework. Research had been commissioned on the GEPF brand. Challenges identified had been service delivery issues and a lack of perception on the GEPF/ GPAA split. It had developed a logo to promote a clear and distinct brand and corporate identity. The budget was R1.8 bn which was 0.18% of the value of the assets under control.

Discussion
Mr S Swart (ACDP) asked what impact the delay in e-tolling would have on GEPF’s investments in SA National Roads Agency Ltd (SANRAL) bonds. How could the Committee assist in reducing delays which occurred between resignation and pay-outs?

Dr Z Luyenge (ANC) asked if the GEPF had timelines for the implementation of its planned work, with special reference to the housing scheme it wanted to implement. Did it have relationships with the Department of Housing and with municipalities? Were members benefiting from investing in Retirement Annuities? What was the Human Resources strategy and vacancy rate?

Ms P Adams (ANC) asked how GEPF intended improving communication with its members.

Mr E Mthethwa (ANC) asked how pension fund members would benefit from bursaries.

Mr D Ross (DA) asked what was the estimated percentage loss it suffered on its portfolio due to the electricity supply cuts. He was concerned that the Annual Report reflected debtor loans with no fixed repayment terms.
 
Mr D Van Rooyen (ANC) said that no detailed strategic plan had been submitted.

Mr Oliphant replied that the housing scheme was a big challenge but also a big opportunity and the GEPF wanted to work on a scheme for members. On the bursaries, he said that educational loan interest rates were very high. He said the GEPF did not have the expertise to administer a product so currently only set policy and strategy. On enhancing communications, he said that communication was a weakness in GEPF and in the industry. Members lacked information on their pension fund and GEPF wanted to educate its members. On the impact of the electricity shortage, he said it was difficult to pin down but that GEPF had had shares in the resources sector in companies, such as Billiton, which had suffered from a lack of electricity. GEPF assets had decreased to R628 bn. GEPF had new governance structures in the new model and set investment return targets for the PIC to achieve.

Mr Arthur Moloto, Chairperson of the GEPF Board, said there had been a study on the electricity shortage’s impact on the mining industry shutdowns.

Mr Oliphant replied that GEPF had resourced itself with communication skills and was monitoring communications to members and that there would be significant changes in GEPF and GPAA with education being a key element of the communications. Administration costs at R670 m was regarded as being favourable. He said that with over R1 trillion in investments it was important for GEPF to diversify its assets and it had therefore bought SANRAL bonds with a yield of over 9%. The bond was still trading at that level and GEPF was still holding the bonds.

Ms Joelene Moodley, Head of Corporate Services, said that the Human Resource strategy following the separation of GEPF and GPAA was to do a skills audit and capacitate management and middle management through training. Five additional staff had been approved to take the total complement to 27. There were six unfilled posts.

Adri van Niekerk, Head of the Board Secretariat, said the reason no annual performance plan had been submitted was because the Annual Financial Statements were sent to the Minister of Finance who submitted it to Parliament. There was no legislative requirement to submit the plans to Parliament and no funds were received from Parliament. She said the Office of the Principal Officer developed the budget and the business plan. On gaps in corporate governance, she said that in an international survey, GEPF had done well with only two small gaps identified. It was working on full integrated reporting.

Mr Phineas Tjie, Chief Executive Officer of GPAA, replied that the pay-out backlogs at the end of March stood at 2 261 cases, a decrease from 4761 cases. It had good working relationships with departments and was entering into agreements with employers. Seven years ago the backlog had stood at 24 000 cases.

Mr T Harris (DA) said GEPF had 50% of the SANRAL bonds and that 50% of the SANRAL bonds it owned was guaranteed by the state. Was the pension fund not exposed? Was GEPF aware of the SANRAL business model when the bonds were bought? He said state-owned entities (SOE) had failed to spend 40% of their infrastructure budget. If government were to become more aggressive in its demand for GEPF to invest in development investments, there would be a conflict of interest with pensioners. He asked what the actuarial surplus was and whether it was in the government’s balance sheet. He said the GEPF was one of the few funds that were still a defined benefit fund. Most of the other funds were defined contribution funds.

Mr Moloto replied that SANRAL was AAA rated and most of the asset managers in South Africa had exposure to SANRAL bonds. On the SOE failure to build infrastructure, he said that the bondholder’s main concern was the ability of the company to service the debt. He said the Development Investment Policy had been in place since 2008/9 so there was no conflict of interest. He said the GEPF would not want to become a defined contribution fund as members would then carry the investment risk. He wished the GEPF could have had an actuarial surplus. After concerns due to the economic crisis, an interim evaluation had been undertaken in September 2011 where assets were valued at R927 bn and liabilities at R936 bn. Since then the fund had grown and assets were probably equal to liabilities. The law prescribed the usage of any surplus. Regarding the awareness of the SANRAL business model, he said that SANRAL bonds had started trading at between 9.75 and 12% coupon rate, making it very attractive and independent ratings agencies giving SANRAL a triple A status. A
lthough the fund held R15 billion in SANRAL bonds, this represented only 1.5% of its total assets.

The Chairperson commented that 95% of GEPF’s money was in the PIC and that it therefore had to be concerned over the governance model of the PIC.

Financial Services Board (FSB) 2012 Strategic Plan
The Deputy Minister of Finance, Nhlanhla Nene, who arrived in time for the FSB briefing, said the FSB, as from 1 April, took over the accounting authority of the Office of the Pension Fund Adjudicator and the Office of the Financial Advisory and Intermediary Services (FAIS) Ombud. FSB’s four strategic areas of operation were the empowerment of consumers of financial products and services, proactive stakeholder management, maintaining sound financial institutions and developing improved internal policies and procedures. He said despite on-going topical litigation on cases such as Cadac, the FSB was determined not to be side-tracked from achieving its mandate and services to the financial services sector. The FSB would be shaped by the outcomes of the proposals contained in the ‘red book’ announced by the Minister of Finance in last year’s Budget speech which set out government’s vision for the financial sector in South Africa. The draft policy document outlined the reforms and priorities in the four policy areas of financial stability, consumer protection, market conduct and access to financial services and combating financial crimes. The FSB would change to become a market conduct regulator and share the prudential regulatory functions as outlined in the ‘twin peaks’ approach.

Mr Gerry Anderson, COO of the FSB, said that the FSB wanted to empower consumers through its “Treating Customers Fairly” (TCF) campaign. There would be a three year rollout which would look at the outcomes of service providers from product development to after sales service. It had identified 20 institutions to pilot the project and get feedback as to what TCF meant and embodied.

The FSB would be making compliance inspection visits to 758 FAIS institutions, 240 pension funds and 54 to both the insurance companies and to Collective Investment Schemes. FSB assisted in the training of SADC member countries and was engaged with the Minister of Higher Education to do projects on financial literacy. In conjunction with the South African Council of Churches (SACC) it was engaged in a pilot project to educate communities as well as through an initiative with the South African Funeral Parlour Association.

Mr Dawood Seedat, CFO of the FSB, said operating expenditure amounted to 80% of its budget and it was targeting a vacancy rate of under 5%. The Information Technology system was being redesigned to provide a proactive environment to implement the knowledge management system and share institutional knowledge.

Mr Dube Tshidi, CEO of the Financial Services Board, said the FSB would be conducting 90 workshops on FAIS. There were many first time FAIS licensees and the workshops were aimed at reducing the Licensee dropout rate. He said the planned activities might be interrupted by the ‘twin peaks’ approach whose proposed date 1 April 2013 but that this would be preceded by legislative changes brought by Treasury.

On the issue of litigation, he said the main cases were Fidentia and Ghavallas, these cases involved three people, with others having entered plea bargains. There had been an application for a stay of prosecution because of a decision given earlier.

He said the question of over the counter (OTC) derivatives should be regulated but that this needed legislation. He said the “Treating Customers Fairly” (TCF) concept had been tried in the United Kingdom and had not worked but that that was because it had been made optional. The FSB wanted to disseminate and discuss the issue but the TCF had to become part of the legislation. TCF would mean that the service provider had to design products with due diligence to ensuring the fairness of the product.

He said hedge funds managers were currently regulated but not hedge fund portfolios.

Discussion
Mr Ross asked if the regulatory exam for financial service providers had issues with language and whether the 65% pass rate was reasonable or needed to be lifted. Was the FSB considering an extension for those who did not comply in time?

Mr Swart asked if there was a danger in the non-regulation of hedge funds. How were weakness and threats dealt with?

Mr Harris asked how long it would be before the ‘twin peaks’ proposals were made. Would it be compatible with a single ombudsman? What was the estimate of the surplus distribution relating from the conversion from a defined benefit to a defined contribution fund and what was the status on that distribution. He asked if there was a conflict of interest in Mr Tony Mostert serving on both the Sable/Cadac pension funds.

Dr Luyenge asked if the FSB had sufficient staff capacity and a staff retention strategy.

Mr Van Rooyen asked how the FSB managed the stay of curators who were intent on prolonging their stay. He requested a detailed report on the cases. He said the regulatory exams were needed and that language was not an issue. Which standards were used to benchmark the approach? How was the SACC project’s impact going to be assessed? Was there any feedback on the gap analysis from the King III report?

Deputy Minister Nene asked the Committee’s indulgence if the FSB did not respond to matters before the court and also on the timeframe for the implementation of ‘twin peaks’

Mr Tshidi replied on the matter of surplus distribution by saying that the R80 bn estimate had been too high and was only R60 bn of which R40 bn had been distributed. There were some outstanding monies to be distributed and the rest were linked to the “political friends” allegation which in turn was linked to the Sable/Cadac matter.

Regarding the ‘political friends’ issue, an individual had alleged that R750 m had been recovered and hidden with only two people knowing the whereabouts of the money, being Mr Mostert, the curator, and Mr Tshidi. The individual suggested that Mr Mostert and Mr Tshidi had taken the money and employed a private investigations firm to corroborate this. The FSB had refrained from rebutting the allegations but had issued a circular showing the R750 m to be invested in three credible institutions.

Regarding Mr Mostert being appointed to many pension funds, he said that Mr Mostert had been appointed the curator of the Governors Options issue, which covered a number of pension funds.

He said in the case of the Cadac issue, an individual had financed his legal defence with the Cadac Pension Fund’s monies while facing criminal charges on the dissipation of pension fund surpluses and therefore the Regulator put that fund under regulation to ensure that the pension fund assets were not used to fund a criminal’s defence costs. No pension fund was in court, it was an individual that was in court, therefore there was no conflict of interest.

On the matter of a curator taking the FSB to court, he said that the curator had worked for many years because there was lots of litigation occurring. This was because the litigants had dipped their hands into the pension funds. Two big institutions were involved through kickback arrangements with trustees. The FSB was awaiting the court’s judgement.
 
Deputy Minister Nene said that the Committee could see what effect litigation had on the FSB’s work.

Mr Tshidi said there was good cooperation with regulators. On the gap analysis, he said that King III was meant for companies and that the FSB was not a company and was not compelled to implement it, but did take from King III to enhance good governance. Ultimately the FSB’s main reference was the Public Finance Management Act.

Mr Anderson insisted that there would not be a displacement of financial service advisors. The purpose of the exams was to ensure knowledge of the Financial Services Act and people had three months within which to rewrite the exam. The FSB was advised by experts on the 65% pass mark. It had agreed to set the exam in Afrikaans.

Mr Anderson said that when Collective Schemes were reviewed, hedge funds would be brought under the regulations. It was looking at the OTC’s reporting structure.

Mr Tshidi said it was difficult to get skilled workers and the FSB promoted internally. He said the SACC project was about getting the message to the people through the pulpit. The FSB had targeted funeral expenditure as that had become so much as to put people in debt. The monies could be better used on the education of the deceased’s children.

The Chairperson said the FSB had a role to play in expanding on compliance matters and in the transformation of the sector.

The meeting was adjourned.

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