Documents handed out:
Public Investment Corporation 2016 Annual Performance plan
Government Employees Pension Fund 2016 Annual Perfomance Plan [Documents not available email firstname.lastname@example.org]
The Government Employees Pension Fund (GEPF) and the Public Investment Corporation (PIC) presented their 2016 annual performance plans and quarterly reports to the Standing Committee on Finance.
The Committee heard that the GEPF was the largest pension fund in Africa, with 1 266 000 active members. It was a juristic entity that was separate from the Government. The PIC was responsible for the investment and protection of the GEPF’s assets. The Fund had grown considerably over time from a 72.3% funding level in 1972, to 101.7% in 2006, despite issues in the South African economy. The improvements that the GEPF intended to undertake were outlined. These included the Optimise Operational Model, an update of the complaints office, an integrated communications strategy, and the appointment of a single master custodian, which were focused on achieving the GEPF’s mandate of good service provision and good governance.
The GEPF maintained healthy relationships with its stakeholders, particularly the unions representing the South African labour market. Its involvement with the Isibaya Fund indicated that the GEPF was committed to achieving transformation and development. The strategies for the 2016/2017 financial year were highlighted. The primary goal was to encourage members to remain with the GEPF and claim their benefits, to decrease the resignation trend and improve communication among the members. It was stressed that the GEPF was a service-orientated company.
The PIC said it invested into unlisted, listed and offshore asset classes. Clients presented it with a mandate and a company in which to invest, and the PIC assessed the risk. Developmental investment principles were applied across the investment portfolio. The legal and regulatory framework of the PIC was outlined, and although the company was completely state owned, the clients indicated an investment mandate, which was monitored by the Investment Committee and its various sub-committees from within the PIC. Because most of the investments were not graded, the PIC had its own credit rating system. The most important aspect of the PIC was ensuring that the investment portfolio was diversified and low-risk, to ensure returns on all investments. In the investment process, due diligence was emphasised in all sectors.
The PIC had a large influence on the South African economy and on the Johannesburg Securities Exchange (JSE), as the company’s equity accounted for 12.5% of the JSE. This meant that the PIC was a powerful tool for transformation and development, such as through the Isibaya Fund. Low growth in the economy had inhibited growth within the PIC, so it had been forced to direct its investments towards radical growth and transformation. State-Owned Entities (SOEs) were very important for the sustainability and performance of assets.
Members were concerned with the resignation trend within the GEPF. They asked about the post-investment monitoring process. Some were worried about the type of companies that were receiving investment, and asked about the mandate of the PIC and GEPF to invest in black-owned companies in order to achieve transformation and development. Members requested details of the GEPF’s investment mandate. They raised questions about the Public Protector’s investigation into the MTN issue, and the investments into companies like Lonmin and African Bank. They also asked whether PIC or GEPF executives had engaged with the Gupta family at all.
Briefing by Government Employees Pension Fund (GEPF)
Mr Abel Sithole, Principle Executive Officer, GEPF, introduced the Government Employees Pension Fund as the largest pension fund on the African continent and the tenth largest in the world. The Fund was responsible for the majority of the public pensions in South Africa with 1 266 000 active members. Thus, whatever happened to the Fund, the government would ultimately carry the responsibility, so the assets needed to be looked after. The Fund was a juristic entity in its own right, so it was separate from the Government. It was governed by a Board of Trustees represented by 16 members chosen by the Minister of Finance, Pravin Gordhan. The members of the Board ensured that assets were looked after and that those who were in public service could look forward to a retirement fund.
Mr Sithole presented the GEPF’s operating model which illustrated partners who operated with the Fund, such as the Public Investment Corporation (PIC) and the Government Pension Administration Agency (GPAA), which was responsible for the administration. He thanked the PIC for the growth and protection of assets, as well as for the economic growth of the GEPF. The Fund had grown considerably over time, judged against a recent benchmark of performance relative to its peers, the largest funds in the world, which had established that the Fund was very cost effective.
The responsibility for investing in individual securities was the up to the PIC. In 1996, the funding level percentage had been 72.3%, and it had since risen to 100% in 2014. This indicated that the deficit had been closed to the point where the Fund had been fully funded for the last few years. An evaluation was currently being carried out to determine the financial position for 2015.
The highlights of the GEPF’s performance primarily included providing a good service and good returns on investment, and ensuring that the Fund and its investments remained sustainable over time. The GEPF valued its accountability to members, pensioners, the Chairperson and the Committee, and Government and the National Treasury. Responsible investment was important, but it was important to remember that the Fund employed people who needed to be looked after.
Mr Sithole introduced the Optimise Operational Model. The main aim of the GEPF was to improve the complaints handling office, as it was not covered by the Pensioner’s Act. Furthermore, the Fund had appointed a single master custodian and as a result the shares and loans were now being held in a single institution, and at any single time the Fund was able to look at its asset holdings and ensure that it achieved its objectives.
The status of relationships with the main stakeholders was presented. The Service Level Agreement (SLA) with the GPAA was reviewed. This was where members actually experienced the GEFP on a daily basis so it was crucial to supply a good service. The Isibaya Fund was a developmental investment with the PIC, which revealed the commitment of the GEPF to play a direct role in the agenda of transformation. The benchmark test of administration and investment management against the GEPF’s peers revealed that the company was ahead in investment, but slightly lagging in administration. There was an integrated communications strategy to improve communication and enhance relationships with the key stakeholders, who Mr Sithole referred to as ‘the people who make it possible to do the work’. Labour was a key stakeholder, with 98% of GEPF members being union members.
Mr Sithole outlined the member benefits, to which the Board could not make changes, but needed to approve. The benefits included the creation of an Additional Voluntary Scheme (AVC), a Voluntary Preservation Fund, the improvement of child pensions to include the premise of one parent deceased as a condition for classification as an orphan, and the clean break on divorce proposals. (
It was important to make responsible investment decisions, specifically looking at the Environmental, Social and Governance (ESG) matters. There was a Social and Ethics Committee to align the industry with best practice.
Looking ahead at the 2016/2017 financial year, Mr Sithole outlined the strategic initiatives of the GEPF to ensure improvement of the entity. An example was the improved benefits administration which would have an accurate member database. These were significant changes which would impact members, but they may not be completed within a year. The primary goal was to get members to appreciate what it was to be a member of the GEPF so that resignation and unclaimed benefits were minimised. This could be achieved through better communication and education.
It was important to improve risk management because of the assets and liabilities that needed to be preserved The most important members were pensioners. There was an Advisory Committee for imminent retirees to promote the fact that the longer members retained their benefits within the Fund, the higher the benefits that were paid out. Thus, if members retired within the GEPF, their benefits would be greater than outside the company.
The reason for the existence of the GEPF was to provide a service, so a culture of service delivery needed to be instilled within the entity. Furthermore, the GEPF needed to redefine its role to be conduit to other stakeholders. The GEPF had to ensure that the service people experienced was one which people in public service deserved.
Unions needed to ensure that they were not secretive regarding the benefits that they had, as this would strengthen the relationship between the GEPF and the unions. This was in line with the mandate of clear communication between members and their respective stakeholders -- the South African Revenue Service (SARS), unions etc. If money was owed to SARS, for example, the pension payment process was significantly delayed.
Mr Sithole ended the presentation by providing a financial breakdown of the GEPF. This included the Budget for 2016/2017; the resignation trend and the indicators for the unclaimed benefits (see presentation attached for details). The projected income, including contributions and investment returns, was R250,1 billion.
Briefing by Public Investment Corporation (PIC)
Dr Daniel Matjila, Chief Executive Officer, PIC, began the presentation by outlining the investment asset classes of the Public Investment Corporation into listed (domestic), unlisted (domestic) and offshore (non-domestic) investments. The client provided the PIC with a mandate to invest, but developmental investment principles were applied across all asset classes. In 2010, the GEPF had been allowed to diversify its portfolio outside South Africa, and since then the GEPF was the only company which had done this. He admitted that this had given rise to the question of investment in MTN.
Dr Matjila outlined the regulatory and legal framework of the PIC. The PIC was regulated by by the South African Government as it was completely government owned. The client mandate includes asset and liability modelling (ALM). This means that the clients design
the strategic asset allocation and the asset classes (see presentation attached for details). Dr Matjila said there has been an issue of sub-grade bonds, this would be defined in the mandate which could shed some light on the problem for the Committee. Dr Matjila clarified that most of the assets were not graded, so the PIC has its own credit rating system so that it could comply with the mandate (see presentation attached for details).
The Investment Committee was the key committee within the PIC that looked after investment and ensured that returns were achieved. There were various sub-committees within the Investment Committee. The process of investment included taking calculated risks, but the PIC would avoid risks that did not yield returns or pay off adequately. Every investment had to produce the required returns and on top of this mandate, the PIC overlayed risk management. This was the key to successful investing. The PIC was also managing a diversified portfolio so it did not ‘put all its eggs into one basket.’ Assets across sectors and regions that gave the company a low-risk portfolio that was not sensitive to volatility in the market, would ensure success. The key message was that every investment pursued must have returns. Thus, there was a need to understand the risk and avoid investments with a possible zero return.
Mr Mervin Muller, Acting Executive Head: Private Equity, PIC, outlined the investment process, which was governed by an independent party. He emphasised due diligence in all sectors, which was the ability to identify targets with the client and alter the contract to achieve these targets in a certain period of time. He illustrated the correlation between asset growth and economic growth. The PIC had an influence on the economy and on the Johannesburg Securities Exchange (JSE), as the company’s equity accounted for 12.5% of the JSE. This meant that in the top 40 stocks, the PIC owned 12% to 15% of the shareholdings. The PIC had a large amount of responsibility and capacity on environmental, social and governmental issues. Most of the companies were sitting on cash for various issues, but the PIC was engaging with these companies to understand why they were hesitant to invest their money and avoid the possibility of a downgrading of the South African economy. Low growth could threaten the very fragile democracy that existed in South Africa, which created difficulties for the Government to meet its social demands.
Dr Matjila turned to the Isibaya Fund. He admitted that it was quite a risky portfolio, but it was an area that could create jobs and so the PIC was investing directly into companies and trying to achieve transformation. This was where the issue of sub-grade investments arose. If the PIC was trying to achieve AAA grade at the same time as trying to achieve transformation, it was impossible. The PIC could not get everything right, and the nature of the South African economy could push its investments to a lower grade.
The PIC wanted to take advantage of regional integration in Africa using South African financial and technological know-how. This was why there had been investment in MTN Nigeria, until the allegations had been revealed to be true. However, the PIC was trying to resolve the issues with MTN Nigeria.
Sectors of the economy that were supposed to achieve economic growth had been in decline for the last five years. If growth was taken at 0.8% going forward, based on gross domestic product (GDP) and employment, the PIC would not be able to fund certain investment ventures. The gap created by slow growth was R2.5 trillion. The PIC’s assets under management grow in real terms, taking the inflation rate into account. If South Africa’s growth remained at 0.8%, the PIC would be going backwards.
Dr Matjila presented the direction of investments into key growth sectors listed in the presentation. This involved the adoption of direct investment for a radical transformation of the economy to achieve development and to drive socio-economic transformation. The PIC was committed to achieving its vision to be the leader in developmental investment for the sustainable financial prosperity of its stakeholders.
The mobilisation of cash became very important, as the PIC was looking for partners who shared in its vision, and fixed state-owned enterprises (SOEs) who complied and delivered on their mandate. The well-trained and knowledgeable staff who managed financial risk were ‘enablers, and ensuring that the PIC remained the most attractive employer to its clients was an issue of good governance.
Ms Petro Dekker, Executive Head: Corporate Services, PIC, indicated that PIC’s average growth had been 14.8% and the real return on investment had been 8.8%. The first four clients in the outline of the PIC’s investment performance had diversified to more than three asset classes. the Compensation Commissioner Pension Fund (CCPF) had more than 70% invested in convention bonds. This indicated a process of working with clients to optimise investment mandates and enhance performance. The PIC was a big proponent of state-owned enterprises (SOEs). Student accommodation was a key investment sector.
Dr Matjila said the PIC valued good governance and this was why it was upgrading its information technology (IT) system. In December, the PIC had added five new board members. Black female representation at senior leadership level was very important, as well as the PIC’s graduate programme from outskirt universities that were not usually targeted by the private sector. He reaffirmed the PIC’s commitment to the transformation agenda, and concluded the presentation with the the overall investment strategy (see slide 26 of presentation for details).
Mr S Buthelezi (ANC) asked whether it was possible to receive the documents of the meeting prior to its occurrence, as the Committee could not have an intelligent discussion without the documents beforehand.
He said that the fund appeared healthy, and asked what the main problems were in terms of investment monitoring, and whether the fund intended to improve the process of monitoring its investments. What role had the GEPF played in the economic transformation agenda of the national government, and what impact had there been with regard to women’s and low-skilled workers’ empowerment. It was important not to lose the national agenda of economic transformation.
The Chairperson agreed with Mr Buthelezi on the need to receive documents prior to the meeting.
Ms D Mahlangu (ANC) referred to the GEPF’s resignation trend. In 2013, the resignation among GEPF members had increased, and by 2015 it had been at its highest level. Furthermore, the presentation had indicated an emphasis on an effective membership programme through educating beneficiaries and improving communication. Given this, why was the level of resignations so high? Members of the Committee needed to understand why the GEPF existed and what its benefits were. The GEPF should indicate what it had done in terms of communication and outreach to its members since the last meeting with the Committee.
She asked about the geographical spread of the GEPF’s offices, because the mandate to increase communication may have encountered difficulties in reaching rural members.
Mr F Shivambu (EFF) wanted to gain a concrete understanding of the mandate of the Public Investment Corporation -- where it invested and what kind of business it did. Given the amount of questionable investments on behalf of the PIC, he asked that whether the GEPF had the scope to make interventions in the PIC to prevent investments of this nature. He asked the GEPF to quantify its participation in white-owned companies. The fund was a shareholder in all listed companies, which were mostly white-owned, so he wanted the GEPF to quantify whether there was an agreement on which areas to invest in by the PIC, or whether the GEPF simply invested. Was there a mechanism that monitored the process post-investment to send to the Board’s representatives. There were companies in which the PIC invested, that engaged in illegal activities such as MTN -- guilty of tax avoidance in Ghana, Nigeria and Uganda. What was the extent of monitoring ensured by the GEPF in these companies? What was the impact of the Tax Amendment Act on the GEPF?
Dr B Khoza (ANC) responded to Mr Shivambu’s question on the Tax Amendment Act, as she believed that the public service was not largely affected by the Act. She asked why the GEPF had kept quiet and not been aggressive in informing its members about the non-impact of the Act. This appeared the opposite to the fund’s mission and vision of member centrality. The Committee and the National Treasury believed the amendments to the Act were placing public servants in a better position than perceived. She asked about GEPF as a single public service and whether, given the kind of infrastructure and capacity in place, it was ready to accept other public servants in the form of municipal workers. The Committee wanted to appreciate the Fund’s capacity, but it had seen other challenges specifically regarding investments and the issue of ‘who owns who.’ She queried PIC’s investment history, and asked if the GEPF would be able to take on other layers, as the Committee was concerned about the direction of municipal workers. She lastly asked how much an individual member of the GEPF pays for administration fees.
Mr Shivambu referred to a case which Ms Thuli Madonsela, the Public Protector, was reported to be investigating, and asked whether money from the PIC or the GEPF had ever been used to fund ANC rallies and salaries.
Mr B Topham (DA) referred to the increased resignation totals and cases since 2009, and asked why the resignation trend had occurred. The GEPF claimed it had a limited mandate and virtually no jurisdiction over the investments of the PIC, so why had there been an improvement in in-house research and monitoring capacity in the GEPF, as these ventures would appear to be pointless?
Mr A Lees (DA) mentioned that much had been discussed about the annuitisation issue. He referred to the trend on resignations, and said that presumably when someone departed from the fund, the GEPF asked for a reason so that it was clear exactly why they had left the Fund. As a result, the GEPF should be able to tell the Committee exactly why the number of people had resigned -- unless it did not ask for reasons and simply paid out. The key to pension funds was communication. He disclosed an example of at least six members whom he knows had contacted the GEPF but had not received replies, and as a result had not received their pensions. He asked when the Pension Fund Adjudicator would be up and running, how it would be established and whether Parliament would have an influence on the adjudication process. He said that the Railways’ fund was completely destitute and abandoned. He queried the percentage growth from 72.3% in 1996 to 101.7% in 2006, asking if this increase had been paid for by taxpayers or was the result of good management. He requested clarification on the mandate of the Isibaya Fund.
The Chairperson indicated that he agreed with Mr Lees.
Mr D Maynier (DA) said that several Members had raised the question of the GEPF’s investment mandate, and it would be useful if the Fund could present a copy of its investment policy/mandate to settle the questions and provide the Committee with a proper opportunity to evaluate the investment performance.
Did the GEPF, in terms of investment policy, prohibit the PIC from holding sub-grade financial investments?
He raised the issue of questionable direct loans. On page 98 of the GEPF’s Annual Report of 2015, there had been an amount of R11.8 billion in direct loans. If the PIC was responsible for investments, was the GEPF then responsible for the administration of these direct loans? According to the Annual Report, there appeared to have been a direct loan of R896.4 million to Independent News and Media South Africa, but he could not find this company on any record. Why had this loan amount increased by R104 million, and what did this considerable increase reveal about this company?
Mr Maynier mentioned a second questionable direct loan of R1.4 billion to “Opisconia Investments 239 Pty Ltd”, which he also could not find on record after hours of searching. There was only a company called Opiconsivia Investments 230, but this company was cited in a different section of the report. Referring to Mr Shivambu’s comments on questionable dealings and investment, which the PIC had denied, he asked how the GEPF dealt with these allegations, if the Fund was in contact with the PIC, and if not, to clarify why.
The GEPF and the PIC had a significant investment in MTN in Nigeria, so what action had the GEPF taken in present and future dealings?
The Chairperson indicated that there was a need for the Committee to apply its mind to the content of the meeting. Strictly speaking, the Committee should have a report from the previous meeting, as certain decisions had been agreed upon and it had now become a ‘shopping list’ of demands on the GEPF. The previous meeting had included several points of agreement: to call the GEPT back six months later, not to raise similar issues, to hold debates within the House. He asked how these could be achieved in a year with local governmental elections. How could real progress be achieved if the GEPF had failed to present the previous meeting’s “snag list?” The GEPF had more capacity than the Committee, but the Committee took responsibility for its actions, and so must the GEPF. For example, the fact that there was no adjudication of complaints in the pension fund was a deficit that had existed from the start. Not enough was being done to achieve real progress.
The Chairperson said questions intended for the GEPF had overlapped with those for the PIC, and requested that the answers be separated. He announced that Mr Mcebisi Jonas, the Deputy Minister, had just arrived and it was a priority to manage time accordingly. The meeting may need to be carried over. On matters of investment, the PIC was required to answer all the specific questions
Mr Maynier asked whether the GEPF prohibited sub-grade investments.
Mr Shivambu said that the GEPF’s response indicated investments occurred simply for the sake of the money, which he referred to as problematic. Proper political and ideological guidance was required to ensure change.
Ms P Kekana (ANC) pointed out that the Committee needed to be mindful that this was not government money -- it was members’ money. The ultimate authority lay with the members themselves. The Committee could debate and deliberate, but it did not have the final say.
The Chairperson confirmed that the GEPF was not another entity that the Committee could simply oversee. It was for the very working class that Mr Shivambu’s party, the EFF, had been created to defend. He would confer with Advocate Frank Jenkins, Senior Parliamentary Legal Advisor, because the Committee could not make decisions that would change the core representation of the members. The Committee would convene at a later stage with all the relevant documents and legal advice.
Mr Maynier said that the Committee needed to evaluate the GEPF’s performance against its mandate, but this was hard to achieve given that the Committee had never had sight of that mandate.
The Chairperson said that the Committee Secretary would note all the outstanding questions and they would have to be covered at a later stage.
The Chairperson requested the PIC to disclose the six cases to the GEPF so that they could be resolved within a month.
Dr Khoza said that it was important to acknowledge that the PIC was a strategic vehicle to drive the South African development path, but there were aspects that required answers. She referred specifically to the PIC’s philosophy and its recent negative appearances in the media. She asked what had informed the PIC’s African Bank Bill, as it had first invested around R9 billion into the bank, which had then been increased to R29 billion. This was at a time when the institution had been facing a number of critical challenges, specifically issues of liquidity. What had the PIC learnt from the African Bank case, and what would it do in the future? The PIC was a very strategic entity for transformation, and the Committee did not want it to be perceived as being reckless and consequently jeopardise the Isibaya Fund, for example. She asked for clarification on the monetary value of each asset class.
Dr Khoza said that in 2009, after the global recession, the Committee had reviewed its international investment strategy in a volatile, open economy. An entity like the PIC was one of the few defiant benefit schemes that had remained post-crisis. She asked how the PIC was addressing the deficit gap articulated in the presentation. There was a large amount of adjustment needed in light of the economic situation in South Africa. It was important to be in the space of job creation, but at the same time to be very cautious in terms of the risk appetite, and to have an awareness that it was the members’ money.
She said that although the communication strategy may be a soft issue, she was extreme concerned over how the PIC communicated. The PIC was part of a highly influential market, but it was also the market itself and had to react in a particular way. She predicted that the PIC would play an important role in communicating its message, criteria and mandate clearly to encourage investment. However, this was not currently being achieved. If the PIC did not communicate its philosophy clearly locally and on the African continent, there would be consequences, such as the MTN scandal.
Mr Shivambu said there was a need to represent the qualitative breakdown of the economy. Every entity with shares needed to have at least one board member with a mandate for transformation and development. This was an immediate issue that needed to be addressed, and would also assist the PIC in monitoring financial crime and corruption. He referred to Lonmin as a criminal organization, as found by the Marikana Commission, in which the PIC had recently increased its shares. It was a platinum producing company and there was no foreseeable increase in the platinum price, so why had the PIC increased its shares in Lonmin? He suggested the answer might be political. He asked whether the PIC had engaged in any of the Gupta companies or with the criminal organisation of the Guptas, which had been looting the state of its resources.
He said there was not one large black supplier able to supply consumption by the black majority in the retail sector, and asked how much the PIC was involved in Isibaya. He believed the National Treasury, supported by the ANC caucus, was the driver behind the African Bank investment and rescue scheme. The bottom line was to develop a clear mandate for transformation and development.
Mr Maynier asked the Deputy Minister if he had made a full statement in the form of a sworn affidavit regarding his alleged meeting with the Guptas.
The Chairperson interjected that Mr Maynier’s question was not relevant to the content of the meeting. The Chairperson said that Mr Maynier could not use the Committee to push his agenda and abuse his position. He had no more rights than any other member of the Standing Committee on Finance.
Mr Maynier referred to the PIC’s mandate as the ‘elephant in the room’. He asked whether investment decisions were politically motivated, as the PIC’s mandate did not flow from an investment mandate.
He requested an investment policy statement for the five primary clients of the PIC, such as the GEPF.
Was the Committee was able to conduct oversight on all entities of the PIC, including unlisted and offshore investments in Africa? He said that the PIC had an investment in Arrun Energy, an obscure Nigerian oil company, and asked for the status and value of the investment. He reiterated Mr Shivambu’s earlier question of whether Mr Sithole or anyone from the PIC Executive Board had met with any of the Guptas or Mr Duduzane Zuma to discuss investment. Why had there been a significant increase in the PIC’s travel and stakeholder costs? He referred to the PIC’s memorandum of understanding with Gazprombank in Russia, and asked why the PIC had made an investment with such an entity and potentially involved itself in a nuclear power agreement. Referring to page 94 of the PIC’s Annual Report, he asked for clarification on the ‘close members’.
Mr Buthelezi said that the biggest threat to the PIC was income equality, with a Gini coefficient of below 0.5. The PIC was critical to addressing this threat. He referred to slide 6 of the PIC presentation which indicated developmental investments to domestic unlisted investment. The status with unlisted companies was that they accepted the PIC’s money but the PIC did not have the right to see what was happening to its money. This affected the black majority, specifically black female CEOs. He pointed out that these companies were not doing the PIC a favour, as the PIC was the one investing in needy companies.
Mr Buthelezi mentioned the issue of communication, and said he does not hear the PIC’s voice as an important shareholder. Regarding returns on investment, did the PIC receive the majority of its returns from listed or unlisted companies? What was the trend of allocations to the Isibaya Fund? He said that the geographic spread of investment had a tendency to be concentrated in the Johannesburg/Gauteng area, but there was a need to spread it across the country. Based on international experience, small and medium-sized enterprises (SMEs) were the big drivers of economic growth, and they were also important in terms of employment, so he wanted to know whether the PIC had had any interaction with the Department on SMEs, and what its investment allocations to SMEs were.
Mr Topham said that the PIC’s returns on investment did not look promising. How did the PIC compare with other investors like Allan Gray and Investec? He referred to slide 25 of the presentation, and asked for clarification on the alpha of 1.5 basis points, and the mandate from clients on this.
The Chairperson announced that if the majority of the Committee wanted to reconvene after lunch, they could do so, but he had prior commitments. He proposed extending the meeting by 15 minutes and to receive written replies from the PIC so that questions were not left unanswered until Parliament resumed in August. If Members had long questions of substance, could they please send them before the meeting convened so that the Committee could be more efficient and Members could receive adequate responses.
Mr Lees said that no matter what the investment was, there were certain returns that were required from it. Mr Lees referred to slide 22 of the presentation, and the investment of 10 000 beds provided for student accommodation. What kind of returns was the PIC going to get from this investment? There was an appetite for investment in SOEs, but the PIC had said that there needed to be an improvement at the SOEs. He referred to the investments in Airports Company South Africa (ACSA) and Eskom, and asked for the returns on these investments. Was the PIC playing a role in the returns, and were the PIC attempts to influence SOEs to be investable a part of the developmental mandate?
The Deputy Minister said that the crucial investment mandate was how to strike a balance between meeting the interests of the stakeholders and achieving the mandate of development. He admitted that this was a big issue. There were people who wanted to monitor the JSE-listed firms for not achieving development. He stressed that it was a balancing act -- there needed to be transformation without recklessness. The prohibitions on SOEs were the most controversial. In areas of SOEs, the Department needed to heighten its due diligence process. Nobody could deny that there were huge problems with SOEs, so the Department needed to be more focused and reflective in its decisions to invest. Some of the SOEs were not making the progress they required. There was a huge government programme to change them and the Department would support it, but if change did not occur then the investment mandate had to change.
Maj Gen Dries de Wit, Vice Chairperson, GEPF, thanked the Committee for their questions and ensured Members that the GEPF was committed to sending the documents to the Committee at least two weeks before the meeting. The next presentation by the GEFP would begin by returning to previous issues. The GEPF’s Investment Policy statement would be sent within seven days. Although there were overlaps with the PIC, his colleague would be given an opportunity to explain the process of the monitoring of investment from the GEPF.
Mr Sithole said that he would attempt to respond to all the GEPF’s questions accordingly. There were a number of questions regarding investment, so he would answer broadly. On risk, he said that the process of investing was risky by definition. GEPF could take its money and put it ‘under the mattress’, as the saying went, but this would not be efficient. The biggest returns of the Fund did not come out of the members’ contributions but out of investment returns, which were especially important if the members lived longer than expected. The risk was definitive in that the GEPF hoped to win more than it loses, but some loss may be incurred. It was important to appreciate that every investment decision was made to protect the existing capital and ensure good returns. This did not mean that every decision actually did this, otherwise the risk component would not be there.
The GEPF monitored not because it had done a bad job in the past, but because the mandate of the Fund was to ensure responsibility and accountability. Monitoring was a structured process of investment funds being broadly allocated, such as the Strategic Asset Allocation. The GEPF allowed the PIC to undertake investments in the listed categories. After this had been established, the GEPF did not go back and check on each bond (loan). The GEPF did not personally make the loans to the institutions -- the PIC made the loans and they were consolidated by the GEPF afterwards.
Mr Sithole said the reasons for investments were that the GEPF had a special mandate to address issues of transformation and Black Economic Empowerment (BEE), but it would be futile if the GEPF were to start categorising each investment by race. The GEPF did play a role, as the biggest fund in Africa, in ensuring transformation. However, whatever the GEPF did could not trump its obligation to its members. The Fund’s return on investments may appear big, but divide it by the number of members and their pensions, and this was no longer the case. This was money that had to meet a particular promise that had been made, and if this was not met, the GEPF would have to turn to South African tax payers for assistance.
He said that 54% of the GEPF’s money was indeed invested in shares in the South African economy. Although these companies were by and large white, this was because the GEPF was investing by definition in the South African economy as it stood and was currently represented, not because it did not want to pursue black-owned investments. He confirmed that the GEPF did have a specific focus on development, issues of transformation and BEE, on which the PIC could elaborate. The GEPF was currently looking to invest in more targeted BEE programmes, as it was aware of the important and unique needs of the South African economy. However, he believed this was not the responsibility of only the GEPF, but of the investors in South Africa at large.
Ms Linda Mateza, Head of Investments and Actuarial Services, GEPF, replied that the investment mandate was based on the strategic allocations and the need to meet the liabilities of the GEPF. The GEPF allocated ranges of the maximum levels of investments to the PIC, and specific inclusions on the rating of bonds, as well as a benchmark to measure the performance of the overall bond at specific intervals. The GEPF reported to the Investment Committee and the PIC sent regular reports. This was an act of oversight. The GEPF did not monitor individual investments below a particular threshold, but it did monitor the overall investment portfolio of the PIC. The monitoring process included a people element and a systems element. The systems element was currently being upgraded. She confirmed that the PIC reported regularly to the GEPF regarding standards of investments, which the PIC would elaborate on.
Mr Sithole referred to the case of MTN and the allegations of the Public Protector. He said that the GEPF engaged with the PIC on a daily basis on these matters, but as already indicated, they were in front of the Public Protector and therefore both parties awaited her decision. He referred the questions of MTN to the PIC, as it was the company that had made the specific investments. He confirmed that the GEPF was concerned with companies who misbehaved. However, if people did something wrong it did not necessarily mean disinvestment -- it meant being pragmatic and ensuring that the GEPF could achieve the overall success of the investment. He concluded that the views of the GEPF or the PIC were not the only views that had to be taken into account.
It was good news was that there was a downward trend in the resignation of members. This was because the GEPF had been involved in radio and road shows to alleviate the misperceptions created by the Tax Amendment Law, and shown that the result of the law was actually positive. The GEPF had already participated with employers, but to amalgamate all the pension funds into a single public service entity was a very difficult task as the majority of the funds were contributions, not investments.
Mr Sithole said that the GEPF needed to improve its administration costs, and this had given rise to the Cost Effective Management (CEM) scheme.
Communication was key in the six cases where pensions had not been paid. The challenge was the interface between the employer and the pension fund, but if the documentation was correct, members would receive their pensions within 28 days. He said that members needed to take charge of their pension fund.
Mr Sithole said that the GEPF law was a law in itself and did not fall under the Pension Funds Act. In the Pension Funds Act, Parliament had failed to mention the need for oversight. As a result, the amendment process would be monitored by a committee, led by an adjudicator.
Dr Matjila confirmed that the PIC had had no exposure to any Gupta family companies, a fact which could be placed on record. The African Bank case would require a written response, but it was classified as a systemic and important bank and had thus required specific attention from the PIC. The PIC had needed to protect the financial system of South Africa through the African Bank. More importantly, however, it was about the lessons learned. The one-line bank had been largely unsustainable, and now it was going to diversify. The African Bank has been broken into a ‘good’ and a ‘bad’ book, and the PIC was assisting in bringing it back to the market.
Dr Matjila said the monetary values response would be put into writing.
Because of the global economic crisis, the structure of the investment portfolio was very heavily weighted towards the JSE, and was thus rendered to too much exposure on the JSE. It was important to build a portfolio that was less exposed to volatility, and real estate as a good asset class in which to invest. Globally and locally, the PIC had learnt to adjust the investment portfolio to mitigate risk. He assured the Committee that the PIC positioned its portfolios to withstand shocks.
The Lonmin investment was controversial, but he believed the increased investment had created and sustained jobs, and the PIC had managed to make money for its clients in the process.
The increased costs were the result of five new board members, which included expert consultants, and the information technology (IT) upgrade. This was all in the name of improved governance. The remuneration rate per meeting remained the same. The PIC would send a breakdown of costs to the Committee.
Dr Matjila said that the response to the unlisted investments question would need to be cleared with the Board, while the answer on questionable investments would be put in writing.
He confirmed that to his knowledge, members of the PIC had not met with the Guptas,.
The Gazprombank was looking to set up a branch in South Africa. There was no link with nuclear energy.
The ‘close family member’ issues referred to an entity, not an individual. The amount transferred had been R1 million. Disclosure of this issue needed to be discussed with the Board. He confirmed that the member was not a Board member of the PIC.
He said that the PIC’s communications strategy was simply to communicate better, and revamp the PIC’s Internet so that people could apply for investment more easily.
Dr Matjila said that R3 billion had been allocated to SMEs. What was now critical was how the PIC dealt with post-investment management. Increased interaction with the Department was planned.
Dr Matjila described the returns on the student beds investment as ‘social returns’. ‘Social returns’ were a combination of equity and price relative to the market, but this would be clarified in a written response.
The Chairperson reiterated the time constraints, and asked that the Committee find another time to convene. He said that if the PIC’s answers were too pithy and short, Members must request a fuller response in writing. Otherwise, the Committee awaited the remaining answers.
The meeting was adjourned.