Government Employees Pension Fund 2021/22 annual report

Meeting report

The Chairperson welcomed the Select Committee on Finance to a meeting with the Government Employees Pension Fund (GEPF) regarding the GEPF’s 2021/22 annual report. National Treasury had been scheduled to deliver a briefing on the Public Procurement Bill, but that briefing had been postponed on Friday and the GEPF had agreed, at short notice, to reschedule its briefing on the annual report.

GEPF 2021/22 annual report: GEPF briefing

Overview by the Chairperson

Mr Dondo Mogajane, Chairperson, GEPF, said that the annual report covered work completed during the term of the previous GEPF board, which had concluded its term on 4 July 2022. However, the incumbent leadership of the GEPF took full responsibility for the matters discussed in the report.

The GEPF aimed to grow the fund while fulfilling its mandate. In the 2021/22 financial year, GEPF operated under very difficult economic circumstances, but, due to its investment strategies, it had nonetheless been able to perform to satisfactory levels, achieving year-on-year growth of 9.6%. The investment portfolio had grown by R201 billion for a total market value of R2.3 trillion. The annual report reflected a recovery in the performance of listed and property assets in the portfolio.

The GEPF had made an effort to enhance its investment processes, including oversight of the Public Investment Corporation (PIC). The GEPF had implemented a few recommendations emanating from the Judicial Commission of Inquiry into Allegations of Impropriety at the PIC (the Mpati Commission). It had reviewed and strengthened its investment policy, and it had conducted an asset-liability modelling exercise to develop a revised strategic allocation, which was currently being implemented. The GEPF had also reached an agreement with the PIC on benchmark returns, which resulted in the signing of a revised mandate for the listed and unlisted portfolios. Finally, the GEPF introduced enhanced monitoring of investments, including a review of the internal investment monetary structure. The board had approved a reviewed structure and capacity for the GEPF’s oversight functions.

The GEPF strengthened its management agreements, resulting in robust guidelines and portfolio construction in the investment implementation process. It planned to improve its oversight and its relationships with its service providers, particularly the PIC and the Government Pensions Administration Agency (GPAA). The new board was committed to continuing the prior board’s efforts to grow the fund and to ensure effectiveness both in administration and in investment strategies.

Governance

Ms Adri van Niekerk, Company Secretary, GEPF, said that at the last board meeting in March, the board had agreed to establish an advisory board. The advisory board would be responsible for providing oversight on unlisted investments managed by the PIC.

Financial administration

Ms Bulelwa Kotta, Head: Finance, GEPF, said the investment portfolio had grown by R201 billion (9.6%) in 2021/22 and stood at R2.3 trillion at the end of the financial year. Net investment income for 2021/22 was R255.7 billion, representing an average return on investment of 11.1%.

Mr Sifiso Sibiya, Head: Investments, GEPF, said that the R201-billion growth in the fund was the result of improved performance in each asset category:

• The value of domestic and foreign listed equities had increased by 12%, partly due to the post-COVID-19 recovery;

• The value of domestic bills and bonds had increased by 6% due to reduced yields;

• The value of domestic unlisted equities had increased by 19%, with improved performance in the GEPF’s property portfolio; and

• The value of foreign collective investment schemes had increased by 6%.

Mr Brian Karidza, Head: Actuarial and Benefit Administration Services, GEPF, said that pension payments had increased by R25 billion to R136 billion in 2021/2022. He provided a breakdown of the types of payments made.

(See presentation for details.)

Discussion

The Chairperson said that some of the numbers in the presentation were overwhelming. It was difficult for Members to properly evaluate an institution which dealt with such a large asset portfolio.

Mr S Du Toit (FF+, North West) said there were rumours that the GEPF planned to invest more in government. It made sense that more funding would be required to maintain the “welfare state” in South Africa. Did the GEPF plan to invest more in government, and if so, how much? What guarantees would beneficiaries have to assure them that funds would not be wasted on reckless investments, especially given “political interference”?

Mr Mogajane said that the GEPF’s primary mandate was to grow the fund and ensure a responsible investment regime was in place. Those imperatives guided every decision taken by the GEPF. Thus the GEPF would take up opportunities which promised good returns, but would not consider opportunities that would reduce the value received by members. The same applied to investments in failing state-owned entities. The GEPF did not and would not invest in state-owned entities unless such investments would maximise returns to the GEPF’s members.

On Mr Du Toit’s allusion to political interference, he said that the GEPF was an independent board with its own fiduciary responsibilities. It could not be coerced into engaging in particular investments, and it had no intention of spending members’ money on reckless investments. Members received defined benefits, meaning that, upon retirement, members had to receive the benefits that they had been promised. That was why the GEPF celebrated its 9.6% year-on-year growth – such growth benefitted pensioners.

He said that the GEPF could cover this matter in more detail, perhaps with some examples, at its next scheduled meeting with the Committee in August. Recently, a clip of a DA leader circulated on social media alleging that the ANC had instructed the GEPF to invest in Eskom. That allegation was false and the GEPF had immediately issued a statement refuting it.

Mr M Moletsane (EFF, Free State) asked about cases in which pensioners died early in their retirement. Did the pensioner’s surviving family receive monthly payments or a lump sum payment? If not, why not?

Mr Eddie Kekana, Deputy Chairperson, GEPF, replied that the rules of the fund provided for a five-year guaranteed period. If a member died during that period, the full pension would be paid out for the remainder of the five-year period. When the guaranteed period ended, the surviving spouse, if there was one, would receive the reduced pension going forward. Suppose a member earned a R100,000 pension annually but died two months into retirement. There were still 58 months remaining in the guaranteed period, and the member’s family would receive the full payment of R100,000 during that period. After that, the member’s spouse would reduce a reduced pension – for example, R50,000. If a deceased pensioner did not have a surviving spouse, the balance from the guaranteed period – the remaining 58 months – would be paid to their estate, but there would be no further payments after that.

The fairness of this arrangement had to be evaluated regarding the underlying concept of a defined benefit fund. It was difficult to individualise in a defined benefit fund; the benefits were defined based on consideration of the average member. Among the fund’s members, there would be some pensioners who, for example, were not married. If unmarried pensioners died before the end of the guaranteed period, they would receive reduced benefits, because the benefits would not extend beyond the guaranteed period. Individual members had to balance such issues against the risk of withdrawing from the GEPF. 

For example, suppose a single person without dependants withdrew from the fund. Instead, the person might draw a pension from a living annuity in the private sector, withdrawing at the maximum rate so that their income matches the pension they would have received under the GEPF. However, such a person would face the risk of exhausting their pension by age 79, while the GEPF’s average pensioner was expected to live until age 83. The person would therefore face the prospect of not having any pension income for the remaining four years of his life.

He concluded that it was difficult to say whether the GEPF’s rules were fair. However, it was important for clients to be aware of the risks they would take if they withdrew from the GEPF.

The Chairperson asked about the group of aggrieved widows complaining that they had not received a fair deal after their spouses’ deaths. They had approached Parliament and the matter had been referred to the South African Revenue Service (SARS). Had any of the widows reached out to GEPF?

Mr Kekana replied that the GEPF had received many related complaints – not only from the widows, but from general pensioners. The widows had complained about changes in the tax rules for spousal beneficiaries drawing income from multiple sources, but the change in the tax rules had resulted in higher rates for all pensioners who received income from more than one source. The GEPF had engaged with SARS and with its own members. The GEPF’s members had been given the option to remain under the old tax regime, but with the understanding that they would have to pay SARS the outstanding amount at the end of the tax year. That option had been detailed in a communication that was issued to all GEPF members, and the GEPF was in the process of sending out reminders. Since that communication, there has been a significant reduction in complaints.

The Chairperson asked for more details about the GEPF investment policy. During the year under review, had the board received any complaints about its investment policy? The Committee received such complaints twice or thrice a year, as did the Standing Committee on Finance.

He said that one issue was the Daybreak matter, which the Committee could discuss with the GEPF and PIC in a future meeting. The matter had been in the media and a group of people had written to him and the Chairperson of the Standing Committee on Finance about it. He had referred them to public media articles about the suspension of the executive officer and the various corrective measures Daybreak was undertaking. The GEPF did not have to comment about Daybreak now, since it could be discussed in a later meeting.

However, there were certainly people who were concerned about the GEPF’s investment policy. He had engaged with two organised complaints – one from an individual and one from a group of some 32 individuals – and he also had informal conservations with people about their concerns. Many who raised concerns were politically progressive people who had entered the public service after being active in the anti-apartheid struggle. Their complaints were surprising – because of their political backgrounds, one expected such people to be “empathetic” when the GEPF invested in public entities.

It was complicated, because there were certain “hypocrisies” when politicians discussed the GEPF’s investment policy. Members of Parliament could push for the GEPF to invest public servants’ pensions in entities such as Eskom and Transnet, while remaining secure in the knowledge that their own pension fund was not used for such purposes. The people who approached him with complaints were not satisfied when he told them that the GEPF was independent, that Parliament could not tell it where to invest, and that it performed well overall. He was worried that even progressive people were concerned about the GEPF’s investment policy.

On the Daybreak matter, Mr Mogajane said the GEPF would prepare a detailed response to present at its next meeting with the Committee. There were other matters similar to Daybreak. For a meaningful engagement, it would be best for the GEPF to appear alongside the PIC and to present the Committee with a detailed account of its actions and interactions with the PIC.

On the Chairperson’s broader question, Mr Sibiya said that the investment strategy of the GEPF was primarily driven by its investment policy statement, which was publicly available. To summarise the policy, GEPF investments were guided by the strategic asset allocation (SAA), the asset allocation that the fund had to maintain in order to meet its long-term investment objectives. Investment objectives included meeting liability payments due to members and ensuring the fund was always financially viable. The SAA dictated the proportions of investment in different asset classes and the proportion of the fund available for offshore investment. This was standard investment practice for all pension funds.

The SAA was derived through an asset-liability modelling exercise: the GEPF and the fund’s actuaries projected all of the fund’s expected payments – for the next 90 years, at a minimum – and then devised investment strategies to ensure the fund remained viable. The SAA was the key factor in determining the fund’s investment strategy. Consideration was made for all asset classes, including government bonds. That was also standard practice for all pension funds. The investment policy statement disclosed the bands for investment in each asset class. Around 50% of GEPF investments were in equities, 40% in bonds, and the remainder in offshore properties.

On government bonds specifically, he said that the GEPF’s investment in such bonds was driven by their investment case. Government bonds were issued by National Treasury and carried sovereign guarantees. They were long-term in nature and therefore aligned with the pension fund’s liabilities. They also offered inflation protection, which was very rare for such investment vehicles. Generally, index-linked bonds – which were indexed to price indices – were only issued by government. The GEPF had longstanding investments in inflation-linked bonds. For these reasons, all pension funds were attracted to government bonds; South African companies held most government bonds in the savings sector. At the same time, the GEPF sought to diversify its portfolio, so it invested across different asset classes, in proportions informed by the asset-liability modelling exercise.

The Chairperson asked whether the GEPF had a call centre where pensioners and beneficiaries could call in to complain or raise unaddressed issues. In addition, was there an ombudsman who could scrutinise GEPF decisions when pensioners or beneficiaries believed that the GEPF had acted in a way that was unfair or inconsistent with the rules?

Mr Kekana replied that the GEPF outsourced administration functions to GPAA. GPAA had a designated call centre that attempted to resolve GEPF-related queries. Because of the size of the GEPF’s membership, the call centre did sometimes experience challenges and becomes overwhelmed with the volume of queries. However, in general, it functioned well.

He said that the GEPF had launched a voluntary complaints-handling mechanism in 2021. It was called the Government Employees Pension Ombud. It operated independently of the GEPF and handled any complaints or disputes from members who were dissatisfied with their pension outcomes or who felt that they had been treated unfairly by the GEPF.

The Chairperson asked for clarity on the relationship between the GEPF and the PIC. Were there any instances where the PIC had wrongly invested money or made decisions outside the proper framework?

Mr Sibiya replied that, as he had explained, the SAA directed the fund’s investments in various asset classes. The GEPF was responsible for asset allocation – determining how much was invested in each asset class. Yet the fund is invested in direct instruments or securities within each asset class. Those assets were the responsibility of the PIC, though the GEPF owned them. Thus there was a principal–agent relationship between the GEPF and the PIC. By means of an investment management agreement, the GEPF mandated the PIC to manage its assets.

The investment management agreement was a contractual agreement that permitted discretionary management by the PIC. The PIC could choose how to invest within the prescribed asset classes, provided that it achieved the GEPF’s investment objectives, which were stated in the agreement. The GEPF conducted oversight of the management of its assets and held the PIC responsible for the ultimate result – that is, for the achievement or non-achievement of the GEPF’s investment objectives. Within those parameters, the PIC had discretion in deciding how to achieve the objectives.

Mr Mogajane added that the GEPF had existing mechanisms for engaging with the PIC, including quarterly meetings between the boards of the two institutions. This enabled the GEPF to exercise oversight and hold the PIC accountable for investments. Recently, the GEPF had acquired legal advice about the extent to which it could engage with the PIC about asset management, beyond the investment mandate assigned in the investment management agreement. Increasingly, people approached the GEPF with complaints about the PIC and asked the GEPF to intervene on the basis that the GEPF was the beneficial owner of the assets managed by the PIC. The GEPF took its engagements with the PIC very seriously. As the beneficial owner of the assets, it took responsibility for ensuring member value. It tried to engage with the PIC about the most appropriate course of action without dictating to the PIC. 

Mr Kekana added that the GEPF was a signatory of the Principles for Responsible Investment, and it had recently received an AA rating for its compliance with those principles. It was also a leading South African member of another responsible investment code. Its governance structures allowed it to play a significant oversight role over the PIC, GPAA, and other service providers. The GEPF had an investment agreement with the PIC and a service-level agreement with GPAA, but oversight was not only confined to those agreements: it had continuous interaction with both service providers. Since the Mpati Commission, the GEPF constantly interacted with the PIC about implementing the commission’s recommendations. He was satisfied with the GEPF’s fulfilment of its oversight functions.

The Chairperson appreciated the GEPF’s presentation and detailed responses to Members. He encouraged the GEPF to communicate more effectively with its members, although he acknowledged it was difficult. People became very emotional about their pensions, which was exacerbated by people’s general distrust of all government institutions. In this way, when the GEPF received complaints, it bore the brunt of the consequences of the failures of other government institutions, including Parliament and political parties. Nonetheless, he thought the GEPF was doing well.

He found it difficult to evaluate the GEPF’s 9% year-on-year growth. How did this compare to domestic and global norms? Was 9% growth a significant achievement, given financial volatility and the impact of COVID-19?

Mr Karidza replied that market-observable benchmarks could be used to compare and evaluate the objective performance of pension funds. Page 57 of the annual report sets out the benchmarks, and the GEPF had performed well against the benchmarks.

The Chairperson said that, though he had limited technical expertise in these matters, he wondered whether the GEPF was receiving undue public criticism, given its performance. People expressed concern that the GEPF was subject to government influence and that it was not financially viable. Perhaps such criticism was unfair. The debate was linked to broader ideological and policy matters.

Closing remarks by the Chairperson

The Chairperson said he had a final matter to raise for Members’ consideration, though his political party had not mandated him to raise it. It seemed to him that Parliament, government, and political parties were contributing to the weakening of the state and the fragility of South African democracy. Ultimately, in any democracy, final responsibility rests with the governing party.

Parliament often discussed how it could hold government officials personally responsible for mismanagement. For example, many years ago, a parliamentary committee – probably the Portfolio Committee on Home Affairs – had decided to take action against the Department of Home Affairs after noticing that the Department spent a lot of money, time, and energy on legal battles. A simple wrongful deportation case would be pursued in the highest courts. The Committee had ultimately said that the Department’s Director-General would have to pay out of his own pocket for legal expenses if the Department continued to pursue and lose legal appeals. Courts had also suggested recently that government functionaries should pay from their own pocket if they used public funds to pursue legal challenges that clearly lacked legal merit.

Similarly, he thought it was time to think about whether politicians should not pay from their own pockets if Parliament and government were not functioning properly. Should they not be held personally accountable, just as Members expected government officials to be held personally accountable? Members of Parliament had to “wake up”. The cholera outbreak in Hammanskraal was a “nightmare” and an indictment of the country’s democracy – people were dying because government could not deliver clean water to them. As elected representatives, all Members were responsible for that failure and the current crisis at Eskom. It should not be made a party-political issue, but he thought that Members should consider such matters as the Sixth Parliament drew to a close. When a new Committee was appointed in 2024, Members would have to be tough not only on the executive but also on themselves.

The meeting was adjourned.