Transnet Pension Fund Amendment Bill: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE; LABOUR AND PUBLIC ENTERPRISES SELECT COMMITTEE: JOINT MEETING
24 May 2000
TRANSNET PENSION FUND

SUMMARY
A delegation from Transnet briefed the committee on the current status of the Transnet pension fund and what the future plans were for this fund. Transnet, which had a debt of R27bn as of March 1999, had been able to turn the large deficit in the pension fund, previously as high as R17bn, into a small surplus through the investment strategies it had pursued. This had allowed a transition in the fund to occur from one fund to three active funds, with the main transition being a change in the fund from one operating on a defined benefits scheme to one operating on a defined contributions scheme, although leaving existing members the choice as to whether or not to move over from the one scheme to the other. The proposed Transnet Pension Fund Amendment Bill would make provision for this transition.

MINUTES
The Chairperson, Mr S Belot (ANC) welcomed the delegation from Transnet. He said that the Minister of Public Enterprises, Mr J Radebe, had wanted to be part of the presentation, but that he was currently in the USA with the President. The Chairperson thanked the Director General for making this presentation at this early stage of the process.

Briefing
The Director General, Mr Sivi Gounden, said that he wanted the presentation to be part of an integrated approach. The presentation would begin with an overview of what had occurred up to then with the Transnet Pension Fund followed by an explanation of the way forward as provided for in the proposed Transnet Pension Fund Amendment Bill.

Almost everything within Transnet had up to then, centred around its debt, which was R27bn as of March 1999. An important aspect of this large debt was its large servicing cost. There was an urgent need to find instruments for dealing with and restructuring the company's debt. Two principles would guide the process to find ways of dealing with the debt. Firstly, all options would be investigated including those which involved international partners. Secondly, the pension fund members should not be prejudiced and they should still have a choice of options once the issue had been resolved. After the debt issue had been resolved, Transnet would then finally be in a position to move forward with its core business.

Ms Gloria Serobe, Transnet's Executive Finance Director, presented further on the Transnet Pension Fund. She said that Transnet's overall debt had been its main stumbling block - a large portion of which was due to the pension fund debt. Ordinarily a pension fund debt should not affect the way a company was run, but in Transnet's case circumstances had dictated otherwise.

In 1990 the company's assets were R5bn and its liabilities were R22bn leaving a net debt of R17bn. A bond was therefore issued to the pension fund for R10bn at 16.25% which meant an annual payment of R1.4bn. This move had been very good for the fund but it was in turn very bad for the company. Its gearing was 72.4% which was significantly greater than what was generally acceptable i.e. 50%. However, if the pension fund debt was removed from the equation, then the gearing worked out at approximately 51% which was closer to what was acceptable. As far as the current state of affairs was concerned, the company had been able to turn the large deficit in the pension fund into a small surplus through the investment strategies it had pursued.

The fund was not an optimal fund in that it currently operated on a scheme of defined benefits for its members, as opposed to one of defined contributions, which would be preferable for the company. Transnet needed space to convert fund members from a defined benefit scheme to a defined contribution scheme. There was no problem in applying this conversion to new members, but for existing pensioners, they were fixed on a defined benefits scheme. For the active members of the scheme, there was a choice as to whether or not they wanted to move to a defined contributions scheme or stay on a defined benefits scheme. When referring to the investment strategy that had been pursued, what was key was that they made optimal investments.

The Director General then asked Ms Serobe to address the implications of the debt burden on the state and to explain how the proposed transition was to be addressed in the proposed legislation. He apologised that all the details the committee wanted may not be forthcoming and that the exact figures for the state of affairs today may not be available, but this was due to market sensitivity on this issue.

Ms Serobe said that the company had been obliged to respond in 1990 to the debt of R17bn and to find ways to turn around that debt. The pension fund's debt was that amount which would be its liability if all the employees were to retire at that point in time. This liability was guaranteed by the government and the implication would therefore be that the government would be forced to pay out the pension fund members if the fund itself could not pay them out. However, currently the active liabilities of the fund were R13.2bn, and there were sufficient assets to cover that, which was significant in that the pension fund had been able to turn around its net debt position.

Going forward, they had to investigate how to reduce the guarantees the government was providing to the pension fund members, but since the government was currently guaranteeing it, they had to find ways to ensure that the fund would not revert to a situation of net deficit. To achieve this, a sound strategy was needed for the entire period from now until when the present members currently receiving benefits, stopped drawing benefits, which was estimated at some time around 2050. The investment strategy pursued had to ensure at worst, that the fund never again went into a net deficit, and at best, improved upon the value of the fund and its benefits to the contributors.

A colleague of Ms Serobe's, Mr Denzel Matjila, then spoke to the committee on the objectives of the proposed Transnet Pension Fund Amendment Bill and the way in which the proposed transition in the pension fund would occur.

The pension fund would in future need to make provision for both members contributing according to a defined contributions scheme, in addition to a defined benefits scheme. It would also have to make provision for the second defined benefit fund, which would be the one that existing pensioners would draw from. Finally, it would also have to make further provisions to what existed at present, for the medical aid fund. Throughout this entire legislative process, the Minister would be consulted.

As far as the proposed transition was concerned, it was important to note that there were currently 102 000 pensioners drawing from the fund and only 98 000 members contributing to the fund. There was currently only one fund, which was a defined benefit fund. There would therefore be a transition from this one fund to three active funds:
- a defined benefit fund for those who elected to remain on a defined benefits scheme,
- a defined contributions fund and
- a second defined benefits fund for the existing pensioners.

Discussion
An opposition member of the committee thanked the Transnet delegation for finally giving the committee this long awaited presentation. He asked if it was correct to say that the committee was now at the stage in the legislative process where they should consult legal advisors? [It was not apparent that this question was answered.]

Ms R Taljaard (DP) asked how many people would be moving to the defined contributions scheme compared to the number that would remain on the defined benefits scheme and how were negotiations on this process proceeding?

Ms Serobe replied that it was necessary to look at the reasons why people would move and there were some complicated formulas involved in these decisions. Also, the reasons people chose to move, were different for each sector of workers and each corresponding union. The general direction though, was to move across to the defined contributions scheme. Specific dates had been set, by which Transnet would know exactly what the numbers of people moving, would be.

An opposition member asked how many unions were involved in this process and what were their reactions to the process?

Ms Serobe replied that a pension fund is a particular entity and the trustees of a fund made decisions on that fund. The Transnet pension fund had a large number of trustees due to the company's large size. This represented a necessary evil in the case of the Transnet pension fund. When it had been decided to go the route of defined contributions, that had been agreed to by all the interested parties which in turn meant that there had been extensive consultation, including with the unions. They had been the ones who had defined the pace of the process to some extent.

An ANC member asked whether or not, and to what extent, employees were consulted and if so, what were their views? Had they agreed to these proposals? He expressed concern over the importance of giving people the option to keep the status quo if they so desired. [Ms Serobe did not reply to this question except insofar as she addressed the question of consultation in her answer to the previous question.]

Ms Taljaard (DP) asked how the liabilities would be allocated?

Ms Serobe said that the current liabilities for the active members was R13.2bn but that this figure was exceeded by the current assets.

The Chairperson said that he reiterated the opposition member's comments of appreciation to the Transnet delegation for coming to present to the committee. He said that the committee should agree that the process would go ahead with the normal route of formalisation through Parliament. The committee would not go through the bill clause by clause right then since it would still have that opportunity at a later date. He then closed the meeting.