SADC Finance & Investment Protocol: briefing by Business Unity & Approval; Government Employee Pension Fund Annual Report

Meeting report

FINANCE PORTFOLIO COMMITTEE
20 November 2007
SADC FINANCE AND INVESTMENT PROTOCOL: BRIEFING BY BUSINESS UNITY & APPROVAL; GOVERNMENT EMPLOYEE PENSION FUND ANNUAL REPORT 2006/7: BRIEFING

Chairperson: Mr N Nene (ANC)

Documents handed out
Government Employee Pension Fund Annual Report 2006/07
Business Parliamentary Office submission
Business Unity South Africa submission
Declaration and Treaty of SADC

Audio recording of meeting

SUMMARY
Business Unity briefed the Committee on its concerns around the Southern African Development Community Finance and Investment Protocol. The general objectives of the Protocol were supported. It however was concerned that there should be focus on developing the underlying infrastructure, which in turn would give rise to investment flows. Fiscal and monetary policy convergence was seen as premature. There was a need for adequately resourced authorities for cooperation on taxation. The objective of co-operation and co-ordination on exchange control policies was seen as too difficult, given that countries had widely differing monetary policy preferences. It was important to develop a solid framework between central banks on payment, clearing and settlement systems. However, they felt that smaller countries might need to be assisted. There was also a need to support and develop small, micro and medium enterprises, as had been shown in the Far East and Asia. Business Unity cautioned that there should not be duplication and fragmentation, and encouraged that South African business be consulted. Members asked if Business Unity was involved in development initiatives, and whether there were plans to reinforce the capacity problems on trade. National Treasury gave some preliminary responses and said it would revert with official feedback. Members resolved to approve the Protocol.

The Government Employees Pension Fund briefed the Committee on its Annual Report and performance. It had about 1.14 million contributing members and 304 000 pensioners. It was a self-administered, defined benefit fund, which used a government owned Public Investment Corporation to manage its investments, while it administered the medical subsidy, injury claims, the non statutory forces and special pension projects. The investment policy was described, including the fact that black economic empowerment was included in the policy. Challenges included the institutional reorganisation, which related to the separation of administration and asset management of the fund, the need for legislative reform, skills retention, shareholder activism, legacy of processes and systems, the need for pro-active risk management, and improving exit turnaround times. Members asked questions whether the Fund had a solvency reserve plan, questioned the internal audit outsourcing, and asked whether the Fund was covered by the Public Finance Management Act and audited by the Auditor General. Further questions related to the risk committee and management of fund assets, the quality of service, how it communicated with members, its transparency, the representation of women on the Board, youth empowerment programmes, unclaimed benefits, the sale of shares at a discounted price, the nature of the business risks, and the need for amending legislation to ensure alignment with other public funded institutions.

MINUTES
Southern African Development Community (SADC) Finance and Investment Protocol: Business Unity Comments
Mr Waheed Patel, spokesperson for Business Unity South Africa (BUSA), indicated that organised business supported the overall objective of the Protocol but would like to raise specific issues on it.

In regard to the creation of a favourable investment climate within SADC, with the aim of promoting and attracting investment in the SADC region, Mr Patel noted that this was a commendable objective. However, SADC should focus on developing the underlying infrastructure and the institutions that created a globally competitive region, and investment flows would be automatic.

He noted that the fiscal and monetary policy convergence would appear to be premature, given lack of progress on trade policy issues.

In regard to co-operation in respect of taxation and related matters within the SADC region, he noted that there was general support. However, he noted that it should be implemented by adequately resourced authorities.

In regard to the objective of co-operation and co-ordination amongst state parties in collaboration with Central Banks on exchange control policies, Mr Patel said that this was a particularly difficult objective. Countries had different and often conflicting exchange rate management policies. For instance, some countries might prefer to stimulate the economy via the exchange rate, whilst others were against the principle of floating their currencies. Countries had different monetary policy preferences. For instance South Africa’s inflation targeting regime was not widely practiced in the region.

Establishing a framework for co-operation and co-ordination between or amongst Central Banks on payments, clearing and settlement system would be useful for intra-regional economic flows. The development of a solid framework was important for eliminating systematic risk within regional payment systems and eliminating contagion in the case of a bank run in smaller economies.

Mr Patel said that co-operating on bank supervision amongst Central Banks was necessary. However, it was important that smaller countries be assisted in developing internal systems prior to the convergence of bank supervision.

Mr Patel noted that the implementation of the SADC Finance and Investment Protocol must take into account, and lend itself to, advancing development and support for Small, Micro and Medium Enterprises (SMMEs) across the continent. Successful economic regions, such as those in the Far East and Asia, had demonstrated the importance of a strong small business sector as backbone of regional economic expansion. In many instances, an enabling regulatory environment and access to financial markets had been the path-breaker for achieving long-term success.

In relation to development finance, he noted that Africa was currently experiencing major financial transitions that required urgent mechanism and intervention. Development finance and foreign direct investment (FDI) would continue to play a meaningful role in the foreseeable future in the regional development. Business welcomed the provision contained in the protocol for the establishment of an SADC development finance institutions network, as well as measures to strengthen capacity building and collaboration in the DFI sector across the region.

Organised business concluded that there could be little argument about the need to harmonise finance and investment policies within the SADC region and broader global context. Southern Africa could not afford to squander its limited resources through duplication and fragmentation. This would not be an easy task, and unity of purpose at every level, both public and private, was required to overcome and resolve the challenges that existed and to share, on a sustainable basis, the benefits that could be realised. This task would undoubtedly be greatly enhanced by the involvement of South Africa and the participation of South African organised business in providing a perspective to the integration initiative. Although this was often lacking in the more political proposals, such involvement could also be mutually reinforcing and supportive.

Discussion
Mr B Mnguni (ANC) sought clarity whether Business Unity South Africa (BUSA) was involved in economic development initiatives in the SADC region.

Mr. Patel indicated that BUSA had a strong business interest in the region and South Africa has the longest-existing Chamber movement in comparison to other countries in the region. BUSA used this experience to share knowledge on challenges of transformation and the role of the chamber movement in building a vibrant economy. BUSA was a member of the SADC employer group involved in economic development initiatives and most of the BUSA involvements in the region were institutionally- driven. At a firm level, members were involved in economic development through job creation initiatives.

Ms N Mokoto (ANC) enquired whether the organised business had any plans to reinforce the capacity problems in the regions related to trade issues.

Mr. Patel indicated that the rectification of the protocol would provide a space for engagement on the issues of lack of capacity across the national boundaries. The immediate issue for BUSA once the protocol was signed by other regional countries would be the strengthening of the SADC secretariat so that there was a balance of responsibility, implementation and monitoring. This would ensure that the lack of capacity did not undermine the noble objective of the protocol. This protocol would facilitate dialogue between public and private sectors and the market response to such changes should be taken advantage of.

A representative from National Treasury gave some insight to the Committee on the thinking of Treasury but noted that this was not an official response.

The Chairperson urged National Treasury to respond as soon as possible to issues raised by BUSA to prevent misinterpretation of the protocol.

The Committee unanimously approved the Southern Africa Development Community Finance and Investment Protocol.

Government Employee Pension Fund: Annual Report Briefing presentation
Mr Martin Kuscus, Chairperson, Government Employees Pension Fund, indicated that the GEPF had approximately 1,14 million contributing members and 303 977 pensioners. Members contributed at 7.5% of pensionable salary .The employer would contribute 13% for civil servants and 16% for uniformed service employees. GEPF was currently a self-administered, defined benefit pension fund. The GEPF’s core functions included member admissions, contribution collections, members roll maintenance, withdrawals (exits), benefit and annuity (pension) payments, and investment of all the Fund’s assets to match future liabilities.

The Government-owned Public Investment Corporation (PIC) was mandated by the Board to manage the investments of the GEPF, and the Fund made up approximately 92,3% of the total investments under the administration of the PIC.GEPF administered a medical subsidy for pensioners, injury on duty, non statutory forces and special pension projects on behalf of National Treasury’s Programme 8.

The investment policy was described as using diversified portfolios with strategic asset allocation to maintain a long term funding level of 100%, and minimise fluctuations in the employer contribution rate. It would be promoting economic well-being in Africa in general. The development of capacity and intellectual capital of the investment management industry in South Africa was furthered by allocating a portion of the portfolio for management by licensed investment operators who were black owned or managed. The investment policy must be directed in a manner that did not cause undue market impact either on registered exchanges or at a macro-economic level.

Significant achievements included the awarding of a pension that fully compensated all pensioners for inflation adjustments since retirement. GEPF committed US$250 million into Africa through the Pan African Infrastructure Development Fund and the fund had agreed a Pension Increase and Funding Level Policy with the Minister of Finance. It concluded a comprehensive investment mandate with the PIC, which outlined risk and return parameters, and optimised portfolio construction methodology, independent investment monitoring and investment administration, independent custody appointments and a clear shareholder engagement policy.

Some of the challenges identified were the institutional reorganisation, which related to the separation of administration and asset management of the fund, while other challenges related to legislative reform, skills retention shareholder activism, legacy processes and systems, relationship management and client service, pro-active risk management, exit turnaround times and timeous submission of documentation by members.

Discussion
Mr K Moloto (ANC) sought clarification on whether GEPF had a solvency reserve plan and whether it did determine the institutional liabilities. In addition, he noted that the internal audit had been outsourced, which affected the GEPF’s ability to understand its risk. He asked the rationale for this. In addition, he sought clarification on the reasons that the board of trustees did not attend training, so that they could make a meaningful contribution in strategically managing the fund.

Mr K Green, Actuarial Services, GEPF, indicated that the actuarial evaluation was conducted in 2004 and would be repeated every three years. The next evaluation would be undertaken before the end of 2007, and so there was not yet an indication of a solvency plan. The figures contained in the report were based on the 2004 data. The level of solvency was determined by 0% to 24%, which was regarded as a fully funded position. If it was above 24%, then there were no insolvency problems. The Fund had generated a remarkable increase in equitable share, as such increasing the solvency reserve of the Fund, creating a buffer for market volatility through a risk budget process. The challenge that the Fund had experienced was that most of the board members were not available to attend training. He could assure the Committee that the Board of trustees was a diligent team fully acquainted with their responsibility.

Mr S Asiya (ANC) sought the views of the management on their accounting systems, whether it was subject to the Public Finance Management Act (PMFA) and whether the Fund was audited by the Auditor General.

Mr Kuscus noted that it was not audited by the Auditor General because there was a separate law that governed pension funds, which indicated that the Fund could use any auditing firms’ services. The Act did not compel the fund to use the Auditor General, nor to comply with PFMA financial governance rules. The GEPF had therefore used the services of a private company or independent auditing firm. The Fund was also not regulated by the Financial Services Board, because of its legislation.

Mr B Mnguni (ANC) asked whether the Fund had a risk committee. He also asked the rationale for mandating PIC to manage the fund assets.

Mr Kuscus indicated that the Fund had originally been using the services of Deloitte Touche on risk management issues, which included the enterprise risk, but they had subsequently terminated the contractual agreement due to the fact that Deloitte Touche was also the auditor for PIC. This raised issues of conflict of interest. The Board had recently approved that the Fund use PriceWaterhouseCooper auditing services for external auditing. In addition, the risk management aspect of the report was reflected under the finance committee.

Mr M Johnson (ANC) enquired what constituted the GEPF, and whether the Fund had internal feedback systems to check the quality of service provided to clients. He sought more information on the mechanism of communicating with members, and the strategy applied to discriminatory acts.

Mr Kuscus indicated that the GEPF included all government employees at national and provincial government, but excluded local government. The Fund has recognised that it was not accessible to members and the call centres had been inundated with minor enquiries, while the volume of visiting members had also increased. The future plan was to open up offices in remote areas to ensure accessibility and increase the availability of member booklets.

Ms Mokoto sought the views of the management on the extent that they would regard the Fund to be transparent, and asked whether members knew the value of their pension funds. She also sought more information on the representation of women in the Board and the youth empowerment programme or learnership programme to fast track skills development.

Mr Kuscus indicated that in regard to youth learnership, the Fund had inherited a dysfunctional system, which never planned for such programmes or activities. However, the Board had now approved an integration of learnership programmes in the activities of the Fund. In addition he also indicated that the Fund had signed United Nations (UN) principles of Responsible Investment, which included social transformation, governance and environmental sustainability. In regard to the value of the pensions, members could calculate their benefits through an internet GEPF- installed calculator. Most of the benefits were defined benefits, meaning there were no fluctuations. Since the new Board had taken office, there were never contesting differences that necessitated the Chairperson calling for a vote and there were no sectarian interest that hade emerged, and that was how the Board measured its transparency. The women’s representation was beyond the Fund or the Board, as it was up to the organisations that were represented on the Board to ensure gender balance.

Ms J Fubbs (ANC) sought more information on the unclaimed benefits and the mechanisms used to track the beneficiaries.

Mr Kuscus indicated that it was a serious challenge to trace the beneficiaries and the Fund had not been effective in tracing some. The unclaimed funds were calculated as part of the revenue but they were deposited in a separate account.

Mr Moloto sought a clarification on the sale of Black Ginger shares at a discounted price instead of prime price, saying because it does not make a business sense, unless the sale was meant to drive economic transformation.

Mr Kuscus indicated that the objective of selling the shares at a discounted rate was purely an economic transformation agenda. The Fund inherited a contractual obligation of ensuring that the shares were sold at a discounted rate to a Black Economic Empowerment (BEE) company, hence could not sell the share at prime rate or another price. However, the Fund earned R1.1 billion from just warehousing the shares while the BEE company was still raising the funds, because the share value increased within a period of three months.

Mr Mnguni sought clarification on whether the absence of internal audit function did not expose the Fund to fraud, and on the nature of the business risks.

Mr Kuscus indicated that the Fund had appointed PriceWaterhouseCooper to undertake the external audit, and simultaneously the Fund was currently head hunting an internal audit manager who would manage a business unit that would be responsible for the internal audit, to prevent fraud and other maladministration practices.

Mr Asiya proposed, as the way forward and to address the financial accountability of the Fund, that the Portfolio Committee on Finance should indicate to the National Treasury the discrepancies linked to the reporting of the Fund, so that the Pension Fund Act could be revised to ensure alignment with other public funded institutions.

Mr Kuscus noted that the Fund endorsed these views and believed that legislative reform should be expedited.

The Chairperson requested any Members who had specific cases of delays in pension pay out from their constituency to hand over the appropriate information to the GEPF team to follow up.

The meeting was adjourned.