Minister Gordhan must investigate government pension reserves 

The Government Employee Pension Fund (GEPF) can only afford to hold 5.9% of its recommended contingency reserves the Chairman of the fund, Arthur Moloto, has revealed (see below). The 5.9% holding is a significant decrease from the 19% of the desired level for the contingency reserve as reported in the GEPF annual report at 31 March 2012 and indicates that the GEPF is failing to turn the situation around.

As the fund entrusted with the retirement savings of 1.2 million public servants and 360,000 pensioners the GEPF has a responsibility to ensure that it is at all times able to meet its liabilities and pay out the defined benefits owed to pensioners. The low level of its contingency reserves poses a serious threat to the fund and leaves pensioners exposed to undue levels of risk of unforeseen losses. 

I will today write to the Minister of Finance, Pravin Gordhan, urging him to launch an investigation into the GEPF contingency reserves. 

Following Mr Moloto's revelation I had written to the Chairman of Parliament's Finance Committee, Mr Thaba Mufamadi, asking him to call Mr Moloto to appear before Parliament to provide details regarding the fund's plans to build up its contingence reserves to the recommended levels. This request has been ignored by Mr Mufamadi. I now have no choice but to write to Minister Gordhan in this regard. 

Minister Gordon must now launch an investigation to establish what the exact current level of the GEPF's contingency reserve is, and what the fund is doing to ensure that the desired levels are achieved. 

I trust Minister Gordhan will appreciate the urgency of the matter and grant my request. Any resulting report should be tabled in Parliament for scrutiny as soon as it is practical to do so. 

Text of the letter from Arthur Moloto, Chairperson of the Government Employee Pension Fund (GEPF) Board, to Democratic Alliance Shadow Minister of Finance, David Ross MP, May 2 2013

Dear Sir,

RE: BENEFIT GUARANTEES FOR PENSIONERS

Your letter "Benefit guarantees for pensioners" dated 28 April 2013 refers. On behalf of the Board of Trustees, I would like to thank you for writing to us with regard to the management of GEPF and whether or not we have been correctly exercising our fiduciary duties as Trustees entrusted with the retirement savings of 1.2 million public servants and 360 000 pensioners.

I would like to assure you and the Democratic Alliance that we take our responsibility as Trustees very seriously in ensuring that the Fund is managed prudently and in the best interest of our members and pensioners. With regard to your questions, please find below our responses:

Prudent management of the Fund

The prudent management of the Fund has been self-evident over the past few years. Not only did we grow the assets under management from around R600bn in the wake of the 2008 financial crisis to the current R1.2 trillion (as at the end of February 2013), but our actuarial valuators have also recently declared the Fund to be 100% funded, bucking the trend of most pension funds in the Eurozone and elsewhere in the world.

Benefit guarantees

GEPF is governed by the Government Employees Pension Law (GEP Law) and the Government Employees Pension Fund (GEPF) Rules. Other than the Fund being a defined benefit scheme in the generic sense, there are various explicit sections in the GEP Law that ensure that current benefits are guaranteed and protected.

Section 17(4) of the GEP Law states that "if any action taken by the employer or if any legislation adopted by

Parliament places any additional liability on the Fund, the employer or the Government or both shall pay to the Fund an amount which is required to meet such obligation." This implies that the Fund has the right to claim the relevant amounts that result from employer and/or Government taking various actions that negatively impact on the financial position of the Fund.

Section 18 of the GEP Law states that should the Fund be underfunded - that is assets smaller than accrued liabilities - no arrangement to restore the funding level will be lawful if it adversely affects benefits unless it has been agreed to after negotiations with the employee organisations admitted to the Public Service Coordinating Bargain Council (PSCBC) . This implies that Trustees have no legal right to reduce benefits unless pensioners and the employee organisations representing the interests of members have been consulted first.

A proactive practice adopted by the Board of Trustees is to inform and consult the PSCBC about any rule amendments relating to benefit changes. Further to this, the Fund keeps the Minister of Finance informed well in advance of any events that may adversely impact on the funding level and thus require future additional contributions to the Fund, for example, the impact of salary increases in the civil service.

The Board of Trustees also signed the Funding Policy on 24 August 2006, the purpose of which was to manage the Funding Level in order to facilitate, amongst others, the securing of benefits. This policy sets the framework for managing the financial position so as to satisfy the Government's commitment to its employees in terms of the GEP Law. As per the policy, the Board of Trustees strives to maintain a funding position such that the assets of the Fund are at least 100% of the liabilities, including any contingency reserves. This is called the long term funding level.

The minimum funding level is a case where the assets of the fund are compared to the accrued liabilities, excluding contingency reserves. The biggest portion of the contingency reserves is the solvency reserve, which serves as a cushion against any unexpected volatility in the markets impacting on the investments of the Fund

A recent example is the 2008 financial crisis. The decision by the Board to set up such a solvency reserve was a strong sign of prudency in managing the financial position of the Fund. This is clear in that the solvency reserve served its purpose during the financial crisis, which was to act as a cushion to protect member and pensioner benefits. As at 31 March 2012, the Fund's assets are over 100% of the liabilities (mainly consisting of accrued benefits) excluding any contingency reserves. This will be reflected in the 2012/2013 financial statements which will be tabled in Parliament later this year. As a result of the 2008 financial crisis, the Fund can only afford to hold 5.9% of the recommended contingency reserves. The Fund is currently investigating ways to build up the current reserves to recommend levels.

Benefits are protected against inflation

GEPF follows a liability-driven investment approach to determine how assets are allocated per asset class. This ensures that assets of the Fund are invested in a manner which is consistent with the liability structure of the Fund. Whilst GEPF is one of the largest holders of government inflation-linked bonds for the purpose of mitigating the adverse effects of inflation, the Fund also invests in growth assets such as equities and property, which outperform inflation over time, therefore allowing for inflation related pension increases.

Future pension increases given the reserves of the Fund

The Government's commitment to guarantee benefits means that benefits are guaranteed at their current level, as per the GEPF Rules including any approved rule amendments. This implies that future pension increases are not part of the guarantee as long as the Minister of Finance has not been notified. In terms of Section 25 of the GEP Law, the level of future pension increases is dependent on the financial constraints of the Fund. However, once a pension increase is approved, it is then guaranteed. The Board strives to give pensioners pension increases that are at least 100% of inflation. This is reflected in the Pension Increase Policy of the Fund as well as the following initiatives by the Board:

1.   The Board has set up a pension increase reserve as part of the contingency reserves in order to enable the Board the award 100% of inflation.

2.   The Board approved implicit assumptions in the valuations and the asset liability modeling of the Fund which allow for pension increases of at least 80% of inflation including a 5% catch up increase.

The above initiatives have allowed the Board to award increases that are over 100% of inflation in the last few years as per the table below:

As we know one of the key influences of the financial position of the Fund and thus the ability to award good future pension increases is the investment returns earned on the Fund's investments. The Fund has an Investment Policy Statement which is based on a robust asset liability modeling exercise. Assuming no further systematic downturn in the markets, through this the Fund will have the maximum chance that investment returns on its assets are at least above those required to ensure that benefits as per the GEPF Rules are secured and future pension increases are at least 75% of inflation, in line with the Fund's Pension Increase Policy.

GEPF's property investments and sustainability practices

One of the strategic objectives set by the Board of Trustees is for GEPF to be a leader in responsible investing. The Fund's Responsible Investment (RI) Policy outlines GEPF's commitment to integrate environmental, social and governance (ESG) issues within the Fund's investment decisions and ownership practices. GEPF recognizes that ESG issues may have a detrimental impact on the Fund's portfolio value over the long-term. The RI Policy applies across all asset classes, including the Fund's property portfolio, which includes directly held properties within the property portfolio via PIC Properties and listed and unlisted property companies and property funds.

Reflecting GEPF's commitment to the sustainability of its investment portfolio, specifically when it comes to GEPF's property portfolio and property-specific investment decisions involves focusing on how the Fund can derive better long-term risk adjusted returns by integrating material ESG factors when considering property investments. The Fund's property investment portfolio currently includes South African property funds and directly owned South African property, including office buildings, retail centers and other real estate assets. GEPF's strategic asset allocation allows for 5-7% of GEPF's total investment portfolio to be invested in properties. As at March 2013, 4.77% (R59.99bn) of the Fund's assets under management were allocated to the property portfolio.

Through its support of the Global Real Estate Sustainability Benchmark (GRESB), GEPF will for the first time have access to an internationally agreed transparent and comparable measure of the environmental and social performance of GEPF's real estate investments, both listed and unlisted property funds, in order to make informed investment decisions with regards to GEPF's property portfolio.

Afrisam investment

GEPF, through its investment manager, the Public Investment Corporation, is on a constant search for lucrative investment opportunities that match our risk appetite and liabilities. These opportunities are present in both the listed and unlisted spaces. Importantly, all South Africans regardless of background, political or religious persuasion are welcome to approach us if they believe they have a compelling investment opportunity in which we can participate for the benefit of our members and pensioners in the long term. In brief, the latter is what informed our participation in the Afrisam transaction in 2008 when the construction sector was experiencing a boom, partly as a result of the construction of the 2010 World Cup stadia and generally, on buoyant investor sentiment globally.

Consequently, the Fund invested a total of R6.1bn in debt, equity and preferential share - in a transaction where a BEE Consortium acquired a majority stake in what was then known as the AfriSam Consortium. As part of the transaction, the Afrisam Consortium had to raise substantial debt in the European market to fund the acquisition and to facilitate the exit of Holcim and Aveng. Due to poor market conditions, exacerbated by the 2008 financial crisis, it became impossible for AfriSam to meet its debt obligations and continue to operate on a sustainable footing. AfriSam therefore had to be restructured to enable it to continue operating and settle its debt.

As part of the settlement, the following took place:

- GEPF's original 2008 investment has effectively been converted into a new equity position in AfriSam's new holding company (Opiconcivia 230). This resulted in GEPF holding 62% equity in Opiconcivia 230 which is subject to a 5% dilution during the implementation of the following phases of the restructuring process, at no value. (For more on this, please find attached the 2011/2012 Annual Report, pg31-34).

Parastatal bond holdings (Sanral, Eskom, etc.)

GEPF's bond portfolio is one of the best performing asset classes delivering an impressive 17% for the 12-months to February 2013, underscoring the diversification and inflation-beating qualities of this asset class in our investment strategy. The bond portfolio includes investments in government inflation-linked bonds, international bonds and parastatals such as Sanral, Eskom and others. The returns from these investments enable us to offer our pensioners inflation-related pension increases without compromising the financial position of the Fund.

Prescribed assets

In terms of prescribed assets and other related issues, in 2009 GEPF conducted research among its own stakeholders and there was a consensus view that due to its size, the Fund must play a bigger role in the SA economy. This led to the launch of the Developmental Investment Policy in 2011, committing the Fund to invest 5% of its assets under management in infrastructural projects that will deliver excellent commercial returns while contributing to economic growth and making positive social impacts on the broader society.

We did not wait for government to legislate on where to invest our members' and pensioners' retirement savings. Our own research, backed by international research, has indicated that carefully selected infrastructural projects have potential to deliver returns which are not correlated with the volatility of the financial markets in the long term.

I hope you will find the above in order. As GEPF, we welcome constructive engagement with all our stakeholders.

Yours sincerely

Signed

Arthur Moloto

Chairperson: Board of Trustees

Issued by David Ross MP, DA Shadow Deputy Minister of Finance, August 5 2013

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