The Government Employees Pension Fund (GEPF) is established in terms of the Government Employee’s Pension Law, 1996, and its assets are managed by the Public Investment Corporation (PIC). The PIC is registered with the FSB and audited by the Auditor-General. The Fund is audited by Deloitte & Touche and Nexia SAB&T.
The board of trustees, responsible for the overall governance of the fund, is headed by Dr Renosi Mokate. The board agreed that the GEPF will focus on the following five strategic objectives for the 2017/18 financial year:
· Improve benefits administration;
· Improve member and beneficiary communication and education;
· Improve investment monitoring;
· Risk management architecture; and
· Improve stakeholder relations.
The sixth objective should be to make the financial statements more transparent. No details are provided of direct loans to unlisted entities of R12.2 billion (2016 – R9.6 billion), and no details are provided of equity investments in unlisted entities of R11.1 billion (2016 – R10,0 billion). Nor have any details been provided of the investment debtors of R2.7 billion (2016 – R1.4 billion) which are included under Accounts Receivable (note 5 to the AFS).
Recently, on being questioned by members of parliament as to whether the GEPF is vulnerable to state capture, Dr Mokate was accused of evading the questions.
As at March 2017 the number of active members of the Fund were 1 269 948 (2016 – R1 273 784), and pensioners and beneficiaries amounted to 423 130 (2016 – 437 051).
Much lip service is given to the assurance that the GEPF payments to beneficiaries are guaranteed by the government. Taking into account existing government guarantees given to state-owned entities, South Africa’s low growth rate, failure to stimulate the economy, the looming final downgrade, the rising government debt and the exceedingly high interest rates on government bonds, these guarantees may in time be hoist by their own petard.
The actuarial present value of promised retirement and other benefits in respect of contributing members is R1.0 trillion. The fund valuator, Howard Buck, is satisfied that the net assets available for benefits of R1.6 trillion is sufficient to meet the future liabilities of the fund.
I do question however whether this value has not been eroded by unsound investments?
The GEPF holds R85.9 billion of Eskom bills and bonds (2016 – R76.5 billion). This represents 16.2% of local bills and bonds (2016 – 14.5%). An additional R9.4 billion was invested in Eskom bills and bonds in 2017. These bonds are guaranteed by government. Eskom is faced with mounting problems, and one wonders if there is a risk of the GEPF having to increase its bond exposure to Eskom?
The GEPF has invested R46 billion (2016 – R41 billion) in unlisted entities and R40 billion (2016 – R22.1 billion) in direct loans to unlisted entities.
The GEPF’s investment strategy uses a “liability-driven benefit approach, based on asset liability modelling”. Asset liability modelling is an approach to examining investment risks to be able to set informed policies for asset allocation and the funding the future payments of defined benefits. Recently, the PIC had to submit details of the investments in unlisted investments to parliament, contained in the Isibaya Investment Schedule as at March 31 2017. The Isibaya Fund is a division of the PIC, which provides finance for projects that support long-term economic, social, and environmental goals for South Africa. R1.691 trillion (87.72%) of the PIC’s funds represent assets managed on behalf of the GEPF. Hence, one can assume that 87.72% of the Isibaya Fund would belong to the GEPF.
It is also to be noted that “investments” include direct loans. One doesn’t require a complex strategy to understand that an investment is a process of investing money for profit, and the higher the risk, the higher the profit. This begs the question, should a pension fund be investing in loans to unlisted companies?
The Isibaya Investment Schedule is confusing in that debt has been revalued at a “market value”. To my mind, the only “increase in market value” can be attributable to interest owing on the debt. One would assume that unpaid interest has not been included in the total value of the fund.
Below are listed certain investments identified in the Isibaya Investment Schedule. The GEPF should provide further details of the performance (including whether any dividends or interest has actually been paid) of these investments, and whether the current impairment provision of R995 million should not be increased.
|Daybreak Farms||1 218 425 412||-45.4%||Laggard|
|Ecobank (equity)||1 033 750 000||-19.85%||Laggard|
|Educor (equity and debt)||411 650 000||-15.24%||Limited|
|Entabeni (equity)||83 210 000||-0.74%||Limited|
|Ethos Fund VI Partnership (indirect equity)||379 286 621||-0.30%||Limited|
|HIFSA (indirect equity)||755 102 948||0.92%||Limited|
|Just veggies (debt)||73 799 985||-4.71%||Laggard|
|Kansai Plastics (equity)||364 685 180||-14,25%||Limited|
|Kiaat Private Hospital (debt)||145 307 751||-5,35%||Laggard|
|Kleoss Fund 1 (indirect equity)||285 975 126||-8.68%||Laggard|
|LA Crushers (equity and debt)||143 962 566||-10.01%||Laggard|
|Lona Citrus Group (equity and debt)||261 489 891||2.28%||Laggard|
|Modderfontein Private Hospital (equity and debt)||441 179 365||2.63%||Laggard|
|PFN Holdings (debt)||289 794 582||-10.91%||Laggard|
|Project Prop (debt)||85 000 000||-2.74%||Laggard|
|Project Sierra – Lancaster 101 (debt)||9 400 000 000||0%||Limited|
|RTT Holdings (equity and debt)||377 515 733||-20.02%||Limited|
|SA Infrastructure Fund (debt and equity)||2 164 365 087||-71.81%||Limited|
|Zamalwindi (debt)||57 000 000||-1.35%||Laggard|
|17 971 500 247|
The internal rate of return (IRR) has been taken from the Isibaya schedule. The ESG score measures environmental, social, governance performance.
The GEPF should provide more clarity on the following matters in question:
1. Where the market value of a debtor’s loan is revalued, does the difference represent interest not paid?
2. If not, on what basis can a debtor’s loan be revalued?
3. Does the GEPF insist on security on loans granted to entities, individuals and funds?
4. What valuation methodology is used to value an equity investment in an unlisted entity?
5. Short-term investments, included under cash and cash-equivalents (note 7 to the AFS), are R27.7 billion (2016 – R7.5 billion). There is no breakdown of this material amount, other than “money-market instruments of three months or less are classified as cash and cash-equivalents”. Does this amount include maturing bonds in state-owned entities (SOEs) or short-term loans granted to unlisted entities?
The external auditors as well as the valuator have given the GEPF a clean bill of health. Nonetheless, I am still of the view that the current investments should be scrutinised through a magnifying glass, and that future investment decisions should be more transparent.