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Is there a hole in the bucket?

Even if the GEPF extricate themselves from the grip of the PIC, they may still be holding some duds.
The PIC's financial statements are far from transparent, writes Curson. Picture: Moneyweb

With R1.928 trillion of assets under management, the PIC is the largest asset manager in South Africa. It is not only tasked with growing these assets and assuring government pensioners with financial security on retirement, but it also has to support and finance the latest government development plan. It is seen as the ultimate cash cow, and the provider of the last resort.

The PIC may be a government entity, and the members of the pension funds may be government employees, but don’t be misled, the PIC is investing private money. In this regard, the PIC should be above reproach. And its annual financial statements should be transparent. In fact, the PIC annual financial statements should set a benchmark for transparency and financial stability.

R1.691 trillion (87.72%) of the PIC’s funds represent assets managed on behalf of the GEPF. The objectives of a normal pension fund would include growth, capital preservation, and income. Though the GEPF is a defined benefit plan, the payment made to GEPF pensioners is based on a formula. The payments are guaranteed by government. This may be cold comfort in years to come.

Perhaps the perception of financial security flowing from the government guarantee allows for the fuzzy conflicting objectives of the PIC, which include not only generating excess returns over a benchmark, but to also grow the economies of South Africa and the rest of Africa through listed and unlisted investments. And let us not forget the PIC’s commitment to supporting the faltering SOEs, affirmed in the Shareholder’s Report: “The PIC is an institution that plays a vital role in the economy through its investments by supporting the current and future sustainability of financial markets and state-owned entities (SOEs), by financing infrastructure projects and by investing in strategic sectors that have a huge developmental impact on the economy”. It is a pity that the PIC has made no attempt to strong-arm the lagging SOEs by refusing to support bad business decisions, procurement corruption, and irregular expenditure.

With all the accusations and fears of state capture going around, one would have expected the PIC financial statements to have improved on the 2016 disclosure. But no, they are as opaque as ever. The PIC appears to be treading a fine line between obfuscation and bare minimum disclosure. The government pension fund (GEPF) is not legally mandated to invest its pensions with the PIC. It is therefore surprising that the PIC has not gone out of their way to demonstrate their performance, other than benchmarking themselves against a pretty vague internally generated “PIC corporate ESG matrix”.

To elucidate, ESG stands for the “integration of environmental, social and governance issues incorporated into investment processes”. PIC claims to have exceeded its benchmark in most instances. There is a small problem though, the ESG matrix may be of relevance to social and governance issues, but it would be useful to know how the equity investments perform against the All Share Index, and how the bonds perform against the Government Bond Index.

Further useful information would be the investment returns for the past 10, five, three and one year returns.

The PIC also carries a hefty remuneration bill. The 10 non-executive directors cost R6.6 million for attending four board meetings a year, the two executive directors cost R2.8 million, and the 12-member executive committee a further R49 million.

The PIC’s income consists of management fees of R1.1 billion (2016 – R1.0 billion). Full disclosure should be given on what the management fees are based on.

Note 6 of the financial statements sets out the classes of bonds acquired, but no details are provided. Due to the sensitivity around the PIC’s investments, full disclosure is required. It appears that secure bonds were sold to invest in more risky bonds. One can only assume that these riskier bonds carry a higher yield. But is the higher yield worth the risk? Or is the PIC required to take up bonds issued by SOEs when there are no ready buyers?

The change in bond holdings is shown below:

Source: PIC financial statements

Cash and cash equivalents has reduced from R609.5 million in 2016 to R403.2 million in 2017. However, an amount of R56.6 million has been moved to an entity with a BBB- credit rating. It would be of concern if this is a portent of things to come.

The PIC takes credit for growing the asset base from R598 billion in 2006 to R1.928 trillion in 2017. But how much of this is “walk in the door” cash, from pension contributions over a decade, and how much of this represents real growth?

Source: PIC financial statements

PIC haphazardly invests in many well-meaning projects. But there is no disclosure as to the return made on these investments, or those investments which are impaired. Nor of mistakes that have been made, nor of investments that have gone belly up.

The PIC disclosed basic information on its Unlisted Investment portfolio to the Standing Committee on Finance (SCOF), but there is no information about returns and impairments.

The PIC is audited by the Auditor-General in terms of the PFMA and the Auditor-General Act. With no disrespect to the Auditor-General, one would have expected an entity with such a large base of assets under its control to have appointed another firm of external auditors.

International Financial Reporting Standards require disclosure of events that occur after the reporting period and before the release of the annual report such as a material change in investments. Surprisingly, none have been reported.

The Auditor-General declared that “an engagement in terms of ISAE 3402 in respect of the asset under management was conducted by a private auditing firm. The engagement was only finalised after financial year-end and the report was communicated to management accordingly”. An ISAE 3402 is a report on the controls. One would assume that the report had no material bearing on the financial statements.

Recently minister Gigaba called on the PIC to disclose details of all PIC transactions for the past three years. But this would not be of much use in evaluationg the PIC’s performance as an asset manager, or whether the government pensioners’ funds are secure. But perhaps that is not the point?

The PIC has a long way to go to improve disclosure by providing for example:

  1. The actuarial present value of future pension payments.
  2. Assurance as to whether assets have been set aside or earmarked to secure the future pension payments.
  3. The amount received from the GEPF/other pension funds in regard to pension contributions, and the amount payable to the GEPF/pension funds. Or are the pension funds having to rely on funding retirement benefits out of current pension contributions?
  4. Details of the size of portfolio allocated to the various external asset managers, and what was the return per asset manager?
  5. Details should be given of direct loans, interest charged (or not), and impairments.

The Public Servants’ Association (PSA), with some 230 000 members, is concerned that the PIC is using their pension money to bail out failed SOEs. A small practical problem, the PIC ensures that many assets are directly owned by the GEPF. Even if the GEPF extricate themselves from the grip of the PIC, they may still be holding some duds.

As a comparison, I studied the annual financial statements of one of the largest privately-owned asset managers in the country to gain an understanding of the proper accounting disclosure of investment funds. The two reports are worlds apart. But then, the privately-owned asset manager has to sing for its supper.

Read more from Barbara Curson:

Falsehood, gossip, libel, rumour, slander

Is the sugar tax coating underlying systemic problems?

SAA spiralling out of control

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While investigators and the public look in one direction for the theft of funds, in another area the looting goes on unabated

Hmmm…a “hole in the bucket” you say…

Twenty or so years from now, South Africans will fondly reflect back to the “good old days” (circa 2017) when they will ask themselves “Remember the days we still had a bucket?”


Agreed. That whole bucket, with it’s hole will be stolen, piece by piece, little by little, precisely through the likes of R165 000 payments made to 10 members to attend QGM’s…. and when it is all gone through unmitigated fraud this circus will move on to the next offering.

Thank you for a very interesting (and alarming) article.

End of comments.




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