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SA retirement funds at a tipping point

Rarely has the savings industry faced such an uncertain future. Politics and Covid are a toxic mix.
Image: Shutterstock

SA retirement funds are at a tipping point. They’re at the mercy of two major imponderables: country risk and Covid risk. Hardly could they have conflated at a more unsettling moment. The outcomes are neither reasonably predictable – for upward or downward tips – nor practically controllable.

What’s to be done? Sit tight and pray.

Known unknown 1

Country risk, long in the aggravation, reaches its apex with imminent sequels to the Zondo commission of inquiry into state capture. At best, the bad guys identified at Zondo are arrested, charged, convicted and dispossessed.

It’s the essential catalyst to trigger business and investment confidence. Bluntly, in a protracted course of varying intensity, it’s the difference between upholding and shredding the Constitution.

At worst, in the mobilization of dark forces against him, Cyril Ramaphosa doesn’t see out this year in the presidency. The circumstances of his departure are as much a subject for speculation as the identification and credentials of his successor. Coming atop a bleak economy, where record numbers of unemployed people depend for their livelihoods on relief measures that cannot be extended indefinitely, such negatives are daunting.

Typically, markets factor the best and the worst. For defence against the worst, there’s a surge in promoting (and profiting from) increased levels of offshore investment. At the presidential summit on infrastructure investment last June, for example, one asset manager proposed the introduction of prescribed assets (to fund infrastructure investment) in exchange for a higher level of allowable offshore investment.

It was for Ramaphosa to differentiate between proposals motivated by national interest as opposed to self-interest. While offshore gathers favour, to judge by the noise, it’s not necessarily a one-way street.

For one thing, the extent of offshore exposure is effectively higher than the 30% ceiling allowed under Regulation 28 of the Pension Funds Act. This is because of the large-cap rand hedges, listed on the JSE, which are outside the 30% (a prudential guideline for portfolio diversification, not to be confused with exchange controls).

Second, a reallocation to offshore investments will reduce the availability of resources for infrastructure investments. As the latter is required for SA economic growth and social stability, there’s no domestic benefit from pursuit of shares in Tesla and Apple.

Third, timing on the rand can be decidedly wonky.

It was from the depth of the 2008-09 global financial crisis that SA’s domestic equity funds outperformed (see graph above). Short memories of those days belong to those same experts who, followers of fashion, then exhorted the virtues of staying home.

Known unknown 2

Covid risk represents the further layer of complication. Nobody, but nobody, can be so brave or foolish as to predict the return to something that resembles pre-Covid normality. It might happen in fits and starts, as inoculations are rolled out, or it might take years, as mutations defy vaccinations. Asset allocations and share selections aren’t for sissies. The point for retirement funds, critically, is the durability of present trends.

The longer that Covid threatens, and there’s enforcement of countermeasures to restrict economic activity, the greater the negative impact on fund contributions and withdrawals.

Contributions to funds from employers would logically be reducing, and withdrawals by employees increasing, as they respectively battle to keep their heads above water. Both ways, it’s thoroughly unhelpful to the welfare of future retirees and the capital formation that backs public expenditures.

How bad is it? Not too bad so far, considering that one year of Covid is past. But inevitably, on a perpetuation of existing trends, company profits and savings levels will gradually dissipate.

The more that incomes are lost or reduced, through retrenchments or furloughs, the more reliance is placed on retirement funds as the pocket of last resort (TT Dec ’20-Feb ’21).

In effect, the system allows so much leakage that there’s no barrier to retain money in a fund when the money is needed for lifestyle sustenance. On resignation or retrenchment, the floodgates open. On “excess deaths’, as they’re wistfully described, there’d also be excess payouts.

Alive to the danger of retirement funds being accessed as transmission accounts, National Treasury has tightened withdrawal provisions so that only one-third of the member’s fund interest may be taken as a lump sum (with the balance as an annuity) on the member’s retirement.

The exception is for a fund interest of below R247 500, all of which can be taken in cash. The overwhelming number of blue-collar workers, who fall into this category, tend not to preserve. Some even prefer to resign than await their lump sums.

Treasury-imposed carrots and sticks hold retirement funds together. They could be academic on retrenchment when the member, bereft of an income or other support for sustenance, is forced by financial distress to cash in his or her retirement savings. That’s notwithstanding the huge disadvantages in terms of tax, loss of compound interest and lack of protection for future years.

Larger administrators of retirement funds have quantified their experiences over different review periods. This largest is Alexander Forbes. Its chief executive, Dawie de Villiers, painted a dour picture in his presentation of interim results for the six months to end-September (see slide below).

Much the same is found by Nashalin Portrag, head of FundsAtWork at Momentum Corporate: “Our analysis shows that around 10% of employers are still (by early February) receiving the Covid relief offered in March 2020. Some employers have had to cut the salaries of employees or put them on unpaid leave.

“During the second half of 2020, retrenchments peaked at three times our normal average. We expect that the severe pressure that Covid and the lockdown placed on employers and employees will continue into 2021, but most likely to a lesser extent.”

Similar experience at another administrator is that the increase in suspended contributions had spiked in May but the absolute level remained minimal. On the main umbrella fund, the point was reached where some 25% of the membership base (which includes employers in the hospitality and travel sectors) had suspended contributions.

“Our understanding is that this figure is consistent with many of the other large commercial umbrellas,” a spokesperson believes. The number of member exits remained about the same between 2019 and 2020, but year-on-year the proportion of exits due to retrenchments had more than doubled.

It’s not all downhill. Remarkable numbers come from SA’s collective investment schemes. They’re setting records for net inflows. According to ASISA, last year in Q3 the amount was R57bn; it followed R23bn in Q1 and R88bn in Q2.

An explanation is offered by Tiaan Kotze, chief executive of Liberty Corporate which has a large share in the SMME market. He finds that significant investment flows have taken place out of retirement funds to the traditional retail investments market:

“In this sector, from a retail investment perspective it’s been a relatively good year. Affluent individuals, who have lost their employment, haven’t so much withdrawn cash as adopted different investment strategies. For example, once they reach their tax-free limit in withdrawing from the retirement fund, they’d invest the remainder through preservation vehicles which in many instances has resulted in increased savings in unit trusts.”

He’s particularly sensitive to cash-flow strain at the corporate level. In struggling to survive, companies scale down. Then, when they recommence contributions to their occupational funds, they’re at a lesser level because of the increase in retrenchments.

Pertinent statistics of Liberty Corporate are illustrated by divisional executive Gurschulle Neethling for Liberty-sponsored umbrella funds and Liberty-administered standalone funds: u

  • Withdrawal claims (including liquidation payments and individual transfers) increased by roughly 50% between the first and second half of 2020;
  • The number of withdrawals relating to involuntary terminations (retrenchments) nearly doubled between 2019 and 2020;
  • Essentially as a result of the contribution relief measures, scheme terminations decreased in 2020 compared to 2019.

Then, on the risk book for policies sold to corporates, before the Covid spike last July the death claims averaged 170 per month. During the spike it increased to 280 per month. “We’ve also seen the sizes of claims increase as higher earners are passing away,” Neethling adds. “We’re now at about 30% more than the first Covid wave which itself was about twice above normal.”

At the same time the insurer detects a sharpened appreciation for life cover. Institutional clients are reluctant to reduce cover levels. Generally accepted is the upwards repricing that Covid has necessitated.

Where to from here? Some propositions:

  • Negatively, that wealthier individuals are in better positions than poorer to preserve their savings will extend social inequalities. With it comes a heavier burden for the state in support of people who have neither pensions nor jobs;
  • Positively, that political leadership is forced to obsesses over an environment for economic growth. Increased investment and reduced savings are incompatible. The battle is not only against Covid but also against time.

The crunch has arrived. Government dare reduce incentives to save, no matter how much the fiscus is squeezed.

Allan Greenblo is Editor of Today’s Trustee

This article was first published in the March/May 2021 edition of Today’s Trustee, here.


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The bad debt of Eskom has been ring-fenced in a Special Purpose Vehicle, and “put under control” of the GEPF. What does this mean in plain language? Well, it is common knowledge that the government does not have the funds to honour the Eskom guarantees. So, the socialist politicians in Luthuli House dumped the problem in the lap of their own employees, the members of the GEPF.

The GEPF is the biggest lender to the government and the financier of the salaries of government employees. Apart from using their pensions to fund the social grant, they are also funding the BEE plunderers and state capture at Eskom. These benevolent public sector workers are also using their own money to pay their monthly salaries. Now they have been “put in control” of the debt that cannot be repaid by Eskom. The GEPF already own the Eskom bonds. Now they also own the default on those bonds. They own both the asset and the liability. That implies that they own nothing if we square it off.

This is the magic of a Special Purpose vehicle when the assets and liabilities of the entity are “put under the control” of a pension fund. For Eskom, the liabilities have vanished, but for the GEPF, the assets have disappeared.

This is the result when your government does not respect property rights. The socialist politician buys votes from the government employees with their own money and then uses the assets in pension savings to delete the liabilities at the SOEs. They describe this process as a quest for social justice and equality. The Zuma faction, in cohorts with the BEE beneficiaries, basically ambushed the Cosatu-affiliated union members through the Tripartite Alliance. Then they call each other “comrade”.

Isn’t this “special purpose vehicle” a technical default?

Wow. These people are brilliant. That’s an awesome sleight-of-hand juggling act. I’m impressed.

The heading should read:

SA at a tipping point

If the country folds we all go down

I don’t for one moment believe there are factions within the ANC! The entire looting of SOE’s and Municipality’s is well orchestrated , the strategy decided upon years ago.. Cyril is but a puppet in all this, he has proved it time and again

Had the Zondo commission (which is yet another cow they milk) locked up even one person, i would waiver my opinion

Until then, the Afrikaans language says it best:

“Hulle is almal kop in een mis”

“The entire looting of SOE’s and Municipality’s is well orchestrated , the strategy decided upon years ago..”

So very true…for the ANC…power has been one “Get rich quick” scheme

Its as much a pozi game for them

No after thought of morality or ethics….just “pinch this, pinch that”

The tipping point is when the crime syndicate prescribe infrastructure bonds to STEAL even more. This is a lovely pot of honey, controlled by a few institutions so changing reg 28 to finance great deals like SAA and Eskom is literally a free stealing orgy!

” Country Risk ” should read ANC Risk.

The theft has finally reached the pockets of those who deservedly voted for their comrats.
Long may you all suffer the fruits of your socialism!!!

Nevermind retirement funds, when the ANC (ZANU PF) is finished with South Africa (Zimbabwe) nothing will be left standing.

Or “Known unknown 3” : all SA employers have a planned TAX REVOLT & zero PAYE gets paid from payrolls across the board. Govt ends within one month.

On a more realistic note, I don’t know what I just did….I but I may’ve caused the SARS E-FILING website to CRASH today (Th.4 Mar)

E-Filing is temporarily DEAD (No browser helps. MS Edge…No response. Firefox…nope. Chrome…forget it! Even their “Russian” browser….down.)

Pensioners were the hardest hit!

For pensioners, the Cvid-19 crisis this is just another déjà vu situation, as the same thing happened in 2008 (financial crisis), when stock markets collapsed, as did property markets, and the value of pension fund assets fell by billions of Rands.

The funds that rode out the crisis best were those with conservative investment portfolios, but they recovered strongly in 2009, largely making up for the losses, like now with the performance of the JSE to date.

Not all values suffered. With stock markets panicking and fears that the whole system could implode, dull but dependable government bonds started to look like an attractive proposition.
The latest Covid – 19 crisis, has been particularly hard for older workers, as older workers face the worst impacts. The balances in private pension accounts of younger workers are generally small and financial losses in absolute terms are therefore also small compared with other age groups.

For people near to retirement, however, investment losses in private pension funds, public pension reserves and other savings may not be recouped. Even postponing their retirement may allow them to offset only part of their loss.

The degree to which the crisis affects current pensioners depends on the composition of their old-age income. The purchasing power of any voluntary retirement savings or housing assets that pensioners were hoping to draw on during their retirement is, of course, hit by the crisis.

For some pensioners, losses in these assets are substantial and interest rates are at historic lows, which may mean much lower living standards in old age. In defined-contribution plans, each person saves for retirement in an individual account and the value of pension benefits is determined by investment performance.

Riskier investments may pay out more when the stock market is booming, but in a financial crisis, they can lose value quickly, leaving people who depended on them poorer than they expected.

Again, this doesn’t matter so much to younger workers who do not need the income immediately, and who, moreover, may actually benefit by being able to buy assets cheaply and enjoy good returns in the future.

If the Zupta side do take over, all bets are off.

Zero investment
Significant divestment
De-risking of investments
Unemployment grows by 10%

If you own a private business you would not add a branch or production line, you would trim shifts for uncertain demand. Unless you were an exporter I suppose.

To Moneyweb, the censorship of comments on your website is from a long-gone era (think Apartheid) and it really is quite disappointing that you choose to stoop to this level. Face the facts: Many people in this country are angry and ‘gatvol’ and this will no doubt come through in comments. Maybe you should make your case somewhere on the website because the comments of mine that you choose to delete clearly meet your stated criteria but admittedly may not be very PC.

Hi Colson. Thank you for your feedback. While we encourage lively debate on our platforms, we have a strict policy of not allowing any comment that is defamatory, racist or uncouth in any way. As Moneyweb, its authors and you the commentators are all liable for litigation, should the subject of a comment seek legal recourse, we have to err on the side of caution when moderating comments.

Thank you for the explanation Eleanor.

It could be a solution for the editor to simply delete the words that may be offensive and allow the rest? On the other hand, I suppose you don’t have the time to edit all comments.

Sometimes it is only a name or word that prevents an informative comment from being published.

Thank you for your service. I appreciate your work. You are keeping me out of trouble by deleting some of my posts.

The danger lies in then being accused of ‘tampering’ with comments 🙂 But it’s definitely an option!

Thank you for the feedback but I just feel some perfectly legitimate comments are being suppressed in the process.

In all honesty I think RSA & not just retirement funds have reached tipping point quite some time ago. We have missed quite a few opportunities to lift ourselves out of the muck, but then made more blunders along the way we we shot ourselves in the foot. We missed the commodities super cycle, the football world cup of 2010 that should’ve padded RSA Inc,’s accounts instead of vultures and FIFA. We had some government/business SA initiatives which sounded good on paper and stayed exactly there. We have a shrinking tax base, shrinking workforce, shrinking fiscus, shrinking brains trust & shrinking local and global confidence that we will still pull ourselves out of this ever accelerating downward spiral. Adding to all this the above comments have summed up very nicely what needs to be done. However the comments have the deja vu feel about them as they have been made years ago where nothing has changed except a more slippery slope.

End of comments.



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