The Government Employees Pension Fund (GEPF) recently released its annual report for the financial year ended March 31, 2020, showing a marked decrease in investment values.
Approximately 87% of its investments are managed by the Public Investment Corporation (PIC), which has been under scrutiny. The Judicial Commission of Inquiry into allegations of impropriety at the PIC – chaired by retired judge Lex Mpati – released its report in April, after the GEPF’s financial year-end.
It is to be noted that the commission did not have the resources to investigate every allegation of malfeasance.
The GEPF made losses of R214.4 billion for the year, and the market value of investments dropped 11.47% to R1.61 trillion. The investments were knocked by the downturn in the economy, the devastating Covid-19 pandemic, as well as the cost of malfeasance perpetrated by a few officials at the PIC.
The GEPF, through the PIC, now has to try to claw back what has been lost or impaired. This article considers five red warning flags.
Red flag 1: Actuarial valuation
A statutory actuarial valuation is carried out at least once every three years. The last one was done by Alexander Forbes Financial Services as at March 31, 2018. The next one will be carried out on the fund for the financial year ended March 31, 2021, but will only be completed in December 2021.
The minimum funding level is defined as the funding level determined excluding any contingency reserves.
The long-term funding level is determined using solvency reserves and other contingency reserves which the trustees deem realistic in the long term.
|Funding levels||2018||2016||Required level per the funding policy|
|Minimum funding level||108.3%||115.8%||90%|
|Long term funding level||75.5%||79.3%||100%|
Whereas the minimum funding level is above the 90% stipulated in the funding policy, the long term funding level in 2018 falls short of the required 100%. Since 2018, investments have plummeted. The 2021 long term funding level rate will be negatively impacted if the investments do not fully recover by then.
In a discussion after the press briefing, GEPF principal executive officer Musa Mabesa assured Moneyweb that the long-term funding rate is being continuously monitored.
Red flag 2: The investments carry further risk of deterioration
The reasons for the risk of deterioration are provided in the notes below.
|Money market instruments, Note 1||29 171||42 323||30 228|
|Direct loans, Note 2||42 344||41 887||44 245|
|Bills and bonds, Note 3||568 766||575 542||576 691|
|Investment properties||14 989||14 651||14 296|
|Equities – primary listing on JSE, Note 4||557 489||763 107||781 485|
|Equities – secondary listing on JSE, Note 4||205 528||199 891||188 601|
|Equities – unlisted equities, Note 5||70 412||68 063||62 993|
|Preference shares||2 951||5 044||4 379|
|Collective investment schemes||118 460||108 331||98 899|
|Total investments||1 610 110||1 818 839||1 801 817|
Note 1: The money market instruments include promissory notes with the Land and Agricultural Development Bank (Land Bank) of R4.4 billion. The Land Bank is experiencing liquidity problems and defaulted on its obligations post balance sheet. At the press briefing, Mabusa said the Land Bank made its outstanding interest payments in September 2020.
Note 2: The direct loans were impaired by R11.9 billion. Further impairments are a possibility.
Note 3: Bills and bonds include bonds with: Eskom (R78.2 billion), Sanral (R20.9 billion), Transnet (R20.3 billion) and Trans Caledon Tunnel Authority (R6.9 billion). In this worsening economic climate, bonds and money market instruments held with state-owned entities may be at risk of defaulting.
Note 4: The loss on fair value is R297.2 billion.
Note 5: The Mpati commission reported that “41% of the R123 billion of unlisted investments are on watch, underperforming or not servicing loans [non-performing loans]”.
Post balance sheet event: The GEPF had to take up the direct exposure of R250 million to GroCapital in July 2020 through a put option agreement with Nedbank, and was also required to lay out R126 million to purchase Drive-In Trading from Bank of America and Merrill Lynch through a CRO (contingent repurchase obligation) agreement.
At the press briefing, Mabesa was asked about the risk of further guarantees that the GEPF had been committed to. He said a moratorium has been placed on all such structured investments.
Red flag 3: Impairments on direct loans
Many of these investments should not have been made at all. For example, Erin Energy Corporation was technically insolvent and did not own any oil leases. The PIC (on behalf of the GEPF) lost the whole investment.
Some investments do however recover. Mabesa gave as an example Daybreak Farms, previously impaired, which recovered after the PIC had intervened and improved governance processes.
|Afrisam Group||527 593||2 354 506||252 815|
|Lancaster Group||3 361 426||959 277||4 275 782|
|Erin Energy Corporation||646 054||269 782|
|Allied Mobile Communications||415 573||867 764|
|Smile Telecoms Holdings||322 857||542 057|
|Firefly Investments 326||401 289||480 633|
|Independent News and Media SA||112 531||338 510||1 058 320|
|Belelani Capital||2 334 171|
|Kilimanjaro Sakhumnotho Consortium||1 038 464|
|Kuseni Group||809 412||307 067|
|Other||2 627 195||2 271 103||1 533 912|
|11 950 511||8 766 971||7 390 611|
There is a view that the direct loans represent a small percentage of the overall portfolio. The Mpati commission pointed out that “when evaluating materiality and prudence, it is important to note that the use of percentages obfuscates the numerical size of the funds in question.”
Red flag 4: Overall net investment earnings
|Dividends||34 051||34 825||30 557|
|Interest||52 275||47 916||44 620|
|Foreign exchange gain||5 942||2 934|
|Reversal of impairment||259||454||625|
|Property income||1 822||1 742||1 742|
|Income from investments||94 945||88 264||77 973|
|Net profit on sale of investments||38 031||11 376||18 716|
|Adjustment to fair value||-297 168||-40 455||69 034|
|Impairment of investments||-11 951||-8 767||-7 391|
|Total investment loss/income||-176 143||50 418||158 332|
|Less: expenses incurred in managing investments||-3 518||-3 641||-4 923|
|-179 661||46 777||153 409|
By September 2020 many investments had recovered.
The real test however, will be the audited annual report as at March 31, 2021.
Red flag 5: The current Investment Management Agreement (IMA)
Certain investments made by the PIC, such as the investment in Ayo Technologies, were queried by GEPF principal executive officer Abel Sithole (now CEO of the PIC). However, he had no power to stop the investment.
According to the Mpati Report (page 621): “… the PIC did not involve or inform the GEPF when it considered and made the investment in Ayo.
“The PIC contended that they considered the Ayo investment fell under the listed investment delegation of authority [per the IMA], a view that Mr Sithole strongly disagreed with and said that while he could not pronounce on the legality of the action, it was certainly a breach of faith and trust.”
The IMA is now under review, and the GEPF is expected to have more power to intervene in any proposed investment. Consequence management will also be strengthened. Until then, the current IMA remains as a red flag.
Briefing to parliament
In the evening of December 2, National Treasury and the PIC briefed the Parliamentary Standing Committee on Finance on the Mpati Report.
Finance Minister Tito Mboweni made it clear that they are going to get to the bottom of what happened, they will deal with all the issues, and they will deal with the malfeasance.
The National Prosecuting Authority and the Hawks have already been engaged. The PIC has already implemented many of the recommendations of the Mpati Report. The difficult part will be clawing back the loss.
Listen to Nompu Siziba’s interview with Abel Sithole, former GEPF principal executive officer and now CEO of the PIC (or read the transcript here):