With the recent R2.2 billion injection into SAA, the Government Employee Pension Fund (GEPF) members were assured that their pension savings would not be impacted, even though it is unclear how much GEPF money is invested, in one form or another, in state-owned enterprises. In any event, being a defined benefit fund, the GEPF pension benefit is guaranteed by the government. Even in the worst case scenario, the fund members are protected from poor investment decisions. But is there a tipping point?
The investment manager for the GEPF is the Public Investment Corporation (PIC). The GEPF, worth some R1.7 trillion, represents about 88.2% of the assets managed by the PIC. The GEPF has also appointed various other asset managers to manage part of the investment portfolio, but it is not possible to ascertain their independence, nor can one judge their investment performance. In order to do this, one would need to know the size of the portfolios that they manage, as well as the return per portfolio.
However, the financial future of the GEPF cannot be isolated from the financial demands placed on it by the PIC. After all, one of the PIC’s investment strategies is to “contribute to the broader social and economic development of South Africa and the rest of Africa”. And therein lies the rub. The PIC not only invests in good companies that earn healthy returns, but it also invests in up and coming companies. This is a riskier investment without any guarantee of a return, and should be closely monitored in order to preserve wealth.
The most recent audited GEPF financials are dated March 31 2016, and we will have to wait until at least October 2017 for the next set. These financials carry some warning signs.
Only the top ten investments per investment category are disclosed, with the result that a significant percentage of assets are disclosed as “other”, making it difficult to form any view on the risk of the assets included in “other”.
The investments of R1.64 trillion include direct Loans of R22.2 billion. The largest loans granted include funds advanced to the IDC (R3.1 billion), Kilimanjaro Sakhumnotho Consortium (R1.9 billion), Tanga Cement Company (R1.4 billion), Independent News & Media (R1.0 billion), and Opiconsivia Investments 239 (R1.7 billion). It is noted that the fund also has a 66% equity investment in Opiconsivia Investments 239, an unlisted entity, which was valued at R4.8 billion in 2015, and marked down to R1.9 billion in 2016.
The rule of only disclosing the ten largest loans, results in incompleteness, as R9.6 billion (43.27%), of these loans are disclosed as “other”. Crucial information in regard to the performance of these loans, such as interest rate, term of loan, security given, and risk rating, is lacking. Unsecured loans would carry a higher risk rating. There has been no disclosure of any default in payment of interest or capital.
There would also be investment risk in the R153.8 billion that has been invested in bills and bonds of struggling parastatals, the R318.9 billion invested in “Other” equities, and the R41.1 billion in “unlisted equities”. An unlisted equity is a particularly high-risk investment, not least because of the lack of regulatory framework, lack of formal market, difficulty in the valuation of the investment, lack of liquidity, limited operating history, and a zero possibility of a dividend.
Included in Financial Liabilities is a “funded equity collar finance with Bank of America Merrill Lynch on July 13 2015” of R4.2 billion. This “funded collar transaction unwinds in tranches with weekly expiries commencing on January 15 2016 and ending on December 22 2017. Each expiry consists of 366 583 shares with a repayment amount of R44.3 million”. The JSE Sens announcement on July 16 2015 states that “the GEPF’s shareholding in Vodacom is not impacted by this placement and it does not constitute a disposal”. This begs the question, is this in substance a loan from Merrill Lynch with the 25 million ordinary shares in the Vodacom Group providing collateral? Perhaps the March 2017 financials will throw more light on this transaction.
In conclusion, there should be full disclosure of all investments, including loans granted to enterprises. Despite the assurance that the state is obliged to pay in any shortfall in pension benefits that would result from poor investment decisions, it does not have a bottomless piggy bank that can carry on neutralising shortfalls caused by inefficiency and bad investment decisions. Continuing to raise taxes in a global world of falling taxes in order to replenish the government coffers isn’t the answer either.
Barbara Curson, is a CA(SA) and tax specialist.