GEPF 2018/19 Annual Report

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Finance Standing Committee

19 February 2020
Chairperson: Mr M Maswanganyi (ANC).
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Meeting Summary

Annual Reports 2018/2019

The Standing Committee on Finance raised concerns about the oversight of investments by the Government Employees’ Pension Fund (GEPF) when it received a briefing on the fund’s annual report. Members also raised questions about reports of a proposed bail-out of the Eskom power utility using R254 billion in GEPF funds. Also of concern were reports that the Public Investment Corporation (PIC) had invested GEPF funds in a questionable land deal at Klerksdorp.

GEPF officials told the Committee that the fund had not received any approach about a loan to Eskom. If it did receive a proposal, it would have to consider its merits and the interests of both the fund and the country. The GEPF board was awaiting a full report from the PIC on the land deal. They assured Members that mechanisms were in place to ensure that investments made by the PIC on behalf of the GEPF were properly monitored.

The Committee heard that the GEPF was the largest pension fund in Africa, with 1 265 421 members. Assets under management were worth R1.82 trillion. Its assets had grown by R17 billion in 2018/19 in spite of a difficult year for the economy. The assets were more than enough to cover the benefits due to members. Net investment income was R47 billion. The average return on investment had been 2.6 percent.

Meeting report

The Standing Committee on Finance received a briefing from senior management of the Government Employees’ Pension Fund (GEPF) on the fund’s annual report.

Dr Renosi Mokate, chairperson, GEPF board, said the GEPF was the largest pension fund in Africa, with 1 265 421 members. There were 464 138 pensioners and beneficiaries. Assets under management were worth R1.82 trillion.

While the fund’s administrative functions and investment activities were outsourced, they remained firmly within the oversight of the GEPF board of trustees and its subsidiary committees. The board was the executive authority of the fund. It consisted of eight employer representatives, six employee representatives, one pensioner representative and one security forces’ representative. The board was accountable for the fund’s investment performance. Regardless of their background and who had nominated them, the members, once elected, were required to act in the interest of the fund as a whole.

The fund’s investments were managed by the Public Investment Corporation (PIC) in terms of an investment agreement and mandate. Fund benefits were administered by the Government Pensions Administration Agency in terms of a service level agreement.

Mr Abel Sithole, principal executive officer, GEPF, briefed the Committee on the fund’s financial results. Its assets had grown by R17 billion in 2018/19, in spite of a difficult year for the economy. The assets were more than enough to cover the benefits due to members. Net investment income was R47 billion. The average return on investment was 2.6 percent.

Contributions by members had grown 7.1 percent, to R75.1 billion, while benefits awarded had grown to R103 billion. In spite of the difference, the fund was cash positive because of its investment income.

Mr Sithole provided a breakdown of the different benefits paid out during the year:

  • Retirement Benefit: The GEPF had processed and finalised 35 931 cases of members retiring. The total value of gratuities paid was R16 billion, and annuities amounted to R45.6 billion
  • Resignation: An amount of R25.2 billion was paid in resignation benefits to 23 362 beneficiaries.
  • Death benefits: The GEPF paid an amount of R4.8 billion in death benefits during the reporting period.
  • Spouse annuities: A total of 2 884 claims for spouse pensions were processed.
  • Funeral benefits: The GEPF processed and paid 24 852 funeral benefit claims and an amount of R338 million was paid to beneficiaries during the reporting period.
  • Child’s pension: The GEPF paid R77.4 million in orphan’s annuities during the reporting period. The orphan’s annuity was replaced by a child pension benefit on 1 July 2018.

Discussion

Mr W Wessels (FF Plus) referred to reports of non-compliance with due diligence and governance processes at the PIC. What was the GEPF doing to monitor more closely the investments made on its behalf by the PIC?  

He referred to media reports that the PIC had acquired land near Klerksdorp on behalf of the GEPF at what he termed a “completely ridiculous” price per hectare. Had the PIC obtained the approval of the GEPF board of trustees? He asked for a response to frequent complaints about poor administration of pensioners’ affairs, particularly in rural areas, and about calls not being answered by the GEPF call centre. He noted that there had been a significant increase in staff remuneration. At what level was the extra money being spent?

Mr G Hill-Lewis (DA) said the GEPF had given an “equivocating” response to reports of a proposal to use R254 billion of GEPF funds to bail out the Eskom power utility. While the GEPF had said it had not been approached about the matter, it had not stated unequivocally where it stood on the issue. He believed it would be totally unacceptable to commit such an enormous sum over and above the R84 billion in Eskom debt already held by the GEPF.

He shared Mr Wessels’s concerns about the land deal. He referred to the PIC’s Isibaya development fund. At a previous hearing, the PIC had told the Committee that around a third of the Isibaya portfolio was underperforming. Was this still the situation, and what consideration was the GEPF giving to its Isibaya investments?

Dr D George (DA) asked for a full list of the GEPF’s investments in unlisted equities and its investments in bonds. He asked whether the GEPF was satisfied with the PIC’s administrative processes and whether it was aware of any errors in the valuation of investment portfolios.

Ms M Mohlala (EFF) said it would be wrong to take the money of working people to bail out Eskom.

Mr I Morolong (ANC) asked for the GEPF’s view on reports that there had been an overpayment for the land at Klerksdorp. He asked what the GEPF’s cumulative exposure was to the debt of state-owned enterprises (SOEs).

Ms P Abraham (ANC) commented that while the GEPF reported on its achievements, there was no indication of whether they measured up to set targets. She asked what the fund was doing to counsel people on their best options as they approached retirement. What efforts were made to ensure that children who fell outside a marriage also received child pension benefits?

GEPF’s response

Dr Mokate responded to questions about the GEPF’s oversight of investment decisions taken by the PIC. She said a framework was in place to ensure the strategic allocation of assets. There were governance structures to ensure that the investment mandate was implemented and monitored adequately. A PIC and GEPF executive committee focused on specific issues at the operational level. There was regular communication between the trustees of the GEPF and the PIC directors.  There was a standing agreement for the boards of the two entities to meet twice a year. The investment committees of the two entities met on a quarterly basis. These structures had worked variably, depending on circumstances. At the moment they were working very well. The GEPF investment committee met quarterly to receive reports from the PIC and to assess the performance of assets. Any investment above R2 billion was brought to the attention of the GEPF.   “As and when we feel that there is a need for us to intervene, we do intervene,.” Dr Mokate said.

She said the GEPF had asked the PIC for a full report on the land deal reported in the media. Once they had received and analysed the report, they would be able to express a view on it. The purchase of the land would have been approved by the PIC through its structures, and not by the GEPF.

Mr Sithole added that it was not unusual for the GEPF to buy land via the PIC in anticipation of future development. In this case, the land had been rezoned for mixed-use development at some time in the future. Based on independent valuations, it appeared that a fair price had been paid.

He said the increase in total staff remuneration was a result of an increase in the number of staff. On the the administration of benefits, he said he could not deny that things did sometimes go wrong in the process of paying up to 50 000 members. The problems affected mainly people who exited the fund while still in service, and had to do with issues like bank accounts. There were hardly any issues with pension payments.

He said the GEPF was not equivocating on the Eskom bond. It was a fact that they had not been approached. They could not say how they would respond until they had received a proposal and could assess its merits. It could well be that a very good deal would be presented to the GEPF. There was also a broader consideration that the GEPF should help solve problems facing the country, provided that it was also in the interests of the GEPF.

To Dr George and Mr Morolong, he said the GEPF provided a full list of all its investments on its website. Page 90 of the annual report listed the exposure to SOE debt.

On the Isibaya fund, 66 percent of the investments were performing. The fact that others were not performing did not necessarily mean they were all bad. They could improve over time.

On the issue of whether the GEPF was satisfied with the PIC’s performance, Mr Sithole said as far as the large portfolios went, they had done very well for the GEPF over the years. This did not mean that there were not particular issues that needed to be addressed. Mistakes were made in day to day operations, but none of them was of a structural or strategic nature.

The GEPF did have an awareness programme for people who were close to retirement, but more could be done to expand it.

On child benefits for those falling inside a marriage, the Government Employees Pension Law required the fund to include children other than those declared by a member. It endeavoured to include all the dependents of deceased members.

The Chairperson commented that the Committee should try in the following week or two to hold a meeting with the PIC, the GEPF and trade unions to discuss the Eskom bail-out issue. He invited a second round of questions.

Further discussion

Mr Wessels asked when the PIC would report to the GEPF on the Klerksdorp land deal. The GEPF trustees should take into account that the Municipal Councillors’ Pension Fund had been involved in the same transaction. They had received a settlement of R120 million because of an invalid transaction. The settlement letter stipulated that the money would be paid only once money had been received from the GEPF. On the valuation of the land, he said much of the land contained dolomite deposits and could not be developed.

He asked for details of the increase in the number of employees. He noted from the annual report that the principal officer’s salary had increased by almost 19 percent in one year. Was this responsible, given the current state of the country?

The GEPF had told the Committee about mechanisms to monitor the PIC. Were these new measures? Was it not time to review the system, given the failures in governance at the PIC? 

Mr Hill-Lewis requested that the Committee be supplied with the independent valuation of the Klerksdorp land mentioned by Mr Sihole. He said it was “weird” that there was still no report from the PIC, given the media coverage of the issue. He accepted the GEPF’s answer on the Eskom issue, but believed it was unacceptable that it had not been brought before them when it was being discussed at high levels of government. He asked whether in the ordinary course of business, it would be acceptable for the GEPF to invest R335 billion of its assets in one specific asset.

A Moody’s downgrade would mean that sovereign bonds and parastatal bonds would lose their investment grade rating. What would the consequence be for the GEPF bond holdings of about R510 billion?

Mr G Skosana (ANC) said the GEPF’s return on investment of 2.6 percent in 2019 was the worst since 2009. What was the reason for this? What was the GEPF doing differently in its relations with the PIC following the Steinhoff and other scandals?

GEPF’s response

Dr Mokate said the GEPF would consider the PIC report on the land deal at its investment committee meeting in March. In the interim, there would be executive interactions to ensure they had all the necessary information. She thanked Mr Wessels for the additional information he had provided.

The additional staff were employed in the areas of investment monitoring and communication with members. The principal officer’s salary had been determined by a bench-marking exercise.

On the GEPF’s relations with the PIC, Dr Mokate said there was a separation of responsibilities. The PIC made the investment decisions. Areas of concern were raised during the board to board meetings.

Mr Sithole added that it was difficult to preempt wrong-doing by individuals, as had been the case in the Steinhoff matter.

On the impact of a credit downgrade, he said most of the GEPF bonds had guaranteed returns. However, bond trading could be affected by changes in the yield. A downgrade had already been priced into South African securities. The current prices in the market probably reflected what the outcome of a downgrade would be.

He said that, from a prudential point of view, Mr Hill-Lewis had made a fair comment about investing too much in a single asset.

Dr Mokate added that the GEPF’s strategic asset allocation framework ensured that risks were commensurate with returns.

On the low return on investment, Mr Sithole said the reason was the poor performance of the South African economy. The GEPF had done better than the 0.7 percent growth in the equities market because of other investments that gave it a fixed return.

On avoiding a repeat of scandals such as the Steinhoff matter, he said the PIC had improved its scrutiny of investment procedures. Because the GEPF was so big, it invested passively in all the big stocks on the JSE instead of looking at individual companies, so it sometimes ended with exposures such as Steinhoff.

The Chairperson concluded the meeting by saying that in spite of a busy schedule, it was critical for the Committee to find time to schedule a meeting to discuss the issue of an Eskom bail-out.

The meeting was adjourned.
 

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