SA taxpayers must demand that civil servant pensions are invested for the greater good - report

Given that they are funding civil servant pensions, all South African taxpayers should be entitled to know where their money is being invested – and demand that those investments make the country a better place.

This is according to a submission by Stuart Theobald and Peter Attard Montalto of the research firm Intellidex to the Commission of Inquiry into the Public Investment Corporation. The PIC has been mired in controversy after investing billions in the bankrupt VBS Bank, companies controlled by Iqbal Surve and in Steinhoff’s empowerment shareholder, Lancaster. 

One of the 10 biggest pension fund managers in the world, the PIC manages R2trn in civil servant pensions through the  Government Employees Pension Fund (GEPF).

The GEPF is a defined benefit scheme, which means that retirement benefits are guaranteed. Any shortfall in the fund has to be settled by the employer, government.

The pension fund is considered "fully funded" if its assets are sufficient to cover the present value of future obligations. But Treasury estimates that, using the strictest measures, there may be a shortfall of R583bn. 

Theobald and Montalto point out that this is more than total debt of Eskom and threatens to undermine the solvency of government as a whole.

The shortfall has widened in recent years in part due to outflows and weak investment returns: The GEPF’s portfolio earned a return of 8.5% in the 2017/18 financial year and 4.3% in the 2016/17 financial year.


Almost a fifth of all new government debt is used to fund the GEPF - and the interest on this debt (currently above 9%) is higher than the fund’s returns.

The means it is "economically rational" for the government to demand that the PIC buy government bonds as it does not in fact harm returns, say Theobald and Montalto. Government faced a firestorm of criticism in recent weeks for considering 'prescribed assets', which would require pension fund members to invest a part of their savings in government bonds.

Given that taxpayer money is used for the government pension fund, and that government is taking on more debt to fund civil servant pensions, which will add to the tax burden in coming years, "the tax payer has a right to expect some return from that investment".

The Intellidex report says that taxpayers should demand that the fund makes investments for the greater good in South Africa.

"The PIC can indeed, as the biggest single investor on the JSE, have a dramatic and positive effect by using its influence to improve the governance and sustainability of South African companies, which would have spill over public benefits for all."

This could include bailing out government institutions where the public benefit can be clearly demonstrated, according to the report. But there will have to be strict controls:

"This benefit should be measured and the sacrifice of financial return (or increased risks) should be calculated and justified in terms of the public benefits and reported in disclosures. This can include supporting government in managing crisis situations, but such decisions should always be made by the PIC independently with the case independently developed for the public good by the PIC’s investment committee. Such investing should never be directed to political ends that happen to fit short term political interests. The public benefits should be measured by independent third parties who report directly to the board and not to the investment decision makers themselves."

Other Intellidex proposals include:

  • Radical transparency. The PIC’s entire portfolio should be available in near real time on its website. It should post closing values and holdings of all listed assets as well as all unlisted assets as at the latest valuation date. “Given our view that the PIC should be delivering a social good and not just a financial good, such a level of transparency would allow the public to monitor whether those public goods are being delivered.” This is done with civil servant pensions in California.
  • A separate investment decision-making process. The Chief Investment Officer should report to the board and not the CEO and he or she should be evaluated against investment and social return objectives. The CIO and CEO roles should never be conflated. This prevents conflicts of interest arising between the operational needs of the PIC and the investment strategy.
  • Taxpayers should know what the internal costs are. The PIC should provide detailed disclosure of its own costs and efficiency levels. The financial returns to investments should be shown as well as the costs of managing those investments.

Compiled by Helena Wasserman

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