One fact is often missed about the Government Employees Pension Fund (GEPF): it is a defined benefit scheme.
Public servant pensioners get a set of benefits each year that are predetermined. Last year, R88.3-billion was paid to more than 430,000 retirees. These benefits are guaranteed by the employer, in other words the government.
The Public Investment Corporation (PIC) manages a large portfolio to meet this liability. But if the PIC makes a hash of managing these assets, it is not pensioners who suffer. Their monthly payouts and medical costs are guaranteed.
Last year, the government contributed R42.1-billion to the fund, an amount that would have been much higher if investment returns had been weaker. Investment income for the period was R75.2-billion – a yield of 4.5% on assets of R1.67-trillion.When the PIC makes a bad investment for the GEPF, the investment returns are lower and the amount the government contributes has to be higher. Weak investment returns directly translate into higher costs for the government.
As it is, there are some indications that the government has not been contributing enough. The fund has been paying out much of its investment returns to beneficiaries instead of adding to its portfolio to meet future obligations.
The fund will be assessed by actuaries this year to determine whether it really does hold enough assets to meet future obligations, and the results could mean a big additional contribution will have to be made by the government.
The GEPF’s portfolio is enormous and includes exposure to just about every different listed asset available, including bonds and company shares. It also has a large portfolio of unlisted assets and has been making substantial loans, including to bail out Eskom and South African Airways. These assets are all managed by the PIC.
There have been comments that some investment losses by the PIC are a threat to pensioners. That would only be the case if the entire government were to collapse and be unable to meet its liabilities.
Who is really exposed?
The GEPF is in effect a mechanism to support the solvency of the government by ensuring it is saving to meet future liabilities. Not all countries do this; many European countries pay their public servant pensions out of current revenue. That creates a time bomb, particularly when your population is shrinking.
We don’t have that problem, although an underfunded GEPF is still a big headache for the government.
Claims that pensioners are affected by the GEPF’s exposure to Steinhoff shares or to the Independent Media group or failed bank VBS are misleading. It is actually taxpayers who are exposed. It is ultimately taxpayers who fund the government, which has to fund the GEPF.
This is why weak investment returns and obviously bad investment decisions at the PIC should be a matter of concern to every taxpayer.
They mean money has to be contributed that could instead be spent on education, healthcare or social grants.
Last week, Erin Energy filed for bankruptcy in New York. The PIC had invested $270-million into that company and guaranteed another $100-million bank loan. At current exchange rates, that amounts to R4.5-billion.
The company was an oil explorer with some assets in Nigeria. It was insolvent even at the time the PIC decided to invest in 2014. The firm is headed by Texan-Nigerian Kase Lawal, who happens also to be a friend of Jacob Zuma.
According to investigative journalists at amaBhungane, Lawal has donated millions to Zuma’s education trust.That R4.5-billion will have to be written down to zero in the GEPF’s portfolio.
In December last year, while many South Africans were enjoying the Christmas break, the PIC invested R4.3-billon in Ayo Technologies, a firm controlled by Independent Media head Iqbal Survé.
According to Ayo’s financial statements, it had total assets of R292-million and a book value of R67-million at the end of August 2017. The PIC’s investment of R4.3-billion gave it 29% of the company when it listed on December 21, implying that it had valued it at R14.8-billion. This, on the face of it, is inexplicable.
We await the company’s financials for the six months to the end of March to see what has happened to that cash.
A losing game
Meanwhile, the share has traded in thin volumes but the market cap has sunk to R8.06-billion, so the PIC’s stake is now worth R2.34-billion according to the share price.
Given the lack of investor interest in the company, I don’t think the share price is a reliable guide to value anyway.
Hundreds of millions were also sunk into Independent Media and into VBS Mutual Bank. Independent has been losing money and is due to pay back considerable amounts of debt this year. VBS is unlikely to be worth anything.Investing is not about avoiding losses. Those fundamentally come with taking risks.
But risks should be managed by having robust decision-making processes.
Investments such as Erin and Ayo would not be made by any professional investor applying accepted investment assessment processes.
It is not GEPF pensioners who should be angry about losses like these. It should be all taxpayers in South Africa.
We rightly get upset when politicians blow money on cars or foreign trips for their wives. But the impact on taxpayers from bad decisions by the PIC is considerably larger.