State pension fund washes its hands of blame for PIC failures

DESPITE IT BEING THE ASSET MANAGER’S LARGEST CLIENT, IT HAS NOT APPEARED TO CENSURE THE PIC IN ANY WAY

THE STATE HAS THE MOST TO LOSE FOR POORLY MANAGED INVESTMENTS AND WRONGDOING AT THE PIC

The board of trustees of the Government Employees Pension Fund (GEPF) says it has not failed in its responsibility to look after the interests of its 1.7-million members and pensioners despite numerous revelations of impropriety emanating from the commission of inquiry into the Public Investment Corporation (PIC).

The GEPF entrusts the stateowned asset manager to manage its entire R1.8-trillion fund, and accounts for about 88% of the funds the PIC manages.

Serious allegations of wrongdoing have been levelled against senior executives at the PIC since the inquiry, headed by retired judge Lex Mpati, began hearings in January.

The GEPF has maintained that its relationship with the PIC is at “arm’s length” in commercial terms. Despite it being the asset manager’s largest client, it has not appeared to censure the PIC in any way.

“The GEPF board and management have not failed in their responsibility to look after the interests of pensioners and members. The PIC is a separate and independent corporation with its own governance structures and shareholder.

“In this instance, the shareholder established the inquiry as it is its prerogative to do so,” the fund said in response to questions from Business Day.

The questions were posed after the conclusion of hearings at the commission and in the wake of an investigation into the controversial R120m fee paid by Steinhoff to businessman Jayendra Naidoo.

The fee was arguably owed to the GEPF for its role in providing funds for Naidoo’s consortium to buy shares in the furniture retailer in 2016. The Steinhoff share price tanked on December 6 2017, when the company said it had picked up “accounting irregularities”.

The GEPF and PIC declined to respond to questions over the fee paid to Naidoo when initially approached by Business Day.

But the GEPF now says it is the PIC’s prerogative to recover the fee: “The PIC invests on behalf of the GEPF. It is for the PIC to recover any fees that are recoverable in the course of the investments that it makes.”

The issue brought into focus the question of who is at risk when the GEPF fails to earn fees or obtain sufficient investment returns as a result of impropriety or negligence at the PIC.

For the year ending March 2018 (the last published results), the GEPF underperformed its benchmark over one and three years, but over five years comfortably exceeded it and beat inflation with annualised returns of 9.21%.

Because the government guarantees the benefits paid to the pensioners of the GEPF, it is the state that has the most to lose for poorly managed investments and wrongdoing at the PIC.

The government manages this risk through its ownership and control of the PIC and its ability, as the employer of the nation’s public servants, to appoint half of the trustees to the 16-member board of the GEPF.

For this reason it is unlikely the GEPF would substantially alter its relationship with the PIC, as the government would not allow such a move.

But the GEPF Act imposes basic fiduciary responsibilities on trustees of the fund, including that they “take all reasonable steps to ensure that the interests of members in terms of the rules of the fund and the provisions of the law are protected at all times”.

So in the event that the PIC commission finds there was substantial professional negligence at the investment manager over a period of years, there will be questions asked of the stewardship of the board of trustees of the GEPF.

But can the government hold them accountable for a mess of its own making?