Over the past two years, there have been media reports of contentious investment decisions by the Public Investment Corporation (PIC), which manages the assets on behalf of the Government Employees’ Pension Fund (GEPF).
Some deals that were struck raised questions around whether undue influence by government drove the investment decisions into businesses whose owners were politically connected, such as a R3 billion investment in Camac Energy (now Erin Energy) and the R3.9 billion buyout of ArcelorMittal’s share of Kalagadi Manganese.
Critics have also argued that the GEPF – and members’ retirement money – was being used by government to bail out an ailing Eskom and to keep Sanral afloat amid the e-toll debacle with the PIC’s purchase of Sanral and Eskom bonds.
GEPF principal executive officer Abel Sithole denies this and says the fund’s mandate is to preserve capital and provide a good return relative to liabilities (payments), and only those investments that meet the mandate will be considered.
The GEPF is the largest pension fund in South Africa – it’s worth about R1.7 trillion – and, as such, it accounts for about 17% of the total value of the JSE.
“With this amount of money to invest, the fund has exposure to the whole South African economy and one has to look at its investments in that context,” explains Sithole, who defends the decision by the fund to buy Eskom and Sanral bonds because they meet the criteria of capital preservation and returns.
As both Sanral and Eskom bonds are guaranteed by government, members’ funds are not at risk and the bonds offered attractive interest rates if held to maturity.
“We are very exposed to the economy as a whole through our investments on the JSE. If Eskom collapses, that is a systemic risk to the economy and therefore all our investments,” explains Sithole.
The investment in Sanral was R18.6 billion, but Sithole says it makes up 1% of the GEPF’s total investment portfolio, and is therefore not a significant investment.
“The GEPF is not the only fund that invests in Sanral and Eskom; many others do too,” says Sithole.
Ian Cruickshanks, chief economist at the Institute of Race Relations, says that while members are not being unreasonable when raising their concerns, the performance of the fund managed by the PIC has performed very well at this stage, compared with other pension investment companies in the private sector.
“So far, it seems that the PIC has used strict investment criteria. The concern, however, is that as government finances come under strain, they may be tempted to use government employees’ pension money to fund government projects that are not justified from an investment point of view. We need to be vigilant,” says Cruickshanks.
He explains that under the previous regime, the government pension fund was used to provide cheap sources of funding for government under the prescribed investment mandate. This occurred in the 1980s because of the continued isolation of South Africa after then prime minister PW Botha’s infamous Rubicon speech. South Africa’s international funding dried up and the economy grew at less than 1% a year over a decade.
“This has happened before, and people are understandably concerned that it could happen again,” says Cruickshanks.
The PIC invests 75% to 80% of the fund in passive funds, which track the average return of the markets, which helps keep the costs of the fund low. The remainder is allocated to active fund managers to provide enhanced returns. The PIC also takes direct stakes in non-listed assets, including property.
The fund may invest up to 10% of its equity exposure offshore – this is substantially lower than the 25% limit on other retirement funds. Currently, 5% is invested abroad.
In 2010, the GEPF launched the developmental investment policy, which adopted a four-pillar approach to developmental investing: economic infrastructure; social infrastructure; environmental investments; and enterprise development (including BEE and job creation).
This includes supporting BEE fund managers and the development of an incubation fund for new black fund managers.