GEPF funding levels weakening

Government Employee Pension Fund (GEPF) principal executive officer Abel Sithole began a round table briefing to address concerns about the organisation’s financial soundness saying: “The good news is that the GEPF is fine, thank you very much,” a phrase he used often.

It was not, however, all good news. Although Sithole spent some hours explaining that the GEPF remained fundamentally sound, there is evidence of a weakening trend in funding levels.

His remarks follow an actuarial valuation report by Alexander Forbes showing that the GEPF’s minimum funding level (assets to cover liabilities) reduced to 108.3% at end-March 2018 from 115.8% at end-March 2016, still well above the required rate of 90%, beyond which trustees need to take action. The long-term funding level, however, reduced to 75.5% (from 79.3%), well below the target of above 100%.

Sithole made it clear that nothing would be done quickly to address the shortfall, given the size of the GEPF and the effect that it changing its investment strategy could have on local markets. Nor does it need to do anything immediately, he said, as pension fund members are guaranteed their defined benefits, and the GEPF is doing a good job managing its assets and liabilities and is getting investment returns well ahead of economic growth.

However, he suggested the shortfall could be addressed by increasing the level of employer (government) contributions, which are below the required contribution rate; being more prudent in terms of pension increases; more prudence on the part of government and unions on salary increases, and a change in strategic asset allocation, primarily to increase offshore exposure of GEPF investments.

With over R1.8 trillion in funds and reserves, predominantly (87%) managed by the Public Investment Corporation (PIC), financially crippling scandals such as Steinhoff don’t even move the needle in terms of the GEPF’s investment returns.

Accumulated funds and reserves of R1.8 trillion at end-March 2018 were up 8.3% from R1.7 trillion in 2017. Its listed equities portfolio increased by 10% to R970 billion, domestic bills and bonds increased by 6% to R563 billion, domestic unlisted equities by 37% to R50.7 billion and foreign collective investments schemes by 7% to R98 billion.

Investments yielded an average return of 8.5% compared to 4.3% in 2017, based on net investment income of R153 billion (R72 billion). Contributions received increased by 7.3% to R70.4 billion, mainly due to salary increases of members. The GEPF provided benefits to 1.27 million active members and over 450 000 pensioners and beneficiaries.

The GEPF owned about R28 billion in Steinhoff International Holdings which is about 10% of Steinhoff and 1% of the total assets of the GEPF.

Nevertheless, its annual report shows a R28 billion investment in Steinhoff, representing 1% of GEPF assets, as well as a R4.2 billion impairment relating to Jayendra Naidoo’s Lancaster Group, utilised for investment in Steinhoff, and an impairment of over R1 billion relating to Iqbal Surve’s Sekunjalo which did not honor its payment obligation relating to funds for the investment in Independent Media.

Sithole reiterated that none of these losses changes or affects the defined benefits to its members, which are based purely on years of service, salary and accrual rates.

Returning to the subject of the GEPFs long term funding level, he said it was “true that the employer is contributing at a lower rate”, but said there is no immediate need for it to meet the requirement, nor is there any prescribed minimum that government needs to contribute.

Sithole said while most of the questions asked in the PIC Commission that is currently underway were about investments in unlisted companies, this was not a concern for the GEPF, which, in fact, would like to increase its exposure to bankable unlisted investment opportunities.

His “biggest worry” is the risk of the GEPF being exposed to the South African market, or the “home bias”, as he put it. But any change in its investment strategy, if any, would be managed prudently “in the context of the GEPF and its size in the South African economy”.

The GEPF accounts for 11% to 13% of the JSE market cap.

Another concern was that more people were resigning than one would normally expect. In financial 2018 the GEPF paid R27.2 billion in resignation benefits to 26 690 people, thus reducing short and long-term funding levels.

While Sithole downplayed concerns, all eyes will be on the GEPF in the coming years to see whether the negative trend can be reversed, or whether decisive steps need to be taken to arrest the trend.