The sitting duck in the corruption fallout

The 2019 annual report of the Government Employees Pension Fund (GEPF) attempts to paint a rosy picture, but the cracks are widening.

With funds of some R1.8 trillion – a juicy target for the corrupt – can its board of trustees really claim to have protected these investments from illicit dealings such as insider trading, fronting run orders, or taking large positions to boost share prices?

Many questions remain on the questionable investments made on its behalf by the Public Investment Corporation (PIC). Nonetheless, GEPF chair Dr Renosi Mokate asserts that the investment activities “remain firmly within our oversight”. And further that “we are overall satisfied with the performance of the GEPF portfolio in totality, noting the poor economic environment in which we operate”.

External audit report

The external auditors, Deloitte & Touche and Nexia SAB&T, issued an unqualified audit opinion on the 2019 annual financial statements and confirmed that: “There are no instances of non-compliance with laws and regulations that came to our attention during the course of our audit of the financial statements.”

This statement appears to be at cross-purposes with one of the findings of the Office of the Auditor-General in the PIC’s 2019 external audit report (paraphrased):

• Investment deals entered into did not always comply with governance processes;
• Due diligences performed were not always sufficient and appropriate;
• One particular legal deal countersigned with a counterparty was not aligned to the structured deal;
• Conditions precedent were not always incorporated into legal contracts; and
• Policies and procedures were not always complied with.

Considering that the GEPF is primarily managed by the PIC, surely this comment should have been followed up on in the GEPF external audit report?

How carefully did Deloitte & Touche and Nexia SAB&T look at the massive portfolio of investments? For example, in regard to the valuation of unlisted investments, they state that “the valuation of these investments involves the use of various complex valuation models, subjective valuation inputs as well as significant levels of judgement”. Is that so? Is unpaid interest not added to the “value” of the investment?

Actuarial valuation

The latest actuarial valuation – performed by Alexander Forbes Financial Services as at March 31, 2018 – indicates declining short- and long-term funding levels.

The minimum funding level of 108.3% comes in at 18.3% above the minimum funding level target of 90%, but the long-term funding level of 75.5% falls far below the minimum funding level target level of 100%.

The contingency reserve of R137 428 million represents only 19.1% of the recommended contingency reserve of R720 893 million.

Financial results

Net investment income plummeted from R153.4 billion in 2018 to R46.8 billion in 2019, as did net income after transfers and benefits, diving from R127.4 billion in 2018 to R12.6 billion in 2019. This is mainly due to the negative adjustment in fair value of R40.5 billion (2018: positive adjustment of R69 billion).

Nevertheless, the investments yielded an average return of 2.6% (2018: 8.5%).

Impairment of investments in 2019 amounted to a conservative R8.8 billion (2018: R7.4 billion).

Impairments include:

• AfriSam Group – R2.4 billion (2018: R0.3 billion)
• Lancaster Group (Steinhoff) – R1 billion (2018: R4.3 billion), and
• Independent News and Media – R0.3 billion (2018: R1.1 billion).

No mention is made of the R4.3 billion investment in Ayo.

It is to be noted that the GEPF has not disclosed its investments in ‘Other’ primary listings on the JSE for R297.4 billion, nor has it disclosed its investments in ‘Other’ secondary listings on the JSE for R33.4 billion.

The cost of management (R’000)
	2019	2018
Executive officers’ remuneration and bonuses (4)	10 324	7 566
Principal officer’s remuneration and bonus	5 882	4 957
Board of trustees’ remuneration and expenses (49)	13 870	11 561
	30 076	24 084

Management fees
	2019	2018
Externally managed	1 729 469	1 600 933
Internally managed	470 429	179 845
	2 199 898	1 780 778

Management of investments

The assets of the GEPF are managed primarily by the PIC. However, 32 external asset managers have also been appointed. No details are provided in regard to the size of the portfolio managed by each asset manager, nor the return on investment.

Assets under management (R’000)
	2019	2018
Money market instruments 1	42 323 368	30 228 303
Direct loans 2	41 886 273	44 244 370
Bills and bonds 3	575 542 873	576 690 673
Investment properties	14 650 804	14 296 588
Equities, primary listing on JSE	763 107 297	781 484 673
Equities, secondary listing on JSE	199 890 771	188 601 729
Equities, unlisted equities	68 063 248	62 993 130
Preference shares	5 044 182	4 379 389
Collective investment schemes	108 330 465	98 898 446
	1 818 839 281	1 801 817 301

1. The investment in money market instruments of R42.3 billion (2018: R30.2 billion) includes promissory notes issued by the Land and Agricultural Development Bank of SA (Land Bank) for R6.2 billion (2018: R6.1 billion) and the SA National Roads Agency (Sanral) Ltd for R69.7 million (2018: R0). Do the increases in the amounts due from the Land Bank and Sanral represent new advances, or unpaid interest?
2. Direct loans include loans granted to special purpose vehicles that have been set up to make investments in established businesses, or investments in shares. Does this mean the GEPF is funding an aspirant class of rent-seekers? The GEPF should disclose a schedule of all loans, including the interest payable, unpaid interest, and unpaid capital instalments.
3. Bonds include R23.1 billion (2018: R26 billion) with Sanral, and R84.5 billion (2018: R87.6 billion) with Eskom.

The GEPF has some R173.2 billion tied up in state-owned entities (SOEs). Many of these entities are propped up by interconnected loans. If one large SOE folds, this will result in a ripple effect of imploding loans.

And the GEPF will be the sitting duck.