ASHBURTON INVESTMENTS: Expert Opinions: Edition March / May 2020

ASHBURTON INVESTMENTS: Expert
Opinions: Edition March / May
2020

Benefits of alternative investments
     They’re numerous as Rudigor Kleyn, MD: corporate and
     institutional at Ashburton Investments, points out.

More SA investors are including alternative assets in their
portfolios as they increasingly understand the benefits
offered.

This echoes a global trend. In little more than a decade,
global alternative assets under management have grown from $2
trillion in 2008 to about $5,5 trillion in 2019. They’re
expected to exceed $8 trillion in 2023.

Alternative assets refer to those not traded on a public
exchange. These include private equity, private debt, real
estate and infrastructure. Also classified as alternatives are
art, antiques and classic cars.

In the past, alternative investments were considered too
difficult to access, high-risk or complex for many investors.
But now they’re accepted as an attractive means to diversify
portfolios, often achieving better inflation-beating returns
than traditional listed markets.

Alternative investments cover such a broad range of
investments it is impossible to classify the whole category as
one particular risk. Some, such as a venture capital that
provides seed money to fledgling businesses on starting up,
are high risk. Infrastructure, on the other hand, is less
volatile and lower risk with returns uncorrelated to business

cycles.

The main benefit of including alternative asset classes in an
investment portfolio is to have sufficient diversification to
reduce risk and enhance returns. They may also act as an
inflation hedge, provide reliable income streams, generate
high absolute returns, contribute towards sustainable
investing goals and provide access to emerging markets where
public markets are thin.

How to grow portfolios

Investors should consider a welldiversified portfolio that can
deliver a steady, above-inflation return throughout market
cycles. This might include public market allocations to fixed
income, public equities and cash complemented by some exposure
to inflation-beating benefits offered by alternative assets.

As with any investment, the returns for private assets are not
guaranteed. But they can potentially be higher than
traditional investments, outstripping CPI to provide a good
inflation hedge.

As it is more difficult to disinvest from alternative assets,
investors are generally compensated with higher returns known
as the ‘liquidity premium’. There are different types of
alternatives.

Infrastructure investments refer to those in vital projects
such as new roads, power supplies, airports, bridges, tunnels,
ports, water and telecommunications. Across the world there is
a growing need for more infrastructure, providing strong long-
term demand. It is estimated that globally at least $3,5
trillion to $4 trillion of annual investment is required
through 2035 to keep pace with economic growth.

In the past, infrastructure tended to be funded and managed by
governments. Given constrained government finances,

there has been a growing role for private funding.

Private equity refers to shareholder capital invested in
private companies as opposed to publicly listed companies.
Private equity tends to involve more than simply the transfer
of capital. Investors become actively involved in management
to build the businesses into more sustainable and better-run
entities. This ensures they make good returns while the
businesses are left stronger and more resilient. Private
equity investors generally invest for the long term of around
10 years.

Private debt funds lend money to companies, as an alternative
to bank lending. Investors in these funds can access better
yields than government bonds offer in a fairly low interest-
rate environment.

In summary

Alternatives offer distinct advantages such as potentially
higher returns (which cannot be guaranteed) and greater
portfolio diversification. Investors should understand the
benefits and unique risks of each alternative-asset type.

www.ashburtoninvestments.com

LIMA MBEU: Expert Opinions:
Edition March / May 2020

  The role of machines in investing
Ndina Rabali, chief investment officer at Lima Mbeu Investment

Managers, provides a perspective.

Artificial intelligence, machine learning, deep neural
networks. These terms cause apprehension amongst asset
managers and fund trustees. Gary Smith, a professor at Pomona
College in California, puts them into context:

Computers can input, process and output enormous amounts of
information at great speeds. Computers are relentlessly
consistent. It is therefore tempting to think that computers
are smarter than humans because they do some very difficult
tasks better than humans.

Computers may be more efficient at discovering patterns, but
they are still incapable of assessing whether those patterns
are useful or merely coincidental. Only humans can make this
assessment.

Computers do so many things well, but this does not mean that
they are better investors than humans. This is why we prefer a
Quantamental investment approach that integrates quantitative
techniques    with   human   judgement   in   building   investment
portfolios.

A simple example

Let us assume that someone wants to buy a house and that this
house must satisfy a list of requirements, including price,
size, location, style and functionality. What process would
they typically follow?

Firstly, they would identify a list of potential houses to
look at in their preferred locations by talking to estate
agents, going through newspaper adverts, or trolling through
various websites. They would also evaluate crime statistics
for the area, drive around to observe traffic patterns and
attend multiple show days. This is the traditional approach.

Or they could use artificial intelligence or machine learning

tools to assess traffic patterns, crime statistics, size,
functionality all at the click of a button. This would save
time, money and a lot of unnecessary effort.

Use of a data-mining tool, to generate a list of potential
houses to buy, not only contributes to improved efficiency but
also removes bias in the process. For example, when driving
around to evaluate traffic patterns, it could be that there
was load-shedding on a particular day leading to a one-sided,
biased view against a specific location. But a datamining tool
can evaluate traffic patterns more accurately – without
wasting petrol.

Secondly, they would conduct thorough due diligence. This
involves inspecting the list of houses they have identified
for faults that may not be immediately observable. In this
case, technology may be of little use because human judgement
will be required to identify significant or coincidental
issues.

For example, assessing how a fresh lick of paint has covered
the cracks on a wall would be too difficult for a data-mining
tool. The point is that the most efficient process is one that
combines the use of both human judgement and computing power.
Some tasks are best left to a computer, and some functions
should retain an element of human judgement.

For optimal results

In the same way, Quantamental investing aims to harness the
best of both worlds to deliver superior returns for investors.
They may use a data-mining tool or an advanced factor model to
generate an unbiased list of investment ideas. However, human
judgement still has a role to play in assessing ideas before
they are implemented in a portfolio.

Investors and trustees are right to be apprehensive if they
choose to continue ignoring the benefits that they can get
from the use of advanced statistical techniques. This is why

we believe that future success in asset management will
require technological efficiency in the processing of
information through expert systems. They assist in forming,
controlling and implementing portfolios.

www.limambeu.co.za

MOMENTUM    CONSULTANTS   &
ACTUARIES: Expert Opinions:
Edition March / May 2020

Empower fund members to save enough
          for retirement
 Heed the advice of Rob Southey, head of asset consulting at
              Momentum Consultants & Actuaries.

Many members of retirement funds don’t know whether their
savings are on track to reach their retirement goals. Even
those who suspect their savings for retirement may be
inadequate often bury their heads and hope for the best,
unaware of steps they can take to improve their retirement
outcomes.

Empowering education and ensuring members have access to the
appropriate information at the right time are potent tools for
helping them to make smarter financial decisions, leading to
better retirement outcomes.

Funds’ trustee boards and management committees try their best
to improve outcomes by creating appropriate investment

defaults. However, defaults are typically designed around the
“average” member. The reality is that the “average” member
does not exist. This is particularly apparent when members
reach their pre-retirement phases when investment portfolios
ideally need to align with the individual member’s specific
annuity choice.

Informed decision-making

The retirement-fund industry can be complex and confusing.
Members need to be educated around how their funds work, how
annuities work and what they can do to increase their
retirement savings to receive an adequate income during
retirement. Some actions members can take to increase their
retirement incomes include:

• Increasing their contribution rates;

• Choosing the investment portfolio that best matches their
personal circumstances and investment horizons;

• Keeping their retirement savings invested when changing
jobs;

• Starting to save as soon as possible (if their employer
doesn’t provide a retirement fund);

• Retiring later in their working lives.

Tap into technology

The practicality of educating members can appear overwhelming
to trustees and employers. However, advances in technology and
the ability of people of all ages and demographics to use
technology like smart phones, tablets and laptops makes
empowering education and communication far more possible than
previously.

YouTube, podcasts, animated Whatsapp videos and easy-to-read
articles on the employer’s staff website are a few of the many

channels that can add tremendous value.

Consistent communication

For education and communication to have a significant impact,
it is important to translate improved knowledge and awareness
into action. Persistent communication, focusing on the same
message across various communication channels and an
escalating sense of urgency, are effective in getting people
to start putting knowledge into practice.

Members need to be continuously informed of how their
retirement savings are doing relative to their targeted goals.
Where savings are falling short, they need to be informed of
the actions they should consider.

While much of this information may be available on the
employer’s staff website or in annual benefit statements,
members often don’t prioritise a retirement ‘check-in’ until
they’re nearing retirement. By then the impact of actions to
improve retirement outcomes is limited. This is why a
professional, wellorchestrated communication strategy designed
to turn awareness into action is vital. The strategy should:

• Show members how potential actions can make a big difference
to their desired outcomes;

• Clearly explain the options available to members when they
need to make key decisions. These include choice of an
appropriate investment portfolio at different life stages,
choice of annuity at retirement and what to do with their
retirement savings when changing employers;

• Highlight the factors that need to be considered when making
choices;

• Inject a sense of urgency, but not panic, andencourage
members to take control of their financial destinies.

It is also important that the demographics of members —

particularly factors such as age, income and education level –
are taken into account and communication is tailored
accordingly.

Member apathy

There is a tendency to underestimate members’ apathy and
overestimate members’ understanding of the retirement industry
and terminology. Momentum Corporate’s research shows that
members have a basic level of financial literacy. Yet there is
general discomfort, regardless of age or income, around the
industry’s terminology.

Education of, and communication with, fund members must become
more top-of-mind for trustees. Effective strategies can have a
significant impact on members’ retirement outcomes.

As a team of unbiased professional retirement-fund
consultants, Momentum Consultants & Actuaries is positioned to
assist with development of such strategies.

www.momentumconsultantsandactuaries.co.za

RISCURA: Expert Opinions:
Edition March / May 2020

TOMORROW’S RETIREMENT INDUSTRY WILL
 BE RADICALLY DIFFERENT – SO WHAT

SHOULD PENSION FUNDS BE THINKING
              ABOUT NOW?
      Petri Greeff, Head of Investment Advisory, RisCura

Pension funds today should be investing for a horizon of 80
years or more. While it’s impossible to predict what the world
will be like in 2100, it’s safe to assume it will be radically
different to the one we live in today.

We can expect the retirement industry   to be disrupted by many
unpredicted changes, but for now it’s   more useful to consider
the trends we can identify. How are     these likely to impact
long term savings outcomes, and what    should pension funds do
now to capitalise on the opportunities and mitigate risks?

Below are some factors the retirement industry should be
considering in order to transform its traditional approach and
ensure it is able to meet future expectations.

Increasing longevity

Life expectancy has increased dramatically across the globe
and will continue to do so as technology and medical research
advance at a rapid pace.

This means we are likely to be working for longer, and
spending a more time in retirement too. Increasing longevity
will have a significant impact on retirement contributions
required, asset allocation, risk levels, and investment
strategies for pension funds.

We may also see a fundamental shift in the way we accumulate
savings over time. The old model of studying or training for a
job and then building a long-term career in that field until
retirement may soon be outdated. Increasingly, people may opt
to stop and retrain mid-career – possibly even a few times
over. This could change the nature of the traditional

retirement journey, and the retirement industry may need to
adapt accordingly.

In addition, many pension funds are likely to face the
challenge of an ageing membership base with fewer new members
coming in due to the impact of automation and AI in future.
Are their current investment strategies designed to support
and survive this?

Impact investing

As Millennials, Generation Z, and future generations form an
increasingly large proportion of pension fund members, their
voices will become impossible to ignore. What do they want and
expect from their investments? Investments that will yield the
required return and have a positive impact on society and the
environment.

Pension funds have been incorporating ESG for some time now,
but these requirements will only become more critical going
forward. What should pension funds do now to position
themselves for meeting the increasing demand for products
offering strong returns and positive social impacts?

Climate risk

According to the Intergovernmental Panel on Climate Change
(IPCC) – a United Nations body for assessing the science
related to climate change – Southern Africa is a climate
change hotspot. The Intergovernmental Panel on Climate Change
notes that temperature increases in South Africa are rising
twice as fast as the global average.

The impacts of this will be far-reaching and will affect food
security, water security, and ultimately economic growth in
SA. Any long term investment strategy today needs to be
cognisant of climate risk and take steps to mitigate against
this.

Technology

Robo advisers will become more prominent in the investment
world in the coming decade and beyond. These will be a good
option for “DIY” investors, since they are likely to offer the
same advice at a fraction of the cost of traditional financial
advisers. When it comes to larger pools of money – pension
funds, or ultra-high net worth individuals, for example – we
anticipate a hybrid approach to investment advice. Artificial
intelligence will work alongside human advisers who have
embraced new technologies. Are pension fund trustees doing
enough to ensure they – and their advisers – keep abreast of
the technological developments and innovations that are likely
to disrupt the industry?

Increasing regulation

Corporate scandals and the need for more oversight are
increasing regulatory requirements. This is placing strain on
pension funds across the globe, and South Africa is no
exception. Busy trustees simply don’t have the governance
bandwidth to deal with the everincreasing requirements.
Additional resources need to be allocated to ensure funds
remain compliant and this ultimately comes at a cost to the
members of the fund.

Each of these trends presents new challenges for pension funds
and innovative solutions are needed. Investment advisers can
answer the call by providing future-focused alternatives for
trustees to preserve the best outcomes for their members while
meeting industry requirements.

GRAVY: Editorials: Edition:
March / May 2020
The way the Zondo commission is going, testimony from the
accountants is making even the lawyers look good.

It was back in 1920 that US columnist H L Mencken famously
observed: As democracy is perfected, the office of the
president represents, more and more closely, the inner soul of
the people. On some great and glorious day the plain folks of
the land will reach their heart’s desire at last and the White
House will be occupied by a downright fool and a complete
narcissistic moron. A century later, it’s proven.

Like a comment attributed to Winston Churchill that democracy
is a wonderful system of government until one speaks with the
average voter. That’s proven too, perhaps rather close to
home.

There are occasions that loadshedding would be really welcome,
as during the fracas which preceded the Sona of President
Cyril Ramaphosa. When we need load-shedding, we don’t get it.
Yet another Eskom failure.

There’re few things more feel-good than making money from
promoting social responsibility. Check the Principles for
Responsible Investment, the non-non profit organisation backed
by the United Nations. In its most recent financial year, fees
from some 2 400 signatories (of whom fewer than 500 are asset
owners) amounted to £11,4m (an average of £4 750 per
signatory). Total income, inclusive of grants, was £13,2m
against costs of £12,5m. The hardship for SA signatories,
notwithstanding emergingmarket discounts, is to pay in hard
currency. As the rand goes down, their fees go up. At least
they get a logo for their letterheads to show they’re
committed, as the UN PRI says, to “drive real change” for the

world to become a “better place for all”. The test isn’t in
the logo.

At the Mpati inquiry into the Public Investment Corporation,
commissioner Gill Marcus asked about possible conflicts of
interest on the part of Abel Sithole (TT July-Sept’19). He’s
chief executive of the Government Employees Pension Fund (the
PIC’s largest client) and commissioner (or still the acting
commissioner) of the Financial Sector Conduct Authority which
regulates the PIC. Let’s wait to see what the report of the
Mpathi inquiry, completed but yet to be released, has to say
about it. Unsaid, except in whispers after the inquiry, is
Sithole’s employment in a previous life. It was at
Metropolitan, now part of Momentum Metropolitan. The FSCA has
effectively fined it a severe R100m for contravention of laws
by a Metropolitan Collective Investments unit trust. To be
sure, such are the checks and balances at the FSCA, that the
one cannot have anything to do with the other. Sithole is now
remote from his former employer, and perceptions of interest
conflicts can be taken too far.

Not much happiness in the retail trade these days. Asked how
he was finding business activity, a Sandton storekeeper
replied: “In the morning it’s dead and in the afternoon it
quietens down.”

The meaning of ‘opaque’ is obscure.

UNPAID BENEFITS: Editorials:
Edition: March / May 2020

No end in sight
Workers are afflicted, not only by administrators but also by
their own funds. Lack of contact information hampers progress.
But there could also be a lack of will. There isn’t a lack of
            costs ultimately for someone to bear.

It’s iniquitous that millions of rand owed to millions of past
and present retirement-fund members, many in poverty, are left
unclaimed or unpaid. That goes without saying. Worse is that
the numbers appear to be mounting. The latest annual report of
the Financial Sector Conduct Authority (previously the
Financial Services Board) shows for the year to end-March 2019
that there were 1 275 retirement funds owing an aggregate of
R42,8m in unclaimed monies to over 4,7m beneficiaries. Add to
them the funds that the FSCA does not regulate, notably the
mammoth Government Employee Pension Fund and Transnet funds,
for the quantum to become yet heavier. What’s to be done? No
longer is it a matter to be resolved by leisurely interaction
between funds, administrators and the FSCA. Impatience is
piqued by the Unpaid Benefits Campaign, an unaffiliated
community organisation which has been gaining traction from
new branches nationwide. It’s supported by Open Secrets, a
donor-funded entity which last November produced a research
report lambasting the financial sector. The more that UBC
supporters take to the streets – an activist strategy planned
to intensify – the more that public awareness will foment.
This in itself is no bad thing, serving as it should to
dissipate lethargy in assets being reunited with their owners.
The flip side is in the reputational risk for the financial
sector, including the FSCA as regulator, taken as a whole
without nuance. Intending to lobby parliament, UBC
steeringcommittee member Thomas Malakotse is reported to have
said: “We will also be calling for a boycott of finance
companies involved in the withholding of benefits. The fund
administrators have been making secret profits for decades by
charging fees on these unclaimed assets, and they are

accountable to no-one.” That’s a broad sweep which overshoots
on context. Much of the problem arose because of
surplusapportionment legislation retrospective to 1980.

Funds and administrators simply had too little contact
information on long-departed members, often lacking even their
ID numbers. This made it inordinately difficult for funds to
ascertain former members’ whereabouts for payment of top-ups
by the time that apportionment of surpluses had to be
distributed by 2008. Surpluses arose, for example, by former
members becoming entitled to share in the contributions of
employers to their old defined-benefit funds.

Clearly, there’s a lot of explaining still to be done; not
only by fund administrators but also by large funds whose
boards comprise nominees of trade unions.

Clearly, there’s a lot of explaining still to be done; not
only by fund administrators but also by large funds whose
boards comprise nominees of trade unions. In fact, the Metal
Industries Provident Fund and the Engineering Industries
Pension Fund – both run by Metal Industries Benefit Fund
Administrators (MIBFA) – are together liable for nearly 45% of
all unpaid benefits (see table as at end-December 2016,
broadly consistent with the report of the Pension Funds
Registrar for the year to end-December 2017). After the MIBFA
funds comes the Mineworkers Provident Fund whose board
includes trustees appointed by the National Union of
Mineworkers and the Association of Mineworkers & Construction
Union. Then there are three standalone funds in the motor
industry whose boards similarly boast tradeunion
representation. Being self-administered standalones, none can
blame outsiders for unpaid benefits. Neither would they have
anybody other than themselves to pick up the costs for tracing
and processing former members to whom payments are due. Nor is
there an explanation for the union-related standalones being
responsible for such a high proportion of unclaimed benefits.
Asked to comment, spokesperson for MIBFA replies: “It is the

policy of the funds not to respond to media inquiries about
the confidential matters of the funds. However, we confirm
that the funds report the unclaimed-benefit member details to
the FSCA on a regular basis as required. Further, members and
beneficiaries of these unclaimed funds are also traced through
MIBFA’s internal processes as well as advertisements in the
press.” For its part, the FSCA has set up a search engine to
help members of the public establish whether there are
possible unclaimed benefits due to them. At the least, the
facility would require basic ID information. Nonetheless, much
as the Open Secrets research is so comprehensive and plausible
for its wellarticulated allegations to demand response, its
report is deficient by omission. It prefers to focus primarily
on Liberty, presumably because it administers more retirement
funds than any other (1 107 out of a 5 140 total, according to
the FSCA), as a prime example of “how financial service
companies make money from administering pension funds”. The
irony is that Liberty, amongst all the institutions involved
with fund administration, has led the pack in setting right to
wrongs. Having become numerically the largest administrator
through the unholy mess it inherited through taking over the
old Capital Alliance funds in the 1990s, it was the first in
applying to court for reinstatement of various “dormant” funds
whose registrations the Financial Services Board had allowed
improperly to be cancelled. These funds still had assets and
liabilities. Liberty’s successful court application in 2018
paved the way for members to be recompensed. It subsequently
caused the FSCA to issue a directive that other administrators
similarly move to reverse irregular cancellations. Liberty has
also appointed three external individuals, relied upon to act
independently, as trustees of its unclaimed benefit funds.
None of which absolves Liberty from past controversies: for
one, through the interest conflicts that arose from using
employees as trustees of the supposedly dormant funds to
pursue their cancellations; for another, on whether the start
it made a few years back to revise the cancellations was
motivated coincidentally or autonomously by the contention of

Rosemary Hunter that the so-called “cancellations project” of
the Financial Services Board was illegal. At the time, in
2014, Hunter was the FSB deputy executive officer in charge of
retirement funds. Up against her was her boss, then FSB
executive officer Dube Tshidi. Their ugly confrontation
eventually landed in the Constitutional Court where, by
majority judgment in 2018, Hunter was defeated in her attempts
to have prejudice from the cancellations fully explored.

Hunter’s role

Who has the last laugh? Unsurprisingly, the latest FSCA annual
report mentions not a word of gratitude to Hunter. At huge
personal sacrifice, she’d brought the inequity of unpaid
benefits into the public consciousness as the regulator never
did. It does mention that Tshidi, who’d moved heaven and earth
to choke her, still sits on the FSCA interim management
committee. As its executive head, his remuneration for the
year to end-March 2019 was R7,6m. But the show isn’t over
while the Unpaid Benefits Campaign, with Hunter in the wings,
sings ever louder.

AT LIBERTY: HOW FEES WORK

Despite the high quality of its research, and sometimes
emotive presentation, the Open Secrets report does contain
errors on cost computations. Since it has singled out Liberty
to illustrate from the particular to the general, the group
has sought to answer some of the more serious
misunderstandings. For its side of the story, Liberty
Corporate chief executive Tiaan Kotze has entered this Q&A.
Q: Administration fees are deducted from unclaimed benefits.
Are these fees eroding members’ benefits?
A: The Liberty Unclaimed Benefits Funds charge administration
fees for the monthly maintenance of members’ records. These
fees are significantly lower than those of commercially active
retirement funds.
The fees are charged against each member’s fund value and paid
by the funds to Liberty in respect of the funds’ operational
requirements. These requirements include administration

maintenance, production of the funds’ audited annual
financials, statutory levies, professional advisory fees and
remuneration of the independent trustees.
Other than members with a fund value of less than R800, who
are automatically exempted, the fee charged for these services
is R9,90 per member per month. The capital benefit is not
reduced by the monthly admin fee where investment growth
exceeds this fee.
The funds have contracted ICTS as their tracing agent. It
charges around R350 for each record successfully traced. This
fee is deducted from the benefit before it is paid.
What is Liberty doing to trace members with lower benefit
balances who’re exempted from administration fees?
We have now processed all members in our Unclaimed Benefit
Funds, where each member has a fund value of over R1 000,
through traditional tracing methods. About a third of members
have values below R1 000. For these members we’re running sms
campaigns, with some success, and also looking at ways to
enhance membership data for those remaining members. These
actions are at Liberty’s own cost.
How are assets of the Unclaimed Benefit Funds invested?
Selected by the trustees is a combination of money-market and
predominantly the Liberty Stable Growth Portfolio. The annual
fee Liberty charges is 0,6% of assets invested. There are no
further fees.

LITIGATION:     Editorials:
Edition: March / May 2020

            Rare win for Mkhwebane
  Punitive costs order against prominent curator of pension
  funds. Court indicates disapproval of Mostert’s behavior.

Public   Protector   Busisi   Mkhwebane   desperately   needed   a

victory. In the North Gauteng High Court, she recently had
one. Unfortunately for Mkhwebane, however, it had little to do
with her legal brilliance. Instead, supported by the Economic
Freedom Fighters, it had much to do with the litigious
gamesmanship of attorney Tony Mostert.

For a series of court applications launched and later
withdrawn by Mostert, to prevent publication of a Public
Protector report scathing of him and the head of what was then
the Financial Services Board, Acting Justice Wanless ordered
that costs be paid by Mostert in his personal capacity on the
punitive attorney-andclient scale.

Through the series of actions, where two counsel were engaged
by the respective sides, the award against Mostert is to
include their costs. This is so that neither the Public
Protector nor the EFF, joined as respondent, should be left
out of pocket. The EFF was the original complainant to the
Public Protector. While the bill to be paid personally by
Mostert should be substantial, it’s unlikely to dent
significantly the hundreds of millions of rand that he and his
law firm have made from curatorship of the numerous pension
funds involving alleged “surplus stripping” by one Simon Nash.
The criminal trial of Nash, the individual who features in
each of these funds, was interspersed by several civil actions
and is about to enter its second decade. In her report, to be
taken on review by the Financial Sector Conduct Authority
(successor to the FSB), Mkhwebane contended that by 2011 the
fees earned by Mostert and his law firm had amounted to R240m
over the previous six years. The amount of fees earned
subsequent 2011, she said, is not known because both Mostert
and (Dube) Tshidi “steadfastly refused to make any disclosure
whatsoever” (TT July – Sept ’19). Tshidi, at all material
times the FSB executive officer and still a member of the FSCA
interim management committee, was accused by Mkhwebane of
“improprieties and/or irregularities” in his nomination of
curators. Further, he had failed to discharge his regulatory

duty “to properly manage the possible or perceived conflict of
interest between Mr Mostert’s role as curator and the
appointment of his own law firm”.

How was it that the fees of Mostert and his law firm could
have run into the mega-millions of rand? The answer is
indicated in the judgment. In making the order against
Mostert, the court had to consider whether the nature of his
“voluminous” application in this instance was “spurious and/
or vexatious”. Not only did it have no prospect for success,
the court held, but the urgency had been selfcreated by
Mostert. Wanless noted that the latest application by Mostert,
for an award of costs against the Public Protector and the EFF
amongst others, was “just one more in a long line of
litigation” which had ensued between Mostert and the pension
funds involving Nash: “This litigation has been arduous,
particularly mean-spirited and, most importantly, expensive.
It has burdened not only this court but many other courts
before it.” He wanted to make an order that reflected his
disapproval of Mostert’s application both in nature and
manner. And since Mostert had elected to join the EFF as
respondent with the Public Protector, the EFF had incurred
costs for which “it is thus entitled to be compensated”.
Mostert had launched the application both in his personal
capacity and in his capacity as curator or co-curator of Nash-
related pension funds. The court found it “difficult to
understand” why these funds were joined as applicants because
they had “no real interest in it” and had not filed
affidavits.

The notice that the Public Protector would be carrying out an
inquiry, and publishing a report, applied to Mostert only. In
taking a view on whether the other applicants should share in
the award against Mostert, the court agreed with the Public
Protector and EFF that “the pension funds and members thereof
should not be mulcted in costs”. It was in January last year
that Mostert first attempted to interdict the Public Protector

from publishing her findings on Julius Malema’s EFF complaint.
A few months later, Mkhwebane published her report anyway.

CORPORATE        GOVERNANCE:
Editorials: Edition: March /
May 2020

       An idea whose time has come
At least for due consideration. Germany extends an offer to SA
          for adaptation its co-determination model.

In SA from time to time, the prospect of worker representation
on company boards rears its contentious head. What does this
have to do with pension funds? Everything, because it goes to
the heart of their role in a stakeholder democracy on whose
functioning their fortunes rely. Two years ago, rather
diplomatically, President Cyril Ramaphosa asked the Cosatu
national congress to think about workers on boards. Whether it
thought or didn’t – it’s a difficult think for the union
federation – the response was apparently mute. In the UK, when
Jeremy Corbyn put it into the UK Labour Party election
manifesto, it was broadly dismissed as leftist lunacy for its
prescriptive quotas. Also in the UK, when Teresa May suggested
a moderate version on becoming leader of the Conservative
Party, she rapidly withdrew under pressure from organised
business. When Elizabeth Warren recommends the principle, in
her candidature for the Democratic Party’s presidential
nomination in the US, support is obtained from at least one
large institutional shareholder. It had tabled a resolution at

the Microsoft meeting where the motion was defeated. But the
shareholder seemingly intends to table similar resolutions at
other high-profile companies for the controversy to become an
election issue that will challenge the standpoints of rival
candidates.

One way or another, it’s a debate more likely to gain than
lose traction. And no less in SA where Germany has become
active in promoting for discussion its highly successful model
of co-determination in corporate governance. After a state
visit by Ramaphosa to Germany two years ago, last November a
powerful German delegation of senior officials from employer
and trade union confederations visited SA. They held a series
of workshops with their SA counterparts to discuss the
potential and limits of the German model for local adaptation.
To the ears of South Africans, the concept should be far from
revolutionary. Rather, it invites a refinement of the
workplace forums for which the Labour Relations Act provides.
These forums, the Act states, are “entitled” to be consulted
by the employer “with a view to reaching consensus” on a wide
range of workplace matters. This aspect of the legislation,
still operative, was enacted in 1995 during the halcyon
Mandela era. Back then, in line with the new Constitution,
there was a discernible aspiration to build consensus. Since
then, there’s been regression into confrontation. Even with
the Companies Act allowing pension funds – including those in
which trade unions are persuasive – to nominate main-board
directors of companies where they’re shareholders, there’s
reluctance to walk through the open door. The topic of the
German model could be addressed at the next meeting, due to be
held later this year, of the Germany-SA binational commission.
SA can only benefit, for it has much to test against the
“partnership in conflict” concept that underlays one of the
world’s most successful growth economies. The essential
element is trust between employers and employees, respectively
recognising their interdependence as “social partners”. Such
trust is built in Germany through a legal framework of

supervisory boards and works councils for joint representation
to enable joint decision-making. Martin Schaefer, Germany’s
ambassador to SA, is under no illusions about rapid adaptation
of his country’s complex model. For one thing, he points out,
German policy counters rent-seeking oligopolies. For another,
there’s the attitude in government that the social-market
economy understands capital as a means to generate growth
equally. By contrast, he observes that in SA there are ongoing
ideological battles where capital and labour continue to see
themselves as class enemies: “There’s a lack of trust.”

For the German experience to help SA, he’d like to see “better
competition policies that make more room for new entrepreneurs
from where growth will come”. Obviously too, trust would have
to be developed between government, the private business
sector and labour “for which we need success stories”. He
points, for example, to the “magic triangle” that helped
Germany avert the worst consequences of the 2008-09 global
financial crisis: “Drastic decisions were taken together.
Government financed short-term work to help affected
companies. Business promised to avoid large-scale
retrenchments. Labour agreed to renounce real and nominal
salary increases. A few years later, we emerged stronger from
the crisis with less unemployment and real salary increases.”
The message is that everybody benefits from everybody’s
participation. It’s from this “credible desire for dialogue”,
as Schaefer puts it, that Germany can boast hugely profitable
companies, the highest salaries for industrial workers and the
lowest ratio between executive and employee remuneration:
“Without economic growth there can be no social
transformation, and without social transformation there can be
no constitutional stability.” SA, beset by instabilities, can
take note. It has much to learn from the German
konflikpartnerschaft, including the way in which it encourages
vocational training. To be hoped is that the learnings won’t
be entirely academic; rather that efforts through the
binational commission will help to make them usefully

catalytic.

CO-DETERMINATION STRUCTURES
In Germany there are basically three “communication vessels”:
* Works councils, at workplaces where there are
at least five employees, for sharing of workplace information,
facilitating consultation and exercising co-determination
rights;
* Supervisory boards, where companies with more
than 500 employees have one-third of board seats for employee
representatives and where companies with over 2 000 employees
have 50% of employee representation, for co-determination at
supervisory board level;
* Trade unions for participating in negotiation of
collective agreements. The unions cooperate with works
councils and have seats on the supervisory board.
Source: Hans Bockler Stiftung

RETIREMENT           REFORM:
Editorials: Edition: March /
May 2020

             Defects in the system
Rowan Burger, head of client strategy at Momentum Investment,
                        calls for them

  to be addressed so that funding can be improved across the
                            board.

It’s time for the legislators to reassess the state of SA
retirement savings. They should change their focus from one of
cost saving to look more broadly at financial inclusion and

quality of outcome. Much has been done over recent years to
simplify the tax system and push for greater efficiencies.
This can be demonstrated by the fact that, over the last
decade, the number of active retirement funds has reduced from
more than 13 000 to just over 2000. A streamlining of pension
and provident funds may bring even further reduction. The
level of governance and reporting has increased significantly,
as evidenced by the increase in the size of the levies from
the FSCA regulator. It means a cost-only outcome of the
reductions drive is not the sole benefit. Take a step back to
consider what the unintended consequences of this focus have
been so far. Ours is a voluntary tax-incentivised savings
system. Employers have a choice to enrol their employees in
the system. With greater member choice, employees decide their
level of savings. Measures of the system’s success would also
be the extent to which the working population is covered and
whether the benefits delivered are adequate. From the 2018
National Treasury tax statistics, we can observe that in the
system there are only some 4,7m of an estimated 16,5m workers.
We also see that contribution levels average 11% of taxable
remuneration dropping down to only 2% for the top earnings
category. This clearly indicates that the current system
misses its mark in terms of coverage and delivery of outcomes.

(It is broadly accepted that a 15%-of-salary retirement
savings level, appropriately invested for 40 years, will
deliver an adequate retirement income.) Instead of further
focus on incremental cost savings which could be achieved by
funds, it is time to take a broader view of how to solve these
other problems:

• The old-age grant is generous by international standards.
As it is means tested, it forms a disincentive for low-income
workers to participate and preserve savings;

• Much of our workforce is informal or part-time. It means
that the pre-determined regular contributions required by the
Pension Funds Act excludes them from meaningful participation,

since SA has only around 9m permanent full-time employees;

• While there is a tax incentive for higher-paid workers,
those below the threshold have no incentive to tie up their
savings until they are aged 55;

• Threats of prescribed assets and other investment
restrictions have higher-paid workers preferring to save
outside the system where they can control their savings;

• The ability to encash benefits in full when changing jobs
leads to over 90% of these members doing so. This results in
savings terms being nowhere near the 40 years, and therefore
in insufficient benefits;

• With the current poor savings levels, lack of skills in the
economy and improvements in old-age life expectancy, on
international experience there should       be   increases   in
retirement ages to at least age 65;

• Contribution reconciliations and death-benefit distributions
remain administratively-intense activities. Their benefit to
members should be better interrogated and debated;

• Disclosures of costs have been important but need to be
balanced by an assessment of value created. Over recent years,
the advantage of a significant pool of assets to support the
economy and transform the lives of ordinary South Africans has
become clearer than ever. Support for this savings pool is
essential. Much has been achieved over the last decade to
achieve better retirement outcomes. However, our system will
remain sub-optimal without a broader focus and a few more bold
reforms.

CURRENTS:       Editorials:
Edition: March / May 2020

                  Tough to follow
                  US lead in ESG disclosures

Compared to the gentle guidance of the Financial Sector
Conduct Authority for retirement funds to consider
environmental, social and governance (ESG) factors in making
their investments decisions, the approach of the Securities &
Exchange Commission has adopted an entirely different and
ruthless approach that regulates the ESG disclosures of public
companies. Similarly applied in SA, retirement funds would
know a whole lot better what they need to consider.

Public companies under SEC jurisdiction must disclose, for
instance:

• Compensation terms and conditions for executive management
and board members;

• Ratio of the chief executive’s compensation to the median of
the total cost compensation of all other employees.

There are also regulations that require disclosures in
company-specific ESG matters. Amongst these are for miners on
mine safety, payments made to governments for extraction of
natural resources, and even on the source of certain minerals
where the Democratic Republic of Congo gets special mention
under the supply-chain rule intended to prevent mining from
funding domestic conflicts. Moreover, all ESG disclosures are
subject to antifraud rules. These include lying directly or by
omission. A fact is “material” if there is a “substantial
likelihood” that it would have been viewed by “the reasonable
investor as having significantly altered the ‘total mix’ of

information available”. Companies can still publish
sustainability reports that burnish their image as responsible
corporate citizens, like in SA. But these reports would
nonetheless be subject to the anti-securities fraud rules,
unlike in SA. The SEC has raised the bar for ESG disclosures.
A prod from SA investors could get the FSCA and JSE to begin
thinking as kindred spirits.

Strange exception

According to its latest annual report, one of the FSCA values
is transparency. But this value apparently doesn’t extend to
the R70m claim brought against it by the Pepkor retirement
fund. The claim was for losses allegedly suffered by the fund
as a result of the regulator’s negligence in the Trilinear
debacle, due for trial in the high court last November (TT Oct
’19-Jan ’20). The outcome? The court case has been withdrawn
and the Pepkor fund is bound not to disclose whether a
settlement has been reached.

ARC as anchor

In the global portfolio of multinational employeebenefits
consulting firm Mercer, the 34,4% it held in Alexander Forbes
would hardly have amounted to a rounding number. Wanting to
offload, as part of its routine investment review, it found a
willing buyer in African Rainbow Capital.

Certainly preferable to piecemeal disposals through the
market, in a R1bn “shareholder reorganisation” ARC will
replace Mercer as the largest

single shareholder in Forbes. ARC will hold 33,9%

and Mercer 4,5%, Forbes and Mercer agreeing that

their “strategic alliance” remains unaffected.

A strong motivation of ARC is broadening access

to financial services. Substantial investments are

TymeBank in banking, Rand Mutual Assurance and

African Rainbow Life in insurance, and Afrocentric in
healthcare. “Regulatory reform, on the management of pension
funds, will deliver positive outcomes for SA and Forbes is
well placed to benefit from them,” believes ARC co-chief
executive Johan van Zyl. “In particular, new regulation
introduces lower fees as pension-fund members are able to save
inside their pension funds and thus have significant savings
over the period of their working lives.” At present, he adds,
ARC has no intention to hold more than 50%. But the
transaction does give Forbes a new anchor shareholder, and a
black-empowerment one at that. He also notes that ARC’s
investment strategy is to acquire “strategic shareholdings”,
not to operate businesses. It leaves this to capable
leadership and management teams. Such a leader, as Van Zyl
well knows from their Sanlam years, is Forbes chief executive
Dawie de Villiers. He’s happy that ARC “fully supports our
advice-led strategy”. As the empowerment shareholder in Sanlam
also, ARC isn’t short of strategies to support.