Can the state employee pension fund survive a R254bn knock?

The crux of this article is to consider the financial impact of the proposed action to divert R254 billion from the Government Employees Pension Fund (GEPF) to Eskom.

It does not discuss whether the government has the legal right to expropriate R254 billion from the assets of the fund. After all, the assets belong to the members of the fund.

Adamus Stemmet, spokesperson for the Association of Monitoring and Advocacy of Government Pensions (AmaGP), recently asserted that:

“Treasury has no legal right to change the GEPF’s investment policy, nor does it have the large amounts belonging to the GEPF at its disposal to use at will to bail out SOEs, other organisations and entities.

“The members [owners] of the GEPF clearly have a say in such matters.

“This legal right should and must at all times be protected by the GEPF board of trustees. That is their mandated responsibility as trustees. They must protect the fund’s members, the financial stability of the fund and also that any other assets of the GEPF are properly and professionally managed.”

Brief background

The Public Investment Corporation (PIC) manages 83% of GEPF assets in the form of equity, bonds, money market instruments, and property portfolios. The remaining 17% is managed by 32 asset managers appointed by the GEPF.

The relationship between the PIC and the GEPF is opaque, and it appears that the PIC takes the lead in making investment decisions.

The PIC was subjected to public scrutiny when the Mpati Commission of Inquiry (set up in October 2017), delved into allegations of impropriety in making investment decisions.

The Mpati report has been completed, but has not been publicly released.

Current value of the fund?

Unfortunately, no one has any idea of the current value of the fund. Neither the PIC nor the GEPF provide interim financial statements. The PIC integrated annual report is only published some seven months after its March 31 year-end, and the GEPF 2019 integrated annual report was only released in December 2019.

By the time the March 31, 2020 integrated annual reports are published, many new investments will have been made, investments will have been compromised, and investees may have hit the wall.

Neither the PIC nor the GEPF deserve any praise for their financial reporting. Not all investments are disclosed, and some of the accounting practices are questionable (for example, adding unpaid interest to the cost of a loan, giving the incorrect impression that the investment is growing).

In my view, a closer look should be taken at the investment valuations.

For want of a more accurate figure, it is necessary to use the fund’s market value of R1.8 trillion as at March 31, 2019.

An actuarial valuation of the GEPF is carried out every three years. The most recent, performed by Alexander Forbes Financial Services as at March 31, 2018, indicated declining short- and long-term funding levels.

The minimum short-term funding level was only 18.3% above the target of 90%, and the minimum long-term funding level was 24.5% below the target of 100%.

Factors to take into consideration

Injecting R254 billion into Eskom is in my view neither a loan nor an investment – it is an unwarranted gift granted through gritted teeth.

As Eskom is clearly insolvent, it will be unable to pay interest, nor make loan repayments.

Further, the GEPF/PIC will receive no rights – no right to appoint directors, no say in business decisions.

As at March 31, 2019, the GEPF had already invested R85 billion in Eskom.

It also holds R23 billion in the South African National Roads Agency, R21 billion in Transnet, R12.6 billion in the Development Bank of SA, and R6.9 billion in the Trans-Caledon Tunnel Authority. How can government provide assurance to the GEPF that these bonds are guaranteed? Will the GEPF eventually lose this money as well?

Taking R254 billion out of R1.8 trillion amounts to a massive 14.1% haircut.

As at March 31, 2019, the GEPF had R29 billion in “cash and cash equivalents”.

It will thus have to sell some good assets to provide the cash.

In my view, the R254 billion cash injection into Eskom cannot be classified as an investment, and will immediately deplete the assets in the fund.

Working on the basis of an asset value of R1.8 trillion, my rough non-actuarial calculation indicates that the R254 billion haircut will cause the fund’s long-term funding level to drop to 64.9% (minimum funding level target level is 100%). The short-term funding level will only be 1.6% above the minimum 90% level.

This latest threatened action is a red flag to the rating agencies.

It is a clear indication that government has no money, and will take, divert and expropriate when needed.

And we have been warned. The first port of call is the sitting duck of the corruption fallout, the GEPF.

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