The fund responsible for managing R1.8-trillion of government workers’ pensions says the worst performance by the JSE in a decade knocked its investment returns in the year ended March 2019.
The Government Employees Pension Fund (GEPF), which is seeking permission from the National Treasury to increase its allocation to offshore investments, said it will report a drop in its investment performance for the first time in four years after increasing investment returns from 4% in 2016 to 8.5% in 2018.
The GEPF’s principal officer, Abel Sithole, said the fund was still in discussion with the Treasury and the two parties have not reached an agreement on whether it can take more assets offshore.
Having more assets invested outside of SA might have insulated the GEPF from the JSE losses but not much from markets’ performance point of view as the the MSCI world index also closed the year down 8.7%, while the Dow Jones Industrial also fell 3.5%.
Nevertheless, Sithole said more offshore exposure could have cushioned the fund from a currency effect point of view.
“To the extent that other markets have performed better and if we were exposed to those markets and their currency was in favour, we might have been better off,” said Sithole.
He said the fact that GEPF has not reached an agreement with the Treasury was “not a train smash” even though he would have liked to have had a response “yesterday”.
“But it doesn’t bother me that we might not get an answer tomorrow. We are still in discussion,” he said.
The GEPF is currently able to invest up to 10% offshore, whereas private retirement funds can invest up to 30%. The fund has most of its exposure in SA with over 50% in listed equities. In years like 2018, where the JSE all share index lost 11.37%, it is disadvantaged from geographic concentration of its listed investment.
“It’s not because we are negative about the South African economy or we want to desert it. It’s simply because we are heavily impacted by how the overall markets perform. We are so overly exposed to the JSE, for example,” said Sithole.
As a defined benefit fund — meaning that it has to pay out certain level of benefits to its members when they retire or resign which is not related to how much a member actually contributed — investment returns play the biggest part in GEPF’s ability to meet its obligations to members, especially since it is paying out more benefits to members than it is receiving in contributions.
In 2018, the fund received R70.4bn from members compared to R95bn of benefits paid out. To try and close this gap, the GEPF has several options: to ask the government to contribute more since workers’ contributions are capped at 7.5% of their pensionable salary; implement below-inflation pension increases; ask the government and labour unions to agree on lower salary increases, or change its asset allocation.
Sithole said given the GEPF’s level of funding, it was not anywhere close to implementing remedies such as below-inflation pension increases or to ask employers for more money. But a shift in asset allocation was necessary because “we don't know the future”.
Offshore diversification is only one option. The GEPF is also looking at the possibility of allocating more assets on unlisted equities and bonds. Investments in the unlisted space have become a contentious issue following controversy over unlisted investments by GEPF’s biggest asset manager, the Public Investment Corporation (PIC).
Sithole said the fund was satisfied with the PIC’s work as returns have been in line with its mandate. However, it is asking the PIC to report more regularly than in the past to increase its oversight.
“There are other actions one can take, like saying if some investments are above a certain limit, we want to be spoken to. Not to dictate the process, but be spoken to so that we can provide input if we can,” said Sithole
An actuarial valuation which was recently completed by Alexander Forbes showed that GEPF’'s funding level to meet short-term obligations such as resignations, death and retirement benefits stood at 108.3%. That is to say the fund would still have 8.3% of assets left if it had to pay every member what is due to them today.
However, long-term funding level sat at 75.5%, which was also affected by the solvency reserves that the fund holds as insurance.
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