by Devan Pillay

Labour must act to ensure that pension funds create growth and development.The retirement fund industry in South Africa was valued at R694 billion in 2000 (equivalent to 80% of the GDP) and R836 billion in 2001. Organised Labour is increasingly concerned that the industry is dominated by private sector interests at the expense of retirement fund members and contributors – ordinary workers.

New research by NALEDI indicates that South Africa has sufficient financial resources to fund development initiatives and other investments. In order for Labour to play a meaningful role in influencing investment decisions, it must act as a collective, be aggressive and consistent. NALEDI is actively engaged in research and advising the Labour movement on how it can exert more influence and control in the pension fund industry

This article does not address the possible lessons for the rest of Africa"s ordinary pension fund contributors but we hope trade union researchers from the rest of the African continent will find ways of using this research in a way which addresses pension fund issues in their own countries.

Present Situation

The pension fund industry is presently dominated by the private sector, making business’ agenda more dominant. Ideally, pension fund contributors should be the most important role players in the industry, but currently they have the least influence. Given that the majority of contributors to pension funds are ordinary workers – organised Labour, as representative of the working class, should therefore have more clout in the affairs of the industry.

Amendments to the Pensions Fund Act in 1996 gave members of retirement funds the right to elect representatives onto the boards of their respective funds. Worker elected representative must at least comprise 50% of the board of trustees. While a major victory for the Labour movement, it also poses two significant challenges. Firstly, few worker elected trustees have the necessary skills and knowledge to assess and evaluate advice given by the industry service providers. Secondly, is the reliance on the very same service providers, who have vested interests. Linked to the challenges are other pertinent questions:

* To what extent are labour/worker elected trustees able to influence the manner in which the industry functions?

* In terms of fees, performances, etc. how do worker elected trustees ensure they get value for money? How do they deal with poor performing asset managers, etc? On what basis do they choose service providers?

* Closely linked to the above point, how do the board of trustees ensure they have been advised correctly so they are able to take the right decisions?

Present investment patterns

The graph on the next page demonstrates the investment patterns of self-administered pension funds from 1996 to 2000.

Significant portions of the assets (more than 60%) are invested in shares and the insurance industry. The poor performance of the industry was recently highlighted in the media, where it was reported that the top 10 financial giants lost 11.09% value. The Sunday Times noted the "South African pension funds lost 9% of their value in the first three months of this year. And their performance over one year has been even worse – a loss of 12%." With inflation of around 9%, the real loss comes to 21%. Although partly a result of global conditions, it remains the responsibility of trustees to ensure that funds perform well.

Worker investment for a better life

Most, if not all, service providers to the pension fund industry live in up-market suburbs, while most of the worker elected trustees live amongst the poor. Service providers generally view stocks, shares and futures as the primary instruments for investment and are more concerned with the prospect of faster returns that are translated into faster commissions.

Worker elected trustees therefore need to exert influence over investment decisions. While some role players in the industry will argue that social investing is not in line with the fiduciary duties of trustees, this argument is based on the myth that infrastructure development and productive investments have no financial returns. This also ignores the fact that social investing is in the best interest of workers, who are contributors to these funds.

Research shows, however, that if 5 to 10 percent of pension fund assets were mobilised for developmental purposes, it would amount to R40-80 billion that can be used to target infrastructure development and productive investments. Such investments do not put workers’ funds at risk, as both are "secure" investments with reasonable financial returns. In addition, it would assist in reducing the infrastructure backlog, improve employment levels, and have positive economic spin-offs. However, at the Growth and Development Summit in June 2003, both government and business rejected Labour’s proposal on such investment.

Exerting influence and taking control

While codes of conducts do exist for service providers, on the whole they are ineffective. In order to ensure that the service providers do provide an efficient and cost-effective service to funds, relevant monitoring structures need to be created. When it is found that service providers have not acted in the best interest of a fund and its members, such service providers should be black listed by the labour movement and through its presence in other funds enforce such a black listing. A database of defaulters should be created and made available to all funds. Service providers that charge exorbitant fees should endure similar sanctions.

Service providers benefit from overgenerous conditions. Asset managers, for example, are paid up-front, that is, upon receipt of capital, expunge their commission, instantly reducing the capital amount by their commission. These kinds of practices need to be regulated. It is suggested that investment and asset managers’ remuneration be performance linked. In other words, commission ought to be linked to growth of the original investment.

Worker elected trustees must be empowered through appropriate training. Worker-friendly training and capacity building programmes must be developed and provided on an ongoing basis, to build a cadreship of trustees. A labour-friendly unit should be on hand to assist trustees with issues that require specific skills. This unit would also play a watchdog role on services rendered by service providers.

Finally, trustees can mobilise resources through their respective funds to be invested in developmental initiatives and productive investments. This intent must be built into the investment philosophies and strategy of respective funds.

Significant portions of the assets (more than 60%) are invested in shares and the insurance industry. The poor performance of the industry with the top 10 financial giants losing 11.09% value, was recently highlighted in the media. The Sunday Times noted the "South African pension funds lost 9% of their value in the first three months of this year. And their performance over one year has been even worse - a loss of 12%." With inflation of around 9%, the real loss comes to 21%. Although partly a result of global conditions, it remains the responsibility of trustees to ensure their funds perform well.

WORKER INVESTMENT FOR A BETTER LIFE

Most, if not all, service providers to the pension fund industry live in up-market suburbs, while most of the worker elected trustees live amongst the poor. Service providers generally view stocks, shares and futures as the primary instruments for investment and are more concerned with the prospect of faster returns that are translated into faster commissions.

Research shows, however, that If 5 to 10 percent of pension fund assets were mobilised for developmental purposes, this would amount to between R40-80 billion. Infrastructure development and productive investments in those sectors of the economy that are growing and creating jobs could be targeted with these funds. It is not as though workers’ funds would be at risk as both are "secure" investments with reasonable financial returns. However, at the Growth and Development Summit in June 2003, both government and business rejected Labour’s proposal on such investment.

Worker elected trustees therefore need to exert influence over investment decisions. While some role players in the industry will argue that social investing is not in line with the fiduciary duties of trustees, this argument is based on the myth that infrastructure development and productive investments have no financial returns. This also ignores the fact that social investing is in the best interest of workers, the main contributors to these funds.

EXERTING INFLUENCE AND TAKING CONTROL

While codes of conducts do exist for service providers , on the whole they are ineffective. In order to ensure that the service providers do provide an efficient and cost-effective service to funds, relevant monitoring structures need to be created. Where it is found that a service provider has not acted in the best interest of a fund and its members, such service providers could be black listed by the labour movement and through its presence on other funds enforce such a black listing. A database of defaulters should be created and made available to all funds. Service providers that charge exorbitant fees should endure similar sanctions.

Service providers benefit from overgenerous conditions. Asset managers, for example, are paid up-front, and upon receipt of capital, expunge their commission, instantly reducing the capital amount by their commission. These kinds of practices need to be regulated against. It is suggested that investment managers/asset managers’ remuneration be performance linked. That is, commission needs to be linked to the growth of the original investment.

Worker elected trustees must also be empowered through receiving appropriate training. Worker-friendly training and capacity building needs to be developed to build a cadreship of trustees. A labour-friendly unit should be on hand to assist trustees with issues that require specific skills. This unit would also play a watchdog role on services rendered by service providers.

Finally, trustees can mobilise resources through their funds to be invested in developmental initiatives and productive investments. This intent must be built into the investment philosophy/strategy of respective funds.

[Devan Pillay is Project Manager of Naledi’s Pension Fund Project]