ALLAN GREENBLO: The big debate over fiduciary duty
The cop-out answer is simply to comply with the regulation 28 guidelines for prudential investment. But it’s not so simple
There’s a debate that trustees might want as much as they might want a dose of Covid-19. Like the virus, which mutates through defences to contain it, so also there’s the concept of fiduciary duty that mutates with circumstance in its application to retirement funds.
The spreading infection in the SA economy is growth-choking debt. This makes unavoidable the debate over fiduciary duty, both at the level of individual funds and at the Financial Sector Conduct Authority (FSCA) as the regulator, in that retirement funds are virtually alone in their capacity to help relieve the national debt’s worst consequences. But this isn’t in the job description of fund trustees.
Because they’re obliged by fiduciary duty to act in the best interests of their funds, the crisp issue is a value judgment on the composition of best interests. Asked specifically, it’s whether trustees push for maximum exposure to offshore assets or plough members’ savings into the domestic infrastructure projects that are presented as the flywheels for SA’s economic expansion.
The cop-out answer is simply to comply with the regulation 28 guidelines for prudential investment. But it’s not so simple, even with the anticipated regulation 28 amendments to facilitate the investment by retirement funds in infrastructure.
Regulation 28 defines maximum exposure to respective asset classes, leaving plenty of room for discretion and diversification in their weightings. At the extremes, trustees have been spoilt for choice between dollar-denominated and rand-focused portfolios.
Performance of the former has been spectacular relative to the latter. Of course, this pattern needn’t hold. But given the litany of woe that finance minister Tito Mboweni frequently and frankly presents, bets on the rand’s longer-term direction are likely to be one way only.
As it stands, regulation 28 allows retirement funds a maximum 30% of their assets in foreign portfolio investments. This stipulation, speaking politically, legitimises the ceiling.
On the other hand, 30% invested offshore is 30% less for investment in SA infrastructure. To get an idea of the scale, take R4-trillion as the asset value of SA retirement funds. Compare it to the estimated R2.3-trillion required for the 243 projects mooted in June.
Now to square the circle. If funds fail to exploit the offshore facility, their trustees are at risk of a breach in fiduciary duty by not pursuing optimal risk-reward returns.
But if they don’t fill their boots with stock to build domestic infrastructure – they can put 100% of their portfolios into debt instruments guaranteed by the SA government, for instance – they’re at risk of a breach in fiduciary duty by constraining the potential for the SA economy to mutate from near-zero growth.
Then there’s the obligation on retirement funds to consider environmental, social and governance (ESG) criteria in their investment decisions. This they do over their SA investments, not least for the benefit of future generations. However, the requirements for ESG compliance cannot pressure them to shun high growth in Far East autocracies.
So they won’t, presumably. When money talks, it’s louder than ESG. Funds and their members usually prefer higher rather than lower returns.
Private sector retirement funds needn’t confine their offshore decisions to bursts of patriotism. Under newly appointed principal executive officer Musa Mabesa, the huge Government Employees Pension Fund (GEPF) is in discussions with the National Treasury on its asset-liability modelling. That’s code for deciding when, where and how much the GEPF will invest offshore.
The GEPF is a defined-benefit fund, operating under its own law and not subject to supervision by the FSCA. The better its investments perform, the better for its members’ benefits. Conversely, were the GEPF unable to pay its members the defined benefits promised, taxpayers will have to make up the shortfall.
So good luck to the GEPF in its sortie abroad. Equally, it’s been announced that the defined-contribution Eskom Pension & Provident Fund (EPPF) – the largest under FSCA supervision – plans to invest $170m in US infrastructure, private equity and real estate.
Huh? Like the US needs SA money for its infrastructure? And from the savings of employees in this state-owned disaster? Yet it can be argued that the rationale is wholly justifiable as portfolio diversification. The $170m is a tiny fraction of the R145bn ($8.7bn) in EPPF assets.
Still, lest they feel guilty about the choices they make, the principle is a precedent for offshore decisions of private sector SA retirement funds. The difficulty they face, in meeting the government’s expectation for them to invest heavily in infrastructure, relates less to quantum than to timing and liquidity. On an escalation of retrenchments, which sparks constant cash outflows, funds will need dollops of liquidity well before the proposed infrastructure projects begin to produce returns.
Lurking for ages has been the suspicion of an implicit trade-off for retirement funds. If they voluntarily invest in state-approved projects, the introduction of mandatory prescribed assets would be obviated. Under SA’s current economic circumstances, such a suspicion mightn’t be too far-fetched.
Regulation 28 is amended from time to time, for instance on the level of offshore exposure permitted. In the foreseeable future, this level is more likely to go down than up. Similarly, at some unforeseeable point, the worst of all worlds could be an amendment setting out not the maximum but the minimum level for investment in asset classes that government will define.
In the desperation of the present, anything’s possible. The trick is to make it look consensual.
- Allan Greenblo is editorial director of Today’s Trustee, a quarterly magazine mainly for the principal officers and trustees of retirement funds.
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