budget 2019: BIG ISSUE
PIC: Lower returns at heart of the problem
The Government Employees Pension Fund has seen its position deteriorate since 2016
The Mpati commission of inquiry into the Public Investment Corp (PIC) is hearing allegations of impropriety and possible corruption, but budget documents answer a larger question: how has the PIC performed as a fund manager?
Short answer: not well.
The PIC is by no means on its own in the "poor returns by fund managers department", but the impact of underperforming investment returns in the case of the PIC is worrying because of its huge size: just over R2-trillion.
It also illustrates the problem of larger fund managers, which are effectively in the position of tracker funds when markets underperform, and there is none even close to the size of the PIC.
The problem is not currently acute, however, because the Budget Review notes that an actuarial valuation, completed in December 2018, showed that the PIC’s then R1.8-trillion in assets was sufficient to cover 108.3% of its liability on a "best estimate" basis.
A "best estimate" basis measures the present value of future pension liabilities.
But the problem is by no means trivial.
On a stricter liability measure, taking into account the reserve the fund has to hold to make pension payments and remain solvent, assets cover only 75.5% of liabilities.
On both measures, the PIC’s client, the Government Employees Pension Fund (GEPF), has seen its position deteriorate since 2016.
The report says: "The contributing factors are lower-than-expected investment returns, the introduction of new benefits and improvements to existing benefits.
"In addition, contributions to the fund were lower than actuarial assumptions."
In fact, National Treasury officials say that by far the biggest problem is the lower-than-expected returns; the others are tiny by comparison.
The fund aims for a return of the consumer price index plus 5%.
That would normally come out at around 11% in nominal terms per year.
In 2016/2017, the asset returns were only 4.3% while in 2017/2018, they were 8.5% — better but still not great. Cumulatively between 2016 and 2019, the returns were around R225bn less than this target.
Problem areas tend to remain obscured by the size of the fund, but one obvious problem area has been the PIC’s investments in nonlisted entities, including Independent Media and technology firm Ayo, both controlled by SA businessman Iqbal Survé.
Independent Media failed to repay a loan of R253m to the PIC as scheduled in August last year.
Asked why the PIC failed to perfect its security, deputy finance minister Mondli Gungubele reiterates that the government has decided it should not be party to investments in a media organisation.
Discussions about buying out the government’s stake continue, and he acknowledges that they were taking some time. The issue is complicated, he says, by the Mpati commission since the government does not want to be seen to be interfering in the commission.
Re-establishing the board of the PIC, which resigned en masse this month, is similarly affected by the inquiry.
Meanwhile, investment income achieved on behalf of the GEPF, which includes dividends, interest on bonds, and income from unlisted investments, stood at R68.5bn in 2014/2015 and has increased very marginally to R72bn in 2017/2018.
Benefits paid, on the other hand, have increased fairly strongly from R43.2bn in 2012/2013 to R94.9bn in 2017/2018.
The Treasury’s target for the fund is that the assets should be sufficient to cover 90% of its liability on a "best estimate" basis, hence there is some leeway built into the system. However, with payouts increasing fast, and investments simultaneously underperforming, warning signs are flashing.