Pension fund members lose R800bn through bad governance

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Investor activism

Corporate governance failures at companies such as Steinhoff, Resilient, EOH, MTN, British American Tobacco and most recently Old Mutual has again highlighted the role that retirement funds have to play as asset owners that represent the interest of fund members.

Constructive active shareholder engagement by asset managers on behalf of institutional investors like retirement funds, should seek to convince executive management of companies that they need to adopt a more strategic approach in how they conduct business. While it is important for boards of trustees and management committees to monitor the investment returns achieved by members, it is not sufficient for ensuring that members live in a stable and sustainable society once they retire.

The recent Guidance Notice issued by the Financial Sector Conduct Authority (FSCA) on 14 June 2019 deals with the sustainability of investments and assets in the context of a retirement fund’s investment policy statement. This notice again served as a call to boards of trustees and management committees to start paying attention to this matter and provides guidance to boards of retirement funds on how and why they should comply with regulations relating to sustainable investing.

Good governance

The Code of Responsible Investing in South Africa (Crisa) is a voluntary code that was drafted under the auspices of the Institute of Directors, together with the Association of Savings and Investments in South Africa (Asisa). Crisa was launched on 19 July 2011 and came into effect in February 2012.

The code aims to provide the investor community with the guidance needed to give effect to the King Report on Corporate Governance South Africa (King IV) as well as the United Nations-backed Principles for Responsible Investment (PRI) initiative. Signatories, such as asset managers, to Crisa are expected to adopt the principles and practice recommendations on an “apply or explain” basis. The King IV Code on Governance in South Africa was issued on 1 November 2016. The code require that retirement funds implement a policy on the incorporation of sustainability considerations, including ESG, into the fund’s investment activities. King IV requires that boards of trustees and management committees to accept ownership responsibility for its investment arrangements and investment activities as provided for in Crisa. FSB Circular PF 130 (PF 130) is used as reference for ensuring that retirement funds consider the King IV Code.

Responsible investing

Responsible investment is an investment strategy that aims to generate both financial and sustainable value and consists of a set of investment approaches that integrate environmental, social and governance (ESG) and ethical issues into financial analysis and decision-making. Circular PF 130, issued by the Financial Services Board (FSB) in June 2007, outlines the responsibility of trustees and management committee members to ensure that fund benefits are optimised and the associated investment risks (including ESG) are minimised through a balanced approach (i.e. risk and return).

Revised retirement fund regulations, effective 1 July 2011, govern how retirement funds invest their assets and Regulation 28(2)(c)(ix) requires retirement funds to determine the material factors that could affect an investment. South African retirement funds must be able to “explain” how they have integrated ESG considerations in their investment policies, or why they have chosen not to do so. Regulation 28(2)(c)(ix) states that a fund and its board/management committee must: “before making an investment and while invested in an asset consider any factor which may which may materially affect the sustainable long-term performance of a fund’s assets, including but not limited to, factors of an environmental, social or governance character.”

Investment strategy and policy statement

Asset consultants of retirement funds have a critical role to play in aligning the interest and the actions of the asset owners and the asset managers to whom investment mandates are awarded. Regulation 28(2)(b) of the regulations of the Pension Funds Act, 1956, require all retirement funds to have an investment policy statement (IPS).

The responsibilities of boards of trustees and management committees as required by Regulation 28(2)(c)(ix) needs to be captured in the IPS of a retirement fund. Asset consultants need to articulate the need for incorporating ESG considerations into the purpose and objective of retirement funds as part of their IPS. The asset consultant also needs to assist retirement funds with designing and reviewing the fund’s investment strategy that will allow a fund to meet its long terms objectives, but not at the cost of society and the environment. Asset consultants need to closely monitor and report on the steps that asset managers take on behalf of the retirement fund and what the results have been of these actions. The consultant should also review the IPS on at least an annual basis and make the necessary adjustments as and when regulations with regards to ESG is revised and updated by the FSCA.

A secure and safe retirement

Socio-political stability, sound corporate governance, good infrastructure as well as investor and business confidence are all key requirements for sustainable economic growth. The growth required for members to be able to save and invest and create the necessary wealth required to retire financially independent. South Africa currently finds itself in a low economic growth trap with rising levels of debt, government policy uncertainty, record levels of unemployment and inequality, which together represents a material risk from a socio-political stability perspective.

The fiduciary duties of trustees and management committees should not be limited to only protecting and advancing the financial interest of their own fund members. They should also act as stewards of retirement fund assets that must contribute towards securing the future of the broader South African and global business, environmental and investment ecosystem. Quality of life during retirement should not only be measured in financial terms, but also need to consider the safety, security and the stability of the environment in which retirement fund members will live during retirement.