Your retirement fund savings are going to have to play a far greater role in developing South Africa and even Africa to ensure that when you reach retirement you will have a sustainable income until death.
Repeated warnings were given by the government and the investment and retirement industry at the Institute of Retirement Funds (IRF) annual convention held in Durban this week that the R3 trillion in retirement savings has to be supplemented and better directed to stave off potential revolution and calls for nationalisation and to ensure you will receive an adequate pension when you need it.
Speakers warned that investment strategies based purely on seeking returns that outperform indices or other asset managers are no longer good enough.
The key in future is to be sustainable, long-term investment based on environmental, social and governance (ESG) investment principles.
In other words, investments should be made only in companies or projects that protect the environment, help improve society in general and are managed in an ethical way. The argument is that if this does not happen, the environment will be destroyed for future generations, society will become increasingly unstable and companies that do not behave properly will fail.
Speakers warned that only by supporting such a programme will adequate returns on pension savings be sustainable.
In South Africa the new approach to investing will be based on what is called the Code for Responsible Investing in South Africa (see box below).
The code was mainly the initiative of the Government Employees Pension Fund (GEPF) and the Institute of Directors, and it was compiled by a committee representing the GEPF and its asset manager, the Public Investment Corporation (PIC); the Johannesburg Stock Exchange and the Securities Regulation Panel; the Financial Services Board; the industry association, the Association for Savings & Investment SA; the Institute of Directors, the Principal Officers Association; a number of financial services companies and expert individuals.
The code, which is voluntary, places the responsibility for its implementation on institutional investors such as retirement funds and life assurance companies, which invest money on your behalf.
The Deputy Minister of Finance, Nhlanhla Nene, told IRF delegates that retirement savings as a source of long-term savings have a significant and positive correlation with investment and growth. It is because of this important savings role that the government has made it its priority to boost the country’s saving rate, especially household savings. And retirement reform will be key to achieving this by introducing things such as the compulsory preservation of retirement savings.
Elias Masilela, the newly appointed head of the PIC, which manages about R1 trillion on behalf of government institutions (mainly the GEPF), says the PIC has been instructed by government to work to a developmental strategy.
He says that in the current world economic crisis there will be few funds available from foreign sources to pay for development in South Africa and in Africa.
The money needs to come from our own savings, and that money has to be used carefully to invest for the long-term viability of South Africa, Masilela says.
Importantly, investment must be directed to encourage economic growth to address the growing problem of unemployment, particularly among the youth, he says.
Rowan Burger, the head of investment strategy at Liberty, pointed out that if it were not for taxes, grants and government services, South Africa would have the worst disparity of income distribution in the world. As it is, the Gini coefficient, which measures the extent and split of wealth between the rich and poor, is worse for South Africa than countries such as Ghana, Mexico and Brazil.
In other words, the vast majority of South Africans live in poverty with a small but very wealthy group of South Africans at the other end of the spectrum.
Burger says the problem is going to need a multitude of solutions, which include improving education and savings levels.
He says almost 50 percent of people between the ages of 15 to 24 are unemployed, with the national average across all age groups being 25.7 percent.
Burger says it is hardly surprising that, given the current hardships for many individuals, “there is a lot of pressure on the haves to help out the have nots”.
He says the trick is whether the country can solve the problems on a sustainable basis.
He says that demands for the nationalisation of the mines and banks will reduce the value of the retirement savings as the targeted assets are owned in part by retirement fund members, who in turn would see reduced asset values.
Burger says that ESG principles are “so important” against the background of widespread poverty.
“If we can get the right behaviour from the managers of businesses our (retirement) capital owns, would we need the debate on nationalisation?” Burger asked.
He warns, however, that if the retirement industry wants to remain relevant and make a positive contribution, it must speak out and justify its position in society as the custodian of the country’s savings, be pro-active in helping address some of society’s ills, and propose changes and improvements to the existing system for the benefit of all South Africans.
INVESTOR CODE PRINCIPLES
The voluntary Code for Responsible Investing in South Africa is based on five principles. They are:
1. Institutional investors should incorporate sustainability considerations including environmental, social and governance, into investment strategy, analysis and activities “as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries”. The institutional investor needs to ensure the investment strategies are applied and the application is monitored.
2. Institutional investors should demonstrate that they accept ownership responsibilities by having a ownership policy that includes guidelines that must be used to ensure the sustainability of investments, such as the King III corporate governance guidelines and ESG principles; mechanisms to be used to call to account any problematic company in which investments have been made; and how to vote on different issues at such things as annual meetings of companies. Where services are outsourced to service providers such as asset managers, the onus is on the institutional investors to ensure the mandate deals with sustainability concerns.
3. Institutional investors should consider collaborating with other institutional investors, shareholders, service providers and regulators to promote the code and other codes and standards.
4. Potential conflicts of interest in investment should be identified and pro-actively managed and prevented.
5. Institutional investors should be transparent about how they apply the code, with details being regularly disclosed to companies in which investments are made and to the beneficiaries of the investments such as retirement fund members and life assurance policyholders.