In August 2019, Finance Minister Tito Mboweni wanted an economic policy debate, but hasn’t noticed that a debate is already raging about Cosatu’s proposal to capitalise Eskom with R250-billion from the Government Employee Pension Fund (GEPF). The purpose is to stop the public utility from defaulting on its R455-billion debt in March 2020, with dire consequences for the whole working class, for all in South Africa, not only Eskom employees, as Neva Makgetla has pointed out.

Cosatu’s proposal implies that the answer to the finance minister is “No”. Tax money and austerity should not be used to save Eskom from default if there are other funds at the government’s disposal. We have argued this since 2018, when “fiscal consolidation” turned into outright austerity.

In a much quoted critique of Cosatu’s proposal, Stuart Theobald labelled it “mathematically impossible”. But something was wrong with his numbers or concepts. As a consequence, he underestimated the role of the GEPF in SA’s public finances and in the whole economy.

The GEPF’s R84.5-billion held in Eskom bonds isn’t “half of the public debt it holds”. It only pertains to half of the R151.6-billion the GEPF had lent to parastatals in March 2019.

The GEPF has invested much more in public sector debt and is offering its financial services at market rates (to the extent this policy stance isn’t corrupted in the hands of its fund manager, the Public Investment Corporation).

The GEPF held government bonds to the amount of 368.6-billion in March 2019. This was 13.4% of the total R2,748-billion in domestic national debt. The interest bearing claims on the government comprised 64% of the GEPF’s R575.5-billion investments in corporate and public bonds and bills.

The 2019 Annual Report of the GEPF says the pension fund earned R48-billion in cash interest from its bonds and bills. If we assume that the government paid interest on its bond debt to the GEPF in the same 64% proportion as described above, then the government supplied the GEPF with close to R31-billion in interest incomes in 2019.

In addition, the government paid the GEPF’s pension scheme R75-billion in contributions. In total, therefore, the Treasury paid the GEPF about R106-billion in tax money in the 2019 financial year. This equalled some 31% of the government’s total borrowing requirement, or half of the budget deficit.

The GEPF is a giant. Stuart Theobald wouldn’t have needed to go to “Basel 3 bank rules” (on international risk regulation) to question why the Development Bank of South Africa (DBSA) was included in Cosatu’s proposal. DBSA has borrowed R12.6-billion from the GEPF.

Now, does the public entity GEPF need all this income at market rates to keep its promises to 1,265,000 government employees, 303,000 pensioners, 160,000 spouses and 1,600 orphans?

We have updated a table we first published in August in Daily Maverick where the reason for a jump in payments after 2012 also was discussed. The 7.5% fixed growth rate in a formula was changed to a floating one. This increased pension claims. Many members quit their jobs to cash in, some of them the day before retirement. But this didn’t shake the GEPF scheme.

If the GEP Law of 1996 had been written within a “pay pensions as you go along” actuarial paradigm (a so-called Paygo scheme), it would be blatantly obvious that the GEPF is vastly overfunded, just as it appears to the eye and to logic. The surpluses to reinvest are growing. In 2019: R54.8-billion after paying all pensions and benefits.

The GEPF could be half of its R1,800-billion size, be paid 5% in non-market interest on its then R900-billion in assets, all placed in government bonds, and still run a healthy surplus of tens of billions of rand to reinvest. Alternatively, and for a start, the government could take a contribution holiday from its two thirds of the R75-billion in contributions (2019), also making the coming public sector wage negotiations easier.

But the law from 1996 demands a minimum 90% coverage of all liabilities to working and retired members, to be paid out in the theoretical event of the state disappearing and everybody retrenched, playing that the state is a private corporation. The board has even adopted a policy of “100% fully funding”. And so we find the government doing debt service to itself and lambasting the “public sector wage bill” where close to 13% of the bill are contributions to the GEPF on the pensionable part of wages and salaries.

The GEPF is no doubt the best pension scheme in South Africa. From the point of view of its primary purpose, one can guess that it is the best public pension scheme on the continent. The scheme delivered an average 5.6% per year increase of pension payments from 2003 to 2013 and since then a little less; the 2019 increase was 5.2%. The GEP Law guarantees pension increases every year at 75% of inflation. If the increase was lower than inflation, the policy is to catch up later.

But like any other public pension scheme the GEPF has never and will never increase the pensions paid to retired members by more than the rate of inflation, or a little more than that. Relative sizes will not improve significantly. Especially if it remains a “minimum 100% fully funded” scheme.

Extra funds above the 100% minimum were also established by the board after 2006. This is why the 2018 actuarial audit calculated a theoretical R583-billion “long-term deficit”. The ambition to fill those funds is completely utopian. The GEPF will find no counterpart in the South African economy to R583-billion in additional imaginary claims or ownership titles. We would in fact not want SOEs (or private corporations for that matter) to be R583-billion more indebted. And we would not want one of the most overvalued stock markets in the world, the Johannesburg Securities Exchange, to be even more overvalued. It would comprise a financial bubble of gigantic proportions waiting to pop.

The GEPF scheme can be transformed in law to a Paygo scheme, where the manager pays pension and benefits year after year as he or she goes along. Within that actuarial logic, the issue of pension increases and benefits would be different. A compromise for now could be to lower the demand for funding to, say, 60%; “100% fully funded” is irrelevant for a state pension scheme.

The GEP Law only demands a funding of 90% of the pension claims of working and retired members. To acknowledge this immediately, and deal with the Eskom debt crisis and devastating austerity in such a setting, is a bridge to change.

The GEPF lends money at market rates, also within the public sector family. This policy must be one centre of the discussions about mending Eskom’s destroyed finances and about budget austerity in the midst of crumbling public sector services and infrastructure. Cosatu’s proposal is meaningless without lowering the cost of debt service, no matter if R250-billion in unsustainable debt is moved to a “SPV” or to the Treasury’s balance sheet.

Stuart Theobald opposed Cosatu’s proposal. He suggested however, that negotiations start with creditors about debt relief. He also hoped, like Mark Swilling, for “Green Investors” assisting with rebated loans to Eskom on certain conditions. It is not wrong to hope, but such support in principle for non-market measures points to the GEPF, the biggest creditor of the government and of Eskom.

Cosatu’s demand for an independent audit of Eskom’s finances should of course be extended from coal contracts to the debt book. Tim Cohen was alarmed by strangely high interest rates on some Eskom loans and it seems that R22-billion remains to be paid to the World Bank. Many have demanded that this loan to the gigantic coal power build was outrageous from the beginning and that it should be written off as so called “odious debt”.

Still, the unsustainable part of Eskom’s debt is in a league of its own. The only institution in South Africa that can bring it under control in reasonable time is the GEPF. It can do that by conceding some of its claims on Eskom and indeed also its four times larger claim on the national government.

The public sector workers who are directly hit by austerity should take the lead. DM/MC

Dick Forslund is senior economist at Alternative Information and Development Centre.