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Eskom pension fund remains a head-scratcher

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Ruan has been a financial writer for 18 years. The fact that she is always surrounded by people smarter than her is her favourite perk of the job. Her previous stints include editor positions at Financial Mail, Business Day and Finweek. She has also ventured into corporate, public relations and even tried working for herself, but couldn't get to grips with her own management style. She returned to her first love: financial journalism in 2019 by joining the Business Maverick Team as Associate Editor. Ruan dotes over her rescue dogs and talks about them non-stop. She blames them for not being able to own nice things.

I have written quite a bit about the Eskom Pension and Provident Fund (EPPF), pointing out omissions, oddities and the obvious risks it posed to its more than 80,000 members.

First published in the Daily Maverick 168 weekly newspaper.

Needless to say, it ruffled some feathers. The executive reported me to the Press Ombudsman in 2019, and I was rapped over the knuckles for not giving the fund’s management sufficient opportunity for a right of reply.

Despite my personal view on the issue, Business Maverick apologised and rectified the matter in terms of the sanction issued. But by no means were the facts of my reporting ever questioned.

In its integrated report for the 2019/20 financial year, the fund said: “The Press Council did not … rule on the validity of the allegations,” adding: “We assure our stakeholders that the fund is governed by the strict policies, clear process and the oversight offered by the board of trustees, which represents all the stakeholder groupings.”

They were, however, humble enough to admit to the reputational damage suffered because of my revelations, and acknowledged some measures of improvement in the integrated report, including embarking on a members’ roadshow and an internal assurance assessment to strengthening allocated areas. It also stated it was reviewing a whistleblowing mechanism to report wrongdoing.

Not much detail is divulged in the 20-page report, and the abridged financial statements for the same period that usually accompany an annual report remain absent from the website.

I did, however, ask the media team for access to the annual statements to get a better understanding of the fund’s financial position and to be able to analyse the accompanying accounts. I’m awaiting their reply. But despite the patchy information included in the report, it still illustrates material matters of interest.

The 70-year-old pension fund is an independent and private provider of retirement benefits to the employees of Eskom and sister outfit Rotek, as well as the permanent employees of the EPPF itself. They service their members’ asset management and the administration of contributions of benefits. As of 30 June 2020, it had assets under management (AUM) of R144.5-billion.

The EPPF is a defined benefit fund, which provides a specified payment amount in retirement. However, unlike any other defined benefit funds, the contingent liability does not reflect on Eskom’s balance sheet.

A few years ago the liability was moved over to the books and to the cost of the member. According to Erich Krohnert, director at Ultreia, this means future shortfalls in the assets need not be covered by an increased contribution by the employer (Eskom) but possibly by a reduction in benefits for members and pensioners.

The EPPF is also only one of a handful of self-administered funds left in South Africa where operational costs include a range of functions, such as internal investment management, operational expenses and member-related activities, including trustee board expenses and support services.

Last year, my analysis showed that the fund’s operating costs in terms of administration was way above the norm. The recent annual report shows administrative costs, excluding project expenditure for the year under review, to be R261,595-million compared with 2019’s R259,066-million.

“Referencing industry standards, the fund’s total expense ratio is 0.58% of AUM up from 0.52% from the year before,” the EPPF states. But the EPPF is a unique fund and to evaluate its cost structure against industry norms is like comparing apples and oranges.

Whereas the total expense ratio of 0.58% of AUM refers to standalone funds, the EPPF dwarfs other standalone funds that currently fall under the scope of the Pension Funds Act – so much so that the EPPF’s assets are almost three times greater than the next standalone fund.

The EPPF is only really comparable to the Transnet Retirement Fund.

The only other reference to administration expenses is the indication of a decrease of 6% in staff costs and 17% in trustee fees. The EPPF remains adamant that it is containing operating costs and improving efficiency. In 2020, the year-on-year increase in operational costs, excluding project costs such as the “strategically important development” of a new administration system, was contained at 1%. The new admin system will save the fund R8-million a year.

Legal and IT fees, however, remained the biggest drivers of costs last year, it says.

Approximately 66% of legal expenses last year relate to resolving the ineligibility matter, which is anticipated to be completed in the next final years, the fund says. Legal expenses are expected to reduce once this matter is resolved, they say.

The report states that addressing the ineligibility of some members, including former CEO Brian Molefe, is still under way. “The vetting process is being conducted by an independent external company to ensure its objectivity and transparency. Eskom is sharing the cost burden,” the EPPF states. DM186

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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  • In the article, Ruan states that EPPF is a defined benefit fund. My understanding is that the EPPF rules thus include a definition which is used to determine the value of the benefit accruing to a member at the time of retirement. It also means that actuarial shortfalls in the calculated aggregate future benefits have to be topped up by Eskom or at least provided for.
    Eskom certainly cannot afford such liability and does not reflect it as a contingent liability in its accounts.
    It appears however that such liability does not exist as “future shortfalls in the assets need not be covered by an increased contribution by the employer (Eskom) but possibly by a reduction in benefits for members and pensioners.”
    This cannot be correct. Benefits accruing to members cannot be reduced if it is a defined benefit fund unless such a provision is part of the definition underlying the calculation of the benefit.
    Perhaps Ruan can investigate this further?

    • Hi Ben. It is very unique and curious case indeed. And I am looking into it. How a board of trustees and the fsca could have approved such a rule is beyond me…but lets see what we can find to clarify the matter. Thanks for the support.

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