Pension fund hole in treasury

The Congress of South African Trade Unions (Cosatu) is heading for a major showdown with the government over Minister of Finance Trevor Manuel’s plans to corporatise the Public Investment Commissioners (PIC), which manages public sector pension funds worth more than R300-billion.

Cosatu late last month raised numerous procedural objections to the way the PIC draft Bill was rushed through Parliament by Manuel without adequate consultation. Parliament’s finance committee agreed to postpone discussions about the Bill until August: ”We see corporatisation and privatisation as part of the same continuum,” Cosatu parliamentary officer Elroy Paulus explains.

In its submission to Parliament, Cosatu said the draft Bill had not been tabled at the National Economic Development and Labour Council (Nedlac) or considered by the Government Employees’ Pension Fund (Gepf), which accounts for about 94% of the assets managed by the PIC. The 16-member Gepf board (with eight members each from employers and employees) has never met, the union says.

The submission continues: ”On the basis of previous developments, it is reasonable to assume that this [corporatisation] could be an initial step which could later lead to privatisation. If this is indeed the case, it could be argued that the National Framework Agreement [NFA] on the restructuring of state assets is applicable. Our analysis raises the concern that assets controlled by the PIC will increasingly be managed and eventually owned in the private domain. Cosatu can only conclude that the proposed establishment of the corporation effectively removes this critical resource with assets worth 25% of GDP from the control of government and the influence of civil society.”

Winning the second round will be more of a challenge. ”We want to start a deeper debate about the role of all pension funds in the economy,” says Cosatu economist Neva Makgetlha.

”Most workers would take a 10% cut in pensions if it meant that unemployment would be reduced. Our members are shouldering the burden of supporting the unemployed,” she says.

A key element of this debate will be the role of the PIC and the Gepf. Cosatu has called for a move back to a pay-as-you-go system of funding pensions, which prevailed until 1989. Under this system, the contributions of the current generation of workers, paid out of current tax revenue, would support the benefit payments of current pensioners. This would pave the way for a huge release of assets from the PIC, which would become redundant.

According to a paper by Gavan Duffy of the Alternative Information and Development Centre, The Economics of South Africa’s Public Pension Revisited, the PIC’s assets did not grow much until the late Eighties, when they started soaring. At the same time there was a sudden and matching acceleration of public debt.

In 1990 government debt was R96-billion, equivalent to 38,6% of Gross Domestic Product (GDP), while the budget deficit was 0,6% of GDP. The PIC’s assets were R42-billion. The contributions by members (R1,4-billion) and the government as employer (R4,1-billion) came to R5,5-billion, which was more than enough to cover benefits paid of R3,1-billion. On the face of it, there was no problem.

But the apartheid rulers, fearing that a new government would not be able to honour the pensions of civil servants, decided to switch to a system of pre-funding, whereby the Gepf would accumulate a pile of money that would eventually earn enough income to pay all pension benefits, no matter what happened to the government.

At a time when tax revenue was weak because of drought and the worst recession of the past century, government more than doubled its contributions to the fund to R11,6-billion in 1991 from R4,1-billion.

By 2002 the Gepf had 1,1 million employees and 243 611 pensioners. It was almost fully-funded with assets of R275-billion and earned R35-billion from investment income (R20-billion) and contributions (R15,7-billion).

Benefits paid were R14,9-billion.

On the other side, government debt almost doubled to R190-billion in 1994 on the back of the excess contributions and weaker tax revenues. The government was borrowing money from the PIC to close a hole in the budget caused by the build-up of the fund.

Contrary to popular perception, the government has not reduced the national debt: it has soared from R190-billion in 1994 to more than R500-billion, an increase of more than 250%.

Duffy points out that, for all the years except 1998, benefits paid were matched by contributions. During 1995 to 2002, contributions were R113-billion while benefits paid were R109-billion.

”The implication is that fears existing then [in the early 1990s] about the future of pay-as-you-go, although understandable, have not been proven in practice. Pensions would have been paid, and will be paid, with or without the creation of the PIC megafund,” Duffy says.

The benefits to the pensioners of creating the PIC megafund were zero. The Gepf is a defined benefit fund, where pensions are predetermined and based on years of service.

An increase in the value of the fund does not benefit pensioners. Nor does the choice of pay-as-you-go versus pre-funding affect the level of pension payments.

Seen this way, pay-as-you-go and pre-funding are just different ways of organising the claims of pensioners on future output.

Eric Potgieter, an actuary at Fifth Quadrant actuarial consultants, says: ”The two systems swap one promise to pay pensioners with another kind of promise.

”Under pay-as-you-go, government promises to pay pensioners out of tax revenues. Under pre-funding, the fund has bonds, a pile of paper promises from government to pay interest to the fund. It could be argued that this is a harder promise because government cannot default on its debt, but this is debatable.”

But the cost of the switch was enormous. This astonishing build-up of financial assets, which involved the government lending billions of rands to itself, and therefore owing money to itself, diverted billions of rands from productive social and investment spending, resulting in huge costs in terms of lost output and jobs.

Also, making an implicit debt (of supposedly ”unfunded” liabilities to future pensioners) become explicit affected the country’s sovereign debt ratings by giving the impression that the country had a debt problem.

Ravi Naidoo, head of the National Labour and Economic Development Institute, says: ”Evoking the constraint of a large national debt served a strategic purpose of legitimising moves to restructure government.

”Tight budgets pave the way for a reconceptualisation of the role of government, creating a bigger role for the private sector to take over public-sector functions. For example, privatisation was motivated by the lack of finances.”

Now that the Gepf is fully funded, Duffy says it does not make sense to continue the build-up.

”Over the past 12 years the assets of the PIC have been growing at more than 16,5% per annum. ”If this were to continue for another 12 years its assets would be R1,6-trillion and result in domination of the economy”.

How the billions accumulated

Between 1991 and 1994 the Government Employees’ Pension Fund (Gepf) received about R78-billion comprised of: contributions (R44,6-billion) and interest (R33,1-billion). Benefits paid were R27-billion, which implies an excess contribution of R51-billion. Public Investment Commissioners assets increased from R50-billion to R90-billion as its holdings of government bonds doubled from R36-billion to R72-billion.

Between 1995 and 2002, the PIC received about R238-billion in contributions (R113-billion) and interest (R125-billion).

Benefits paid were R109-billion, which implies an excess contribution of R129-billion.

Between 1994 and 2002, PIC assets increased from R90-billion to R275-billion. Holdings of government bonds increased from R72-billion to R126-billion.

The figures for benefits paid and interest earned refer to public pension funds of which Gepf accounts for almost all assets and members

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Duma Gqubule
Duma Gqubule is founding director at the Centre for Economic Development and Transformation

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