The retirement fund industry can, and should, use its R1-trillion muscle to help fund infrastructure development and job creation through socially responsible investments (SRI). An actuarial science industry initiative, a publication called SRI Focus, calls on fund managers and pension fund trustees to help fund development without compromising their members’ interests or returns. Â
Donald Molema, CEO of Principal Dynamic Models, describes SRI as a response to “a yearning of the millions of South Africans who have been deprived of economic opportunity”. He cites an international precedent that South Africa should follow: in the United Kingdom, the Pension Fund Act requires investment policy to show “the extent to which social, environmental and ethical considerations are taken into account in the selection, retention and realisation of investments”.
Molema believes there are three critical considerations when engaging in SRI. The first is that members’ interests must not be subverted. He adds that investing in private equity is not necessarily SRI and, finally, that SRI goes with shareholder activism.
Fagmeeda Petersen, head of SRI consultancy at Alexander Forbes, notes South Africa’s potential in embarking on SRI. In Europe and the United States 10% of retirement industry funds are allocated to SRI. In South Africa the figure is 1% (R10-billion).
Petersen defines SRI as comprising ethical screening, shareholder activism and targeted causes. She says the most popular targeted causes at the moment are in infrastructure development and job creation.
An example of an infrastructure investment is where a pension fund builds sewerage and water purification systems. Over a course of, say, 15 years, the fund will receive a unitary fee, guaranteed by the National Treasury. At the end of the period the Treasury will pay back the capital amount, with ownership passing to the municipality.
This kind of investment suits pension funds because of the high-volume cash flow required to pay out retirees, sometimes on a monthly basis. Â
SRI funds aim to offer inflation-beating returns and consistently to match higher investment benchmarks. According to Alexander Forbes, the African Harvest Benevolent Fund, for example, delivered, for the year to September 2004, returns of 32,1% against a benchmark of 24,8%. The Frater’s Earth Equity Fund offered returns of 40,9% against a target of 38,9%. Over the year to September the All Bond Index offered 10,06%.
Industry tends to be divided about whether retirement funds should be compelled by legislation to allocate resources to SRI. Michael Leeman of SRI fund Futuregrowth believes that such a move will make SRI a “grudge investment” and “when investments go wrong, people will blame government”.
Yet Hawa Bibi Khan, MD of Merit Asset Managers, believes that in a country where retirement funds constitute the largest saving pool, they must be marshalled towards growth and development through government intervention. “Issues such as lack of liquidity, uncertain returns and risk management are veils that fund consultants use to hide their fear of the transformation of the economy,” she says.
Petersen says part of the reason SRI funds are under allocated is because of a lack of infrastructure and absence of understanding by merchant bankers on the specific needs of pension funds.
Errol Shear, head of life equities at Stanlib, told the Mail & Guardian that “the drive to allocate more resources to [SRI] should come from investors” on whose behalf they manage funds. These include pension fund trustees. Stanlib, with about R190-billion assets under management, runs the R250-million Liberty Wealth Development Portfolio. The fund aims to offer returns that are better than inflation, while aiding development. Over the past three years it has offered average returns of 15,2%, which is 9,2% above inflation over the period. Its investment includes the N3 and N4 toll roads to Durban and Maputo, Mozambique respectively.
Other popular SRI funds include the Public Investment Commissioner’s Isibaya Fund and the Futuregrowth Property Fund, which establishes shopping centres in townships. It currently has a R427-million portfolio of 15 shopping centres servicing seven million South Africans and directly employing 3 750 people.