Eskom pension fund responds to allegations of overpayment and underperformance

I refer to your article Eskom Pension and Provident Fund overpays for underperformance at the expense of Eskom employees published on 5 March 2020 in Business Maverick. Disappointingly, once again the fund was not given the opportunity to respond to your allegations – a basic tenet of fair journalism. We reserve our rights on this matter.

Had your journalist bothered to contact us, we would have furnished her with all the necessary facts and assisted you and your readers to gain a better grasp of our fund operations instead of this red herring you call journalism. Our engagements with Ruan Jooste to date have done little to balance her reporting or improve its accuracy, despite our Chief Executive’s addressing of her questions.

Herewith are the facts: 

Cost competitiveness of the Eskom Pension and Provident Fund

In your article you report that the EPPF’s cost per member “went up from R199 in 2018 to R258 a year later”. You then compare this to “the measly R50 the GEPF made off members in managing their money in 2018”. 

Your analysis and comparison fail to recognise that the EPPF comprises two core businesses, namely the “retirement fund operations” and “investment management”. Hence the reported cost includes these two core businesses, plus a small portion for administrative support. So, the GEPF / EPPF comparison is not on a “like for like” basis as the GEPF outsources its investment management to the Public Investment Corporation and its retirement fund operations to the Government Pensions Administration Agency. The largest component of the EPPF’s total costs relates to investment management. 

Further, the cost per member measurement is a function of the nature of a pension fund (i.e. a defined benefit or defined contribution fund); the nature of services provided by an administrator, as well as the scale of the operation as represented by the number of members serviced by the administrator. This metric makes it difficult to compare different funds to each other. The industry standard used for comparing costs is the Total Expense Ratio (TER), which is expressed as the total costs incurred to administer and invest funds as a percentage of Assets Under Management (AUM). 

The EPPF’s Total Expense Ratio for the year ended 30 June 2019 was 0.54%. Independent benchmarking studies indicate the average Total Expense Ratio for stand-alone pension funds to be in the region of 0.78% of Assets Under Management. The EPPF’s Total Expense Ratio is therefore 31% below the industry average, positioning it among the most well managed funds on cost competitiveness. 

Administrative and staff costs 

Growth in administrative expenses for the year 2019 was largely due to a change in accounting for the in-house investment management unit costs that were included under administration expenses as opposed to investment expenses in the prior years. This was done to align these costs with internal budgets and to ensure improved reporting of internal expenditure. In addition, non-recurring strategic expenditure and the growth in investment management unit staff were the largest contributors to the total growth in administrative expenses. 

The effect of the above resulted in administrative and staff costs reflecting a year-on-year percentage growth above inflation. Normalising for this, the inflationary growth on administrative expenditure was 5.5% for the period. 

To date, savings amounting to some R40-million have already been contracted for as a result of the strategic work carried out, with potential for further savings being realised in future. 

Employee salaries 

The EPPF’s remuneration philosophy is geared towards attracting and retaining the best talent within the financial services industry by paying market-related salaries. In doing so, it employs the services of an independent remuneration specialist firm to advise on remuneration and benefits packages paid to staff. None of the staff, including management, are paid outside the guidelines of the remuneration policy nor the market as advised by the remuneration specialist. Importantly, the EPPF competes with large fund managers and financial services organisations for the same investment/retirement administration talent in the industry – making retention of best talent a key focus area to deliver on our vision and strategic objectives. 

Chief Executives’ and Principal Officers’ remuneration 

The former Chief Executive and Principal Officer, Mr Sibusiso Luthuli, was appointed on a fixed-term contract which expired after his second term in office. Mr Luthuli indicated in 2016 (18 months before the expiry of his contract) that his contract was coming to an end and that the fund should start looking for a successor. The fund complied with the terms of his contract and released him when it expired. Mr Luthuli had served the fund with distinction for eight years. 

Ms Nopasika Lila had been at the fund for eight years as a Chief Financial Officer. She successfully applied for the CE and Principal Officer position after the departure of Mr Luthuli. Ms Lila resigned for personal reasons after nine months in the position. Her departure had nothing to do with a vote of no confidence in her by the board as your articles insinuate. Together with Mr Luthuli, they built the fund to its current strength and financial position. 

The Chief Executive and Principal Officer salaries, like the rest of the EPPF employee salaries, are benchmarked against the market. To this end, we reject your claims of salaries of R8.85-million and R10-million, respectively, being paid to previous Chief Executives and Principal Officers. 

Remuneration of executives and staff is debated at the Human Resources and Remuneration Committee of the board, with advice from an independent remuneration adviser. The outcome is then recommended to the board for a decision. The chairman is responsible for signing what has been approved by the board and does not have the powers to make the unilateral decisions alluded to in your article. 

Appointment and remuneration of trustees 

The Board of Trustees is made up of 14 members, of which seven are employer-appointed; three are pensioner-elected (and not one as reported in your article), two are non-bargaining member-elected, and three are bargaining-unit member elected. These appointments take place in accordance with the rules of the fund. Similarly, the remuneration of Trustees is made in line with the rules of the fund. 

In addition, the board is supported by independent experts in the fields of investment, medicine, and human capital.

Audit reports 

Your article states that “PWC called the cost of compensation, following very generous increases put forward by Luthuli and approved by the Chairman, ‘a material risk that requires resolution’, before PWC would sign off on the financials”. The EPPF is not aware of such a matter. On the contrary, the EPPF has received unqualified audit opinions over the years. 

We trust the above clarifies matters and will receive the same prominence in your publication as the previous article. DM