Is Eskom’s pension fund a defined contribution or defined benefit fund?

The rules of the Eskom Pension and Provident Fund fund specify SA’s largest private pension fund is structured as a defined benefits fund, which usually means that the employer underwrites the contingent liability to guarantee the payment perks agreed upon when a worker is appointed. 

It is different from its defined contribution counterpart, in which members get only what they have put into the fund plus the market returns over the years. Defined contribution funds generally transfer the risk of market volatility to members, but often this is a preferable outcome because members pensions are increased.  

A defined benefit fund is based on a fixed formula, often based on the last salary slip of the member which gets paid in perpetuity. If members on average happen to live a long time, that can land defined benefit funds with a big obligation.

A defined contribution fund means members are paid a pension according to what they and the company contributed over the years, plus what their investments have garnered over the years. Hence, future income earned is mostly based on future investment returns 

All over the world, funds have been moving from defined benefit to defined contribution funds, as the contingent liability for companies has become a risk they can longer afford. So to reduce such an unpredictable risk, if pension funds fall short of its covenant, it will be forced to fill the gap and pay out according to a fixed schedule. 

The fact that Eskom is seeking to change its approach is a further indication the financial stress test finds itself in dangerous territory, and with Eskom needing its own bail-out money, there is no way they can’t spare any cash to cover a position of a possible shortfall in its pension fund.  

Eskom states in its financials, that “[t]he group accounts for its pension obligations as a defined contribution plan in line with IAS 19 Employee benefits. The rules of the Eskom Pension and Provident Fund (EPPF) set the employer’s contribution rate at a fixed rate of salary,” it says.

But the other side of this coin, the fund describes itself a defined benefits scheme, an implied surety that salary of service is set for life.   

Trustees of the EPPF had amended the rules of the fund to facilitate addressing any deficits which may arise in the future. This is Rule 36.1(3), which allows for either an increase in contributions from employees, with the consent of Eskom of course, or a reduction in benefits the required recourse. 

So using a legal opinion to grant this longer leash, Eskom has by definition cut down a contingent liability. Eskom says “The group pays a fixed contribution to the fund and has no legal or constructive obligation to make good a shortfall should it arise". Independent legal opinion during the year confirmed that Eskom has no legal obligation to fund any shortfall that may arise.

“As the fund has been in a net (positive) asset position since its commencement, Eskom has not previously provided any additional contributions to meet the benefits payable as per the benefit formula.”

It would seem that only a forced liquidation, will force Eskom’s hand into raising its contribution, to cover its covenants 

Whether Eskom will give its consent when called upon, is impossible to know, and the EPPF is left to steer this ship safely and sustain the required funding ratio. But people are living longer and the money is stretching thin as the fund show sub-bar investment returns, soaring operational costs soaring in an environment of unprecedented uncertainty

This has put the fixed funding model at serious risk.  The liabilities of the EPPF according to the valuator’s certificate included in the 2020 financial statements were approximately R101-billion, but even if the fund drops in value by as little as 1%, that is a loss of R1-billion, which our economy will struggle really hard to withstand. 

Fortunately, the EPPF still states a healthy financial position in its financial reports to the end of June 2020. But that was six months ago, and as the Covid-19 pandemic, and market crashes that ensued, regular life is changed in a second, leaving the fund stuck between a rock and a hard place. And it is well documented that the fund is playing the private equity field hard, and such investments are way too illiquid for a rainy day. And they are preparing for the surge in retrenchment payouts of Eskom’s staff realisation plans, and of course, refunding the contributions to a stack of illegal members that contributed for some time. 

So the fact that members and pensioners of the EPPF interpret the rules differently is irrelevant, as Rule 36.1(3) allows the money managers to reduce the benefits of active members and poor pensioners.  

For active members in service, this could mean that the current accrual rate they raise during pensionable service is pinched, and possibly be further reduced for future salaries.  

For the poor pensioners that rely on the monthly income to cover the living cost, the below-inflation increases in annual pay make it almost unaffordable.  

Over the last two years, the increase awarded to the pensioner community was cut to just 1%.  

According to Erich Kröhnert, Director at Ultreia Consulting Services, the benefit butchering comes down to actuarial valuations. The losses made were a sub-par investment performance. However, he says, the actions of the employer can also lead to affect the financial position of the fund. For example, higher than expected salary increases can lead to losses. 

He says that the trustees still need to hold the employer account and have a fiduciary duty to serve the best interest of the members, but scandals like illegal memberships and paid-for trustees, who unlike Brian Molefe were forced to pay back the money following a reportable irregularity in the 2019 audit report. And this year the fund reported that former Eskom CFO Anoj Singh is also on the bandwagon unlawfully belonging to the membership scheme.  He has been refunded his side of the contribution equation.  

Sikonathi Mantshantsha, the Eskom spokesperson, has defended the position of the utility’s stance by stating that Eskom views the liability in the EPPF as a DC in terms of the International Financial Reporting Standards (IAS Employee Benefits) and the benefits are calculated by a formula in terms of the rules of the fund. 

On the question of whether and when Eskom will consider an increase in contributions to cover a sudden shortfall, he simply stated the EPPF rules dictate that Eskom's contributions are fixed. The EPPF rules further provide that a decision to increase contributions (employer and employee) would be made by the EPPF Board of trustees in consultation with the appointed actuary, not by Eskom’s management.  

But he did confirm that “Eskom’s position is that it is not liable to make any shortfall in the EPPF, should it arise”.  

But what Eskom fails to say, despite the fund’s declaration of independence and the only SOE that supports a separate and private institution. Eskom as the employer still fills the most seats at the table of trustees. Eskom executive appoints six representatives, and currently, employees have two seats.  There are around 80000 members in total. BM

The spelling of names in this story has been corrected. Apologies for the error.