The critics are wrong about Cosatu’s PIC proposal to save Eskom

As one of the probable sources of Cosatu’s idea of tapping into the vast resources of the Government Employees’ Pension Fund (GEPF), the Alternative Information and Development Centre (AIDC) would like to address some of the main concerns to the proposal that are now attracting so much publicity. AIDC’s research into the Public Investment Corporation (PIC) and the GEPF goes back to 1998, as part of our then-campaign against the apartheid debt for which the new ANC government had accepted full liability.

We would additionally like to address an issue that has not been addressed: the climate crisis. While the connection between the Eskom crisis and its threat to the whole economy has been widely recognised, neither Eskom’s singular contribution to climate change nor it’s critical potential role in mitigating the climate catastrophe has figured much, if at all, in the critiques of Cosatu’s proposal.

Two main concerns are common to the alarm being expressed: First, the morality of picking on a government employees’ pension fund as the vehicle for addressing the public problem that is Eskom. Second, the danger of exposing the pension fund to risk when, as with all pension funds, it has a fiduciary duty to safeguard the fund by prudent investment strategies.

The first concern about the morality of using the GEPF for public purposes is entirely understandable. This is because it is virtually unknown that a substantial amount of the GEPF’s current assets come from public money (it was the late Gavan Duffy whose pioneering research from 1998 first drew attention to this unexpected reality). Even less well known is that the pensions were a sticking point in the 1993 negotiations over the peaceful transition to democracy. In his autobiography, My Own Liberator: a Memoir (2017) the former Deputy Chief Justice, Dikgang Moseneke, writes about his experience as a member of the technical committee that drafted the interim constitution of 1993.

He tells us:

“Perhaps the trickiest part of the interim constitution came right at the end of the… drafting process. …We came to learn that the securocrats in the police and army would not support the transition unless two matters had been resolved: a constitutionally sanctioned process of amnesty for past crimes that were politically inspired, and pensions.” (page 302)

And that was all he said about pensions. However, AIDC’s aforementioned research into the apartheid debt fills in the pieces to which Moseneke intriguingly alludes. It is important to note, at the outset, that the about-to-be-detailed changes to the pension fund were a political decision that had nothing to do with the actuarial requirements of the pension fund.

In 1989, the largest of 10 public pension funds (the Government Service Pension Fund), was shifted from a pay-as-you-go scheme to a fully-funded scheme. In anticipation of the demise of apartheid, this guaranteed huge pensions for out-going apartheid state officials, and reassured them that pensions will be guaranteed. The shift was orchestrated by the apartheid government and, as we have seen, accepted by the ANC (as one of the costs of the peaceful transition).

Bradley Steyn provides further information about the changes to the state pensions in his book, Undercover with Mandela’s Spies (2019: 171). He argues that this decision was endorsed by both FW de Klerk and Nelson Mandela. According to Steyn, FW de Klerk insisted on the changes to satisfy the base of the National Party, which predominantly consisted of civil servants. Mandela wanted to mitigate against mass job losses as well as to placate what Steyn referred to as “freaked-out” whites. The net result was the publicly funded bloating of the pension fund at the expense of financing a more redistributive developmental agenda.

It is not possible to give a precise number to the quantum of public money that now sits in the GEPF without full access to the data. Nevertheless, one can say with certainty that the state directed significant amounts of state resources to the fund through inflated employer contributions over the period. At an average interest rate of 8%, the public share of the fund has compounded to several hundreds of billions of rands. The government effectively borrowed from itself to finance the shift. The capital costs plus the interest on the debt (that government owed to itself), has been paid by taxpayers.

The question then arises: why should public money not be used in the public interest? This does not mean giving a “get-out-of-jail-free card” to corrupt officials and mismanagement at Eskom, or the PIC for that matter! In fact, Eskom’s finances and debt should be publicly disclosed and audited, including the illegitimate $3.75-billion World Bank loan to build the giant coal power station, Medupi, in 2010.

Second, those implicated or complicit in impugned transactions must have their day in court and if found guilty must swap their suits for orange overalls. Finally, the funding must come on condition that Eskom is retained as a vertically and horizontally integrated entity, without which South Africa will not be able to transition to renewable energy at the scale and pace required to meet even it’s very modest climate-change commitments.

This argument is fully developed in a soon-to-be published research report, Transform Eskom: A public sector path to renewable energy, a collaborative undertaking involving the National Union of Metalworkers of South Africa, the National Union of Mineworkers, Trade Unions for Energy Democracy (in New York) and the Transnational Institute (in Amsterdam).

This brings us to the second main concern — the dangers of over-exposing the pension fund to risk. Here there are a number of critical points:

Despite claims to the contrary, the financial position of the GEPF is healthy, in spite of bad — probably corrupt — investments made by its asset manager, the PIC, like, for example, Sekunjalo and Steinhoff. As it stands today, with more than R1.8-trillion in assets, the GEPF is 108% funded. Hence it is in a position to cover the pensions of every current pensioner, and the pensions of all future retirees who are currently working and contributing to the fund, until the day they die.

Even if the impossible situation of everyone withdrawing their pensions at once had to occur, R1,663-billion (100%) in pensions would be paid out, and R137-billion (8%) of the R1.8-trillion in assets would remain. Moreover, according to the Government Employees Pension Law, the fund may be 90% funded, and as far as international standards go, the fund may be as low as 80% funded and credit rating agencies only consider the pension fund to be “weak” if it falls below the 60% level. Given this, the fund could safely free up anywhere between R 300-billion and R800-billion with no additional risk to the pension fund at all.

But of course, everyone does not retire at once. Rather, each year some retire while others join the labour force. That’s why it’s possible, as it had been done historically everywhere, for a pension fund to be structured as a pay-as-you-go scheme, where the contributions from current workers cover the benefits paid to pensioners who had previously contributed to the fund. Consequently, pay-as-you-go pension funds don’t accrue huge surpluses.

Turning to the GEPF in particular, contributions received have either matched or exceeded the total amount of benefits paid, until 2013, when this balance was upset by fund members being encouraged to cash in their savings. Even though there has been a substantial increase in the amount of benefits paid out — from R57.9-billion in 2013/2014 to R85.8-billion in 2014/2015 — the GEPF continued to make a surplus of close to R440-billion from 2010 to 2019, at an average of about R48-billion per annum.

Given all this, it is virtually unthinkable that utilising the GEPF’s surpluses would bankrupt the fund. In fact, the GEPF has demonstrated a reassuring resilience in times of crisis and has indeed continued to grow, despite the 2008/9 global financial crisis.

Some analysts dispute that the GEPF’s financial position is as healthy as we describe. They claim that the fund is underfunded. In essence, the claimed theoretical “underfunding” is linked to the increased risk associated with the over-concentration of the PIC investments in the stock market. This concern is valid given that in 2018 the PIC invested about R1-trillion of its total investments in the JSE. Moreover, this increases by an additional R30-R35-billion every year.

Through these investments, the GEPF is effectively supporting high share prices, propping-up one of the most overvalued stock exchanges in the world. This risky and irresponsible investment strategy is easily rectified. Rather than boasting about the fund being the biggest investor in the JSE, where nearly two-thirds of its assets are invested, it would be far safer for the PIC to redirect this investment to government bonds.

In saying this we are not unmindful that the withdrawal of PIC investments will have a debilitating effect on the share price of the corporations vulnerable to a share correction in the short term. Indeed, this is almost certainly one of the reasons why Cosatu’s proposal has not been welcomed. However, given that the return on the investments on the JSE have been moderate, even if the PIC were to lend Eskom money at concessionary rates it would still lead to savings in the long run.

In its bid to capitalise Eskom with a R250-billion loan from the GEPF’s fund, Cosatu has accepted an economic policy position historically held by the international labour movement in relation to the use of public workers’ pension funds. Now that Cosatu has recognised this, some people are objecting to this in the name of protecting “poor pensioners”. They claim that overpaid union workers should foot the bill rather than pensioners.

However, it’s not workers who make up the bulk of the wage bill at Eskom and other SOEs. The wages, incentives and bonuses of Eskom managers and directors are massive in comparison to workers’ wages. Shouldn’t the managers and directors take a cut given that they ought to be responsible for the management of Eskom? Furthermore, at the risk of being repetitive, it’s worth reminding that it’s not just pension money, it is also public money. Besides which, pension money is not at risk in any way.

But if it’s all so simple, why are there all these big “nos”? As Cosatu’s Mathew Parks says “people’s fears are legitimate”. However, neither Cosatu nor AIDC are proposing that the pension fund “gives Eskom a great big donation”, nor is it a “raid on public sector pension money”.

Given that Eskom needs saving, if only because it threatens the whole economy, and that the poor always pay whenever something goes wrong, then at least in this way:

1. The poor pay the least amount of costs from their actual pocket;


2. A lot of the financial risk is mitigated; and


3. Very importantly, workers and the public get to weigh in on what the transition to a low-carbon economy looks like.