Transnet Pension Fund: briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
8 March 2000
TRANSNET : BRIEFING ON PENSION FUND

Documents handed out:
Power Point Presentation on Transnet Pension Fund

SUMMARY
The committee was taken through the process which was undergone by Transnet to transform its Pension Fund from having a deficit of 17 billion rand to one which was fully funded having a surplus of 88 million rand. It now proposes in Phase Two, a division of the fund into three separate funds, which would effectively separate pensioners and active members. Support of the committee for this proposal was sought.

During discussions, it emerged that since 1990 the rules that governed the Pension Fund were of a particular nature, which allowed beneficiaries of the Fund to sit both in the Management of the Company and the Fund. There was clearly a conflict of interest in these circumstances. Currently there are more pensioners than active members.

If Transnet was allowed to do what they wanted to with Phase Two, the committee were assured that there was currently no proposal which dealt with burden sharing. It was in the interest of Transnet that it did not burden government.

MINUTES
Ms Gloria Serobe, the Executive Director of Finance at Transnet and Trustee of the Pension Fund gave the presentation, which focused on Transnet’s Pension Fund.

Phase 1
Currently there is a single pension fund, called a Defined Benefit Pension Fund. This was formed in 1990 under the Transnet Act 62 of 1990. The beneficiaries of this fund are pensioners as well as active members.

As of March 1999, the current borrowings of Transnet were 27 billion rand. 43% of this was the Pension Fund Bond as well as the medical aid provisions. This did not amount to borrowings in the traditional sense. The "true" borrowings were thus 57% of 27 billion rand. In 1994 Pension Fund and Medical Aid made up 54% of the total borrowings. In 1995 they made up 56% and in 1999 it dropped to 43%. The figures for Pension Funds and Medical Aid has not really changed except that in 1999 borrowings increased by four billion rand. The executive of Transnet took the position that short of solving the problems of Pension Fund and Medical Aid, the broader issue of Transnet borrowings was not practical to deal with. These were structural issues, which needed to be dealt with structurally. The effect of the Pension Fund and Medical Aid was that the balance sheet gearing was 72%. Without the Pension Fund and Medical Aid, this figure would be 52%.

In 1990 the Defined Benefit Pension Fund was established and there had to be a valuation of the existing Pension Fund. At that time it was established that that Pension Fund had a 17 billion rand deficit. This was because the Assets were 5 billion rand and the liabilities were 22 billion rand. The liabilities were largely attributed to the statutory 2% increases which amounted to 11,835 billion rand and the ad hoc pension increases (called the social liabilities) amounting to 10,4billion rand. The breakdown of this 10,4 billion rand was based on the increases already granted at that time which was 2,1 billion rand, the future increases of people who were already pensioners which was 4,6 billion rand and future increases for active members which was 3,6 billion rand.

Because the fund itself was 22% funded, and it had to be registered accordingly, to create a different fund, Transnet had to issue a bond of 10,4 billion rand to the Pension Fund (the T11 bond) resulting in the Fund having an asset of 10,4 billion rand and the Company having a liability of 10,4 billion rand. This liability would not be in the books. It was an actual valuation of what was a deficit in the pension fund. This bond of 10,4 billion rand was issued over twenty years – up to 2010 and a coupon was fixed at 16,5%. This effectively meant that the company’s borrowings had to be increased by 10,4 billion rand and its cash flow had to be physically used for the Pension Fund. Thus every year Transnet had to pay 16,5% on the 10.4 billion rand to the pension fund as interest income.

In April 1990 provision was created for this. In March 1991 4,4 billion rand was taken directly to the borrowings as actual borrowing. A discount of 12% amounting to 900 million rand was made. About 3.6 billion rand was thus put into the books. Thus effectively 900 million rand as discount was put into the company books income statement as profit for that year.

In 1992 there was a final settlement of the 10,4 billion rand. Once again the discount on settlement resulted in a profit of about 1,2 billion rand which also went into the 1992 income statement.

The company had a borrowing of 8,8 billion rand. The Pension Fund was offered a choice of the Company’s properties and in return the bond would be reduced accordingly. The Company gave the V&A Waterfront property , valued at 249 million rand to the Pension Fund against the T11 bond (after the developments it is valued at about 1,7 billion rand now). Transnet however bought back 26% of the property in March 1999. The three further buildings in Transnet valued at 120 million rand were given to the Pension Fund. The total T11 Bond amounted to 8,471 billion rand. Thus the waterfront property as well as the three buildings were used to settle a part of the T11 Bond.

The company now had a net borrowing of 8,5 billion rand whilst the Pension Fund had an asset of 8,5 billion rand. The T11 bond was being serviced at 16,5% or 1.4 billion rand per year.

Over the years the result of this on the Pension Fund was that in March 1998 the funding level was at a 3 billion rand deficit as opposed to a 17 billion rand deficit in 1990. This amounted to an improvement on the Fund side but a drain on the Company’s side, nevertheless in terms of the obligations the 16,5% had to be paid. It could clearly be seen that the T11 bond in 1998 was sitting at 7, 3 billion rand.

The Company also had to pay to the fund an additional contribution of 9% to deal with the deficit of the Pension Fund. This was good for the Pension Fund since there was an extra 500 million rand per year which would go towards the deficit. This was subsequently cut from 9% to 4,5% - from 500 – 250 million rand.

Other structural issues also had to be looked at in order to reduce the deficit of the Pension Fund. For example in 1990, the pension increase policy in the Pension Fund was 7,5 %. This did not change until 1999 when the company argued for a reduction to 5% to be more in line with inflation. The result was that the actual liabilities were valued at a 5% pension increase and not a 7,5% increase.

This pension increase policy resulted in the liabilities being reduced to 32 billion rand and since the Pension Fund‘s assets were 32,190 billion rand in March 1999 there was for the first time a surplus, amounting to 88 million rand. The Pension Fund was now 100,3% funded. The company felt that it had completed its Phase 1 solution of having a fully funded Pension Fund with a surplus.

Discussion
Mr M Msomi (IFP) said that it was quite a remarkable turnaround for the Pension Fund to come from a deficit of 17 billion rand to being in surplus. He felt that this achievement had to be contrasted with the factors which had caused the deficit.

Ms Serobe said that since Transnet was a state department at the time, there was no particular system for providing for these liabilities. Secondly the Pension Fund could only invest in particular assets so the investment performance was not as good as it could have been.

Mr Msomi noted that Transnet was able to pay market-related prices for the percentage of the Waterfront which it had bought back in March 1999. Where did this money come from? Was there a special fund for this or did this money come from the profits generated from another company which would then perhaps imply cross subsidisation?

Ms Serobe said that in putting the Waterfront deal together, there were obligations of the Fund and the Company in relation to the developments. These obligations translated themselves into money. The net outstanding amounts from the Pension Fund to the Company were then used to acquire the 26%.

Ms R Taljaard (DP) wanted to know whether there was a clearer indication of the other burden-sharing arrangements, which would be filtered through to the other subsidiaries of Transnet.

Ms Serobe said that any burden-sharing arrangements had to go to Government, through the Ministers to Parliament. At the moment there was no such discussion that she was aware of. If Transnet was allowed to do what they wanted to with Phase Two, there was currently no proposal which dealt with burden sharing. Each case would motivate itself in terms of what Government wanted, what Transnet wanted and what was capable of being done and therefore what had to be shared by whom. It was in the interest of Transnet that it did not burden government with anything.

A committee member wanted an indication of who the participants were in establishing the fund in 1990. He raised this question since he felt that there was a strange arrangement he identified with the fund. He said that in the whole of South Africa there was no other situation where a Pension Fund actually drained a company and runs it into "bankruptcy" as was portrayed.

Mr Mafika Nkwanazi, the Deputy Managing Director of Transnet said that since 1990, the rules that governed the Pension Fund were of a particular nature, which allowed beneficiaries of the Fund to sit both in the Management of the Company and the Fund. Until 1996, the Chairman of the Pension Fund was the previous Managing Director of Transnet. He was a direct beneficiary of the Pension Fund. There was clearly a conflict of interest in these circumstances. Some of the decisions taken by Transnet before that time were not logical. For example, with regard to the three buildings referred to in the presentation, the lease conditions of the buildings were extremely onerous. When the decision was taken to lease one of these buildings to South African Airways, in the same meeting a decision was taken to build the new SAA Towers building. It was not logical to enter into a 20-25 year contract with SAA and simultaneously decide to put up a new head office for R80 million. SAA moved out of the building (which was in the CBD of Braamfontein) two years later, leaving the building empty and Transnet had to untangle this lease agreement and find tenants to replace SAA. It was still having difficulties in this regard.

The member followed up by commenting that it was strange that the rules which were referred to were set up around 1990, when it was clear to most South Africans that there would be political transition in South Africa. The revelation that the MD of the Company could take such a serious decision, which committed a company to such economic problems, was very strange. It suggested deliberate industrial or economic sabotage aimed at de-stabilising the economy of South Africa, so that the new dispensation would not be able to cope with the economic demands which existed. He proposed that there be some kind of investigation around the establishment of this Fund and the involvement of the top management of Transnet in its establishment.

Phase 2
In Phase 2 Transnet is trying to separate the Pension Fund into three funds. It wants to ring-fence pensioners into a defined benefit pension fund for pensioners only. It also wants to form a second fund, to be called Defined Contribution Pension Fund for active members. Active members would thus have to convert from the current benefit fund to this. The member will have to consent to the conversion and new employees of Transnet would automatically be entered into this new fund. Since not all active members would decide to convert, Transnet would have a third fund which would be the Defined Benefit Pension Fund for active members choosing not to convert.

This would require a number of amendments to the Transnet Act. The Board of Trustees had passed a resolution that the conversion from a Defined Benefit Pension Fund to a Defined Contribution Pension Fund be implemented for active members. The company has also in a resolution agreed to this in principle. This amendment would be proposed to Parliament and the committee’s support was being sought in this regard.

There were various reasons for wanting to separate pensioners from active members. For example the investment strategies, investment allocations and tax status of these two groups were all different.

The situation existed where there were more pensioners than active members in the existing Pension Fund. There were about 102000 pensioners and about 91000 active members. Usually this was not the case and this was another reason for proposing the conversion. Nevertheless there would be thorough consultation with members in this regard, since members had to agree to convert and could make their input about the rules for the fund, the agreed contributions and the benefits of the new rules such as death and risk benefits. There were two separate funds anticipated for active members, namely the Defined Contribution Pension Fund for active members as well as the Defined Benefit Pension Fund for active members.

The present Act did not allow for the movement of assets from one fund to another. As people resigned or died this was allowed but it was not allowed en masse. The Act had to be amended to allow for this. The splitting of the present Pension Fund’s assets three ways had to be worked out equitably and this was intended to happen by the end of March or the beginning of April 2000.

The conversion of members was envisaged by 1 June 2000. When this happened, the three funds had to be in place already, and the assets had to be transferable and there had to be agreement between the members, the company and the actuaries, with regard to transfer values. To avoid actuarial controversy, four actuarial firms would be used.

Discussion
The Chairperson wanted clarity on whether the number of pensioners was in fact more than the number of active members. If this was so he wanted to know how this was possible.

Ms Serobe said that there could be many reasons for this situation. The obvious reason was that at some point Transnet had lots of employees – the Company had 285 000 people at one stage. Now there were only 88 000. Secondly a unique situation to Transnet was that there was a possibility for more than one widow to be claiming for loss of support of a husband (an employee of Transnet) who died. Whilst legally this was very controversial, Transnet had not changed this situation and handled such matters sensitively.

A member referred to the internal and external consultative processes. He wanted to know how Transnet intended to reach consensus on the new proposal when there were so many pensioners and active members.

Ms Serobe said that in relation to the consultative process, the Board of Trustees was currently 50% labour and 50% management. The consultation had to take many forms. It had to accommodate for the fact that there were employees who were not part of organised labour and those who were. There was a different communication style, which had to be employed to deal with each group. In terms of the consultation with active members, this was had to be done since by changing a Pension Fund from a Defined Benefit Pension Fund to a Defined Contribution Pension Fund one was changing conditions of employment for employees. In terms of the consultation with pensioners, this was out of courtesy as their benefits are defined and locked. It was done in order to ensure that there was no suspicion about why they were being put alone. Benefits were guaranteed and could not change.

Mr B Mkhize (ANC) wanted to know whether the pensions comprised of both SATS and Transnet’s pensioners. If yes, to what extent is the company liable to pay SATS’s members.

Ms Serobe said that both were included. SATS comprised those employees who went on retirement before 1990. Transnet’s liability in respect of SATS pensioners was in the region of about 11 billion rand and in respect of Transnet ‘s pensioners was about 7 billion rand.

A member felt that the fact that there were more pensioners than active members in the fund, suggested corruption at high levels.

Ms Taljaard wanted an indication of how much of the Pension Fund’s assets were held offshore.

Ms Serobe said that 15% was allowed to be offshore – which related to 5 billion rand. About 2 billion rand was offshore with fund managers all over the world. Among these were SEI and the Bank of Ireland.

Ms Taljaard wanted to know in relation to the separation into three separate funds including one defined contribution fund, whether there would also be consultation on the impact of capital gains tax in the defined contribution funds.

Ms Serobe said that there would be consultation with the South African Revenue Service since the fund would be established by law under Transnet’s legislation and not in the private sector.

The meeting adjourned.