Who guards the watchtower? Investor stewardship and beneficiary needs in South Africa

As a South African born Australian, I find myself in the position where I have lived experience of investor stewardship in a developing economy and in a developed economy. This perspective underlies the conclusion that ‘responsible capitalism’ takes on different meanings within different developmental contexts. For purposes of stewardship, the interests and needs of ultimate beneficiaries are the final consideration. However, when the ultimate beneficiaries find themselves in such divergent conditions, surely this must also affect the look and feel of stewardship?

Developments of global investor stewardship have seen a greater focus on beneficiary needs assessment, additionally to ensuring that sufficient information flows to beneficiaries to make informed decisions. On the needs assessment side, the timelines for maturity of the beneficiaries’ investment informs the long-term view for institutional investors that manage retirement and long-term insurance savings. This assessment may be made with limited direct interaction from the beneficiary on the basis of the duration of their expected future earnings or life expectancy. However, needs assessment may also take the form of direct choices by the beneficiary of the types of investments that they would like their savings to fund. This requires a level of sophistication by the beneficiary, as well as direct input on a periodic basis. Most South African members of retirement funds do not have such sophistication. In fact, even the trustees of most retirement funds do not have specialised expertise to manage funds, which is why such extensive use is made of asset managers.

Beneficiaries will have a mechanism to sanction underperformance, including moving one’s savings to a different fund

Information flows to ultimate beneficiaries works on the premise that ultimate beneficiaries would be able to hold to account their institutional investors when they underperform financially, and potentially also when they underperform on sustainability issues. It further implies that beneficiaries will have a mechanism to sanction underperformance, including moving one’s savings to a different fund. However, in South Africa there is usually no or little choice in retirement fund on joining an employer and members often do not have sufficient financial literacy to assess performance. By the same token, it is not clear that the trustees of most retirement funds have the necessary expertise to hold their asset managers to account. Despite this situation, the South African Code for Responsible Investing, as well as the draft revision of that Code, places the ultimate responsibility for stewardship at the door of the asset owner and places no independent stewardship responsibility on the asset manager. I would argue that the stewardship of asset managers ought to be emphasised in the South African context, as most of the expertise lie there. The same holds for other service providers to asset owners, such as consultants and proxy advisors, which are not mentioned expressly in the draft revised Code at all.

Australia’s approach towards retirement savings is often referred to when amendments to the regulation of retirement savings in South Africa are considered. Most recently, two proposed amendments come to mind. The first is a proposal to create a two-pot system for retirement funds, so that a third of retirement savings would be funnelled into an account that may be accessed by the member before retirement. Such access could make a real difference to a person whose family faces starvation or who cannot access health care owing to financial constraints. Such hardships became even more evident during the pandemic. Australia offers a good example of such measures. It allowed access of up to AUD10 000 during two periods in 2020 to support families under financial hardship because of the pandemic. Even outside of the pandemic, Australians may apply for special early access to their savings under certain conditions.

The two-pot system would see two thirds retained pre-retirement to stop these losses from occurring.

Currently, South Africans can only access their retirement savings when they resign, or are retrenched or at their retirements. If they take their savings before retirement, they must pay normal income tax rates. Despite this disincentive, the loss to retirement savings at resignation is a major problem in South Africa as many simply take the money and never recoup the lost savings. The two-pot system would see two thirds retained pre-retirement to stop these losses from occurring. These amendments will mostly affect lower income groups, as high-income individuals will have the sophistication to invest excess savings in accessible vehicles.

Sustainability seems to be used as part of the argument of why investment in domestic infrastructure should be encouraged

The second proposed amendment is to expressly allow private pension funds to invest up to 45% of their assets in domestic infrastructure. Infrastructure was never previously listed as a specific class of asset and its express inclusion suggests a nudge by South African National Treasury that retirement funds should invest in infrastructure. Infrastructure is an attractive investment elsewhere, including in Australia, because of its long-term horizons and relative low risk, especially when interest rates are low. However, infrastructure in South Africa is mostly government driven and owing to the poor performance of state-run entities thus far, what holds true for infrastructure investment elsewhere does not necessarily hold true in South Africa. Despite this fact, sustainability seems to be used as part of the argument of why investment in domestic infrastructure should be encouraged. That argument runs as follows: investment in domestic infrastructure is an investment in the economic welfare of South Africa as a whole, which will lead to a better economy, which will lead to higher returns on institutional investment portfolios. The spanner in the works is corruption in government.

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By Dr Natania Locke Senior Lecturer, Law at Swinburne University of Technology, Melbourne.

This article reflects solely the views and opinions of the authors. The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.

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References

Chutel, L. (2022, June 23). South Africa’s corruption inquiry leaves few of the nation’s powerful unscathed. The New York Times. [Online]. https://www.nytimes.com/2022/06/23/world/africa/south-africa-corruption-jacob-zuma-cyril-ramaphosa.html

Institute of Directors South Africa. Code for Responsible Investing in SA (CRISA). Retrieved on 26 June 2022, from https://www.iodsa.co.za/page/crisaresourcecentr#:~:text=The%20first%20Code%20for%20Responsible,issues%20into%20their%20investment%20decisions.

Judicial Commission of Inquiry to Inquire into Allegations of State Capture, Corruption and Fraud in the Public Sector Including Organs of State. Proclamation No. 3 of 2018 Government Gazette No. 41403, 25 January 2018.

Locke, N. (2021). Australian investor stewardship and global themes in stewardship. Company & Securities Law Journal, 38, 28-45. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3697674

Services Australia. (2022). Who can access their super early? Retrieved 26 June 2022, from https://www.servicesaustralia.gov.au/who-can-access-their-superannuation-early?context=21971#sevfinhardship

Tomlinson, B., Bertrand, A., & Martindale, W. (2017, May 27) Fiduciary duty in the 21^st century: South Africa Roadmap. UN PRI. https://www.unpri.org/download?ac=1390  

Warren, D. (2021, September). Report No. 6: The Covid-19 early release superannuation: Through a family lens. Australian Institute for Family Studies. https://aifs.gov.au/publications/covid-19-early-release-superannuation-through-family-lens

Williams, P. (2022, June 26). Green light for infrastructure investment by retirement funds? SA Financial Markets Journal. [Online]. https://financialmarketsjournal.co.za/green-light-for-infrastructure-investment-by-retirement-funds/