Dear Members and Pensioners
The Eskom Pension and Provident Fund ("EPPF" or "the Fund") is a self-administered defined benefit pension fund that has approximately 80,000 members (active members and pensioners).
The Fund is a separate legal entity from Eskom Holding SOC Limited with its own governance and management structures. The Fund is regulated by the Financial Sector Conduct Authority (FSCA) under the Pension Fund Act of 1956 and governed according to the Rules of the Fund.
In the spirit of transparency and ensuring that you are informed about what is happening at the Fund, I, as the Chairman of the EPPF Board, would like to give you an update on a number of critical matters. This update seeks to address some of the concerns you might have as a member or pensioner.
Recent Daily Maverick article
The Board of Trustees ('the Board') has considered the allegations made against the EPPF in The Daily Maverick article published on the morning of 27 January 2020. Because of the sensitive nature of this article (and the reputational risk it poses to the Fund), executive management and the Board held an urgent meeting to discuss the contents of the article and its allegations, and to decide on a course of action.
Several allegations in the article refer to incidents that were already investigated as part of an enquiry conducted independently last year. Due process was followed in line with internal EPPF policies, and the Board resolved the matter satisfactorily. However, The Daily Maverick article also makes a number of unfounded allegations. The EPPF will investigate these where it is deemed appropriate.
The recruitment of Executives within the EPPF is conducted through reputable search companies, and a robust process is followed - with reference and security checks conducted. None of our Executives were appointed because of their relationships with any Board members.
Former Eskom Group CEO pension pay-out
We confirm, in line with previous announcements by the Fund, that the High Court handed down a judgment in January 2018 that set Mr Molefe's retirement aside. In this judgement, the Court directed Mr Molefe to refund retirement money he had received from the Fund.
Mr Molefe became a member of the Fund upon his appointment at Eskom, at which time he transferred his retirement benefit of around R4 million from his previous employer, Transnet into the Fund. Mr Molefe subsequently took early retirement with effect from the end of December 2016. In terms of Fund Rules, penalties are applicable to early retirement. Eskom undertook to pay Mr Molefe's early retirement penalties. Eskom also undertook to buy additional years of service for him. In line with Fund Rules, and to ensure that the Fund and its other members were not prejudiced by this early retirement, we calculated applicable penalties and the cost of additional years of service. This amounted to R30,1 million, which Eskom paid to the Fund.
The EPPF was then cited as the fifth Respondent in a matter brought by Solidarity against Eskom. The 21 Respondents in the matter included, among others, Mr Molefe, Eskom Holdings SOC Ltd as well as members of the Board of Eskom SOC Ltd.
The Fund did not oppose the application but filed an answering affidavit in order to place the Fund's version before the court, to enable the court to make an informed decision. The Fund also filed a counter - application requesting the court to, in the event that the application by Solidarity was successful, order Mr Molefe to repay all amounts paid to him by the Fund. Mr Molefe opposed the Fund's counter - application.
The application by Solidarity, which had been consolidated with applications by the EFF and DA, was heard by the court on 29 November 2017.
On 25 January 2018, the High Court in Pretoria ruled on the Brian Molefe case. The ruling stated that the "early retirement agreement" reached between Mr Molefe and the Eskom Board was unlawful and should be set aside.
Mr Molefe sought leave to appeal the January 2018 decision by the High Court to set his retirement aside. He took his appeal first to the Supreme Court, then the Court of Appeals and then the Constitutional Court. When this latter Court dismissed his application, it effectively meant the original judgment of the High Court (which set his retirement aside) stood, and that Mr Molefe remained required to return to EPPF the money that had been paid to him.
Mr Molefe has not yet repaid this money. Accordingly, The EPPF has applied to the High Court for an order that will enforce its judgement by:
a) setting off the amount he owes the Fund against his Transnet Retirement Fund (TRF) benefit that he transferred when he joined EPPF; and
b) directing him to pay the balance he owes after this TRF set-off; and
c) seeking an order directing SARS to refund all taxes EPPF paid when Mr Molefe left Eskom.
The principle of set-off is common law doctrine that applies when two parties are mutually indebted to each other and each debt is due and payable to each party. In such circumstances, each debt is used to extinguish all or part of the other debt and vice versa. For example, if A owes B R100, and B owes A R30, B's debt to A is off set and A would owe B R70. This would mean, naturally, that B no longer had to pay A the R30 owed to A.
The EPPF's matter regarding Mr Molefe is before the court and is sub judice. We will only comment on the matter again when court proceedings have been concluded. However, we assure you that we are pursuing all legal avenues available to ensure full compliance to the High Court order.
Financial soundness of the EPPF
This EPPF is a defined benefit Fund and a key measure of its health is the funding ratio. The funding ratio is the market value of Fund assets divided by the Fund liabilities. The EPPF's funding ratio for each of the last 10 years is greater than 100% which implies that the Fund is in a very healthy financial state. The 30 June 2019 funding ratio is 115% (including all contingent liabilities).
While the Fund is in a healthy financial state, we are very mindful of the low investment returns experienced by the Fund, and investors in general, over the recent period.
Over the 12-month period to 30 June 2019, only two of the asset classes we invest in outperformed the target of CPI + 4.5% - i.e. local nominal bonds and global equities. If we consider a longer-term window of 5 years to 30 June 2019, only global equities outperformed CPI + 4.5%.
The Fund benefits from having a well-diversified portfolio of assets. Investing in only one asset class carries significant concentration risk, hence a diversified portfolio is preferred even though, from time to time, single asset classes may underperform the CPI + 4.5% target.
Even in this low return environment, we still have the responsibility to increase returns while minimising risk and to this end, we are increasing downside protection and income focussed investments, in the form of exchange traded notes and real assets (direct property and infrastructure assets). Real assets are also a better match for the Fund's long-term inflation linked liabilities.
Because the Fund's liabilities are long term in nature, it is very important to assess the performance of the Fund's assets over longer periods.
If we compare the EPPF's 10-year investment performance to that of similar local absolute return funds, the EPPF remains in the top quartile against managers who target CPI + 5.0%. This information is sourced independently from the Alexander Forbes Absolute Return Manager Watch Survey.
The EPPF is governed by a 14-member Board of Trustees. Seven of our Trustees are elected by members and pensioners. The other seven Trustees are elected by Eskom. The Board's mandate is to direct and oversee the operations of the Fund in accordance with the applicable laws and Rules of the Fund. This oversight is provided through the various Board committees as below:
- Audit and Risk Committee
- Benefits Committee
- Communications Committee
- Human Resources and Remuneration Committee
- Legal and Governance Committee and;
- Strategic Investment Committee
The executive management, guided by the Board, are tasked with the operational mandate of the Fund. Below are the names and designations of the EPPF's executive management team:
- Ms Linda Mateza - Chief Executive and Principal Officer
- Mr Shafeeq Abrahams - Chief Financial Officer
- Mr Ndabe Mkhize - Chief Investment Officer
- Mr Joey Sankar - Head of Retirement Fund Operations
- Ms Shyless Nkuna - Head of Human Resources
- Ms Yolisa Skwintshi - Head of Information Technology
- Mr Ayanda Gaqa - Head of Risk and Compliance
- Ms Thelma Melk - Head of Legal & Corporate Secretariat
Replacement of the pension administration system
On 10 January 2020, we communicated with you about the new pension fund administration system that we're in the process of introducing. The EPPF is determined to launch the new system in April this year. The new system will improve the processing of benefits, enhance controls, reduce costs, and provide a better service experience for members. We are excited to bring innovation and development to the Fund.
The process of appointing service providers is robust and where conflicts of interest exist, stipulated guidelines and processes are in place to manage such conflicts. The procurement of the new system service provider was conducted in line with the EPPF Procurement Policy.
The Board assures members and pensioners that it will always act in the best interests of the Fund. We remain committed to good governance.