Trustees: Choose wisely

The Council of Retirement Funds of South Africa recently reflected on the fiduciary responsibility of pension funds and service providers in creating financial stability, transformation, consumer protection and financial inclusion in South Africa. This comes at a time of growing calls for radical economic transformation in all sectors of the economy, especially in financial services.  How do pension fund trustees use their leverage to drive transformation, without compromising their core fiduciary duties?

Contextually, the global economy remains under pressure and muted returns across traditional asset classes mean pension fund trustees and principal officers will need to consider alternative asset classes to ensure better fund performance for their members. This includes incorporating ESG factors, infrastructure investing, private equity and Africa as alternative asset classes.

At the latest Batseta conference in Sun City, we asked our panelists how we could ‘re-wire’ our industry to get it to where it should be.  The panel included Azola Zuma, CEO: Sanlam Investment Management, Helena Conradie, CEO: SATRIX, Mabatho Seeiso, Independent Trustee and Linda Mateza, Head of Investments & Actuarial Services: GEPF.

How do we rewire the retirement fund industry?

Says Helena Conradie, CEO of Satrix, transforming the retirement industry is a systemically complex subject, and is not just about making the right decisions in creating wealth for our members. It includes a whole range of interrelated issues, including regulatory change, the markets, education, behaviours, attitudes, etc. And in the current macro-economic environment, this isn’t easy. But what stands us in good stead in South Africa is our considerable energy that is a result of our collective diversity.

“At Satrix we strive not only to transform the workforce, but also the investor. By democratizing the market and enabling every man on the street to access the power of the market, we empower every investor to aspire towards financial freedom”

For the investor it’s all about inclusion and access…access to information and knowledge, access to product and solution, access to the market. This is where financial technology (Fintech) can play a huge role, actively driving down costs and improving efficiency.

We also need to view education differently as our definition might be too narrow.

How can we challenge the way we think about education?

1. Be open to change

 Says Conradie, we can only educate and be educated if we ourselves are open to change. Yet as an industry, and even more so as human beings, we tend to resist change, we are not open to new ideas. But this is to our detriment, because in doing so we limit our choices to those (investing) options we’re already familiar with and that we feel comfortable with.

If we find it difficult to embrace something as simple as index investing, how will we be able to get our heads around complex issues such as alternatives and ESG investing? It is imperative for us fiduciaries to think differently and to open our minds to those ideas that will counter the low-return conundrum, for the ultimate benefit of our retirement fund members. It should be part of our fiduciary duty.

As we’ve said before, pension funds have shown strained growth due to poor returns across traditional asset classes. For this reason pension funds will have to include alternative asset classes into their portfolios to ensure better fund performance. To date we’ve been slow to do so because of our inherent resistance to the change described above. Reinforces Conradie, it is good to continuously question, but only if its because you’re curious and willing to learn, not only to prove an idea wrong.

2. Be more creative in how we tackle education

Traditional PowerPoint presentations, workshops and conferences all play a very important role, but perhaps it is time to move on and embrace new tools. We could change the face of education by looking at more creative ways to do things. Take Fintech for example, where podcasts, webinars, games and mock trading scenarios could make the intimidating world of investing more real to the man in the street.

3. Education should be a collective industry initiative

We have a shared responsibility to better the industry and make sure every person in this country can enjoy a comfortable retirement.  If we put the needs of our members above those of the personal agendas, it would eliminate the biased sharing of knowledge that confuses rather than empowers the investor.

How do we entrench transformation as a business imperative?

Azola Zuma, Chief Executive for Sanlam Investment Management, reflects on what ought to be done by asset managers. The advantage that established institutions such as ourselves have is that we’ve been investing in alternative asset classes for years for our own balance sheet, so we have already acquired a well-honed skills set. We’ve done the work and we know it pays to invest in alternatives, such as infrastructure, private equity, and funding BEE transactions because it is a self-fulfilling cycle.

Says Zuma, let’s face it, transformation (or lack thereof) is a worldwide challenge and the USA are grappling with exactly the same issues. What is important is for business to realise that we have to embrace diversity. Worldwide we must develop a pipeline of top black investment professionals, specifically at the right levels. Lack of representivity is the real issue. So it’s incumbent on asset managers to bring in the talent at the right levels.

“Embracing diversity is not just a moral obligation, it’s an economic one”.

A diversity of thought and experience is necessary to ensure business sustainability and economic viability. In order to innovate and grow you need people with different backgrounds and diverse experiences. As custodians of retirement savings, we have a great fiduciary responsibility to ensure a quality retirement life for people, and diversity is implicit in this as part of a greater, systemically interconnected structure.

Do we need disruption to bring change to the industry?

Says Azola Zuma, fundamentally we need to change the behaviours of the decision makers in the industry. We have all the tools at our disposal, we have the legislative framework in place, so the reason we’re still talking about transformation is because we’re not following through with the appropriate actions. Regulation 28 says we need to incorporate transformation decisions at a fund level, allowing for allocations of up to 10% in private equity. Investment consultants can guide you, but the ultimate decision rests with you, the trustees.

As asset owners, you have much more power than you might think. It is possible for pension funds to dictate to the industry, because it is your assets after all. The only problem is investment committees and other fiduciaries don’t like getting it wrong, or investing in things they don’t understand. So they shy away from things like alternative asset classes.

Greater collaboration needed

Suggests Zuma, we need to create an open forum where trustees and even asset managers can get together to share experiences in uncharted waters. Especially those who have invested successfully in alternative asset classes. Trustees need to collaborate more with asset consultants and asset managers for better education around those areas. All decision-makers and stakeholders must work together. It’s a collective effort.

We need to change the way we think about investments

Both Zuma and Conradie agree, for change to happen, ultimately we must challenge our thinking. It’s not just business as usual. We have to direct assets and capital flows into long-term projects such as infrastructure, housing, and renewable energy that will grow the economy.

Conradie wrapped-up by saying that the most powerful start for transformation is taking ownership. It all begins with me. And you. As fiduciaries and other allocators of capital. Inclusion and the strength and beauty of diversity is a virtuous, self-sustaining circle. It sets in motion the right flow of decisions, with a natural domino-effect. But it must start with you and me.