Background

The Government Employees Pension Fund (GEPF) was launched by the Mandela government in May 1996.¹ At the moment, it is the largest fund in Africa. Its assets under management are more than R1.67 trillion in March 2017, which is about $150 billion (depending on exchange rates).² It employs a liability-driven approach to maximize returns and minimize risks relative to liabilities.³ The fund was set up for government employees in South Africa and has more than 1.2 million active members and in excess of 400,000 pensioners and beneficiaries.

The board, appointed for a four-year term as prescribed by law, consists of 16 trustees, led by an elected chairperson and vice-chairperson. As GEPF is committed to building a better society, it plays an important role in “driving the corporate sector towards adopting sustainable business practices that generate long-term financial rewards and have a positive impact on South Africa.”⁴ GEPF has created the GEPF's Development Investment Policy, which has adopted a four-pillar approach to developmental investing:

1. Investment in economic infrastructure;
2. Social infrastructure;
3. Sustainability projects; and
4. Enterprise development projects.

“Many of these developmental projects are located in areas where poverty is high and GEPF believes these investments will go a long way towards creating jobs, alleviating poverty, increasing economic participation of impoverished communities, and assisting and supporting with skills development and skills transfer.”⁵ GEPF's objective is to be a sustainable fund for the entire South African society.

Challenge

As one of the most unequal countries in the world, South Africa faces enormous challenges. In a situation of extreme disparities between wealth and poverty and between black and white, the pension policy adopted for workers in the public sector is remarkable. The effectiveness of social policy very much depends on the extent to which it reduces the disparities and tackles poverty. Specifically, for GEPF it means it has to make trade-offs between developmental considerations and investment returns. This has to do with the fact that there are “stakeholders who look at GEPF as if it's a development finance institution or a charity,” while others see GEPF as in the “business of paying pensions to South African civil servants upon retirement.” In other words, the challenge of a dual mandate emerges for GEPF.

Ninety percent of GEPF's assets are invested in South Africa: “any constraints on South Africa's economic growth will have a similar impact on the fund.” GEPF cannot invest more in international assets due to the legislation of the fund. The ministry of finance guarantees the benefits of the GEPF members and, in turn, their asset allocation process is carried out in close consultation with the government. That GEPF cannot invest much outside of South Africa might restrict the ability to grow of the fund. In addition, a result is that the outcomes of the fund are highly dependent on the economic well-being of the country. Of the remaining 10%, 5% is allocated to the rest of the African continent and 5% beyond Africa, to international bonds and equities. As a consequence, due to its high concentration in the domestic stock market, GEPF has a high stake in almost all the companies on the Johannesburg Stock Exchange. This also means that GEPF does not have “what you might call the luxury of selecting companies that are strong on environmental, social and governance (ESG) criteria or divesting from those that don't.” So, compared to other pension funds, divestment is really a last resort.

Process

GEPF is not kept awake at night because it has a large allocation in South Africa. The fund expects that South Africa has an enormous growth potential. For example, GEPF invests in education loans. The fund argues that these provide a diversifying benefit and increase the future potential of the country's output because of the high unemployment rate. The fund is adamant about the consumption of the continent's one billion people, because many of them grow into the middle class. It strongly believes that Africa has a huge long-term earnings potential. GEPF has created a 15-year outlook and aims to provide funds for partnerships across Africa, aiming to benefit from the believed potential.

GEPF is as big as one third of South Africa's GDP (gross domestic product). With 90% of its assets invested in the country, it means that a lot of infrastructure, consumption needs, or any other kind of activity are related to the investments of the fund. GEPF recognizes it has an enormous impact on the economy and society of South Africa, stating: “It is critical that the manner in which we invest somehow benefits the economy and benefits the GEPF.”

To deal with the ESG investing in South Africa challenge, GEPF and its investment management organization PIC have developed an ESG matrix. This matrix is used to analyze the top 100 companies on the Johannesburg stock exchange. “GEPF and PIC expect to see some interesting changes at Johannesburg Stock Exchange during the coming years with regards to the JSE ESG strategy to assist both issuers and investors from an ESG data disclosure and performance viewpoint.” And to tackle the challenge of having to make trade-offs between ESG considerations and returns, the GEPF's Development Investment Policy promotes investment across the four pillars mentioned in the background section.

The outcome

By investing via the four developmental investing pillars, GEPF is expected to obtain “long-term returns for the GEPF's members and pensioners, as well as for the broader South African economy.” GEPF has already addressed issues which have a transformational social and environmental impact: it has invested in education, healthcare facilities, housing, enterprise development, and funding of renewable energy projects. By investing in such projects, GEPF was also able to create a lot of new jobs. “Anything that you care to see when you arrive in South Africa—whether you arrive at the airport, whether you drive on the roads, whether you buy food in the shops, or whether you stay in a hotel—we own a piece of it.”⁶ Therefore, it is crucial that when GEPF invests, it invests in a way that benefits the economy and benefits GEPF itself. “GEPF is effectively a third of South Africa's GDP so what we think is that if the country does not do well then the fund will not do well because we own a slice of the economy,” says John Oliphant, the former principal executive officer of GEPF. Furthermore, GEPF has the potential to exert effective influence on corporate policies and practices.⁷ That also means that active trading in shares of companies in which the fund is so heavily invested would result in significant price movements, and could thus be self-defeating. Therefore GEPF invests passively.

Lessons for Achieving Investment Excellence

• A dual mandate asks for strong governance as it is always hard to find and keep the right balance between the two objectives and avoid achieving one at the cost of another.
• Considerable focus on a single country leads to concentration risk and suboptimal international diversification.
• A large size of a fund can be a handicap and limits the degrees of freedom a fund has. This will come at a cost. Funds have to strike a balance between being able to move their assets without having a large market impact and their wish for having influence and impact with their investments.