SA pensions tackle neglected mining sector

Workers in South Africa’s volatile mining industry have had a lot to complain about in recent years. Pension funds Sentinel and the Mine Employees Pension Fund show how workers in the industry can make sure their futures are financially secure

March 13, 2013

With much of South Africa’s economy depending on the country’s rich natural resources, the mining industry is the centrepiece of Africa’s most developed nation. The country is blessed in particular with large amounts of diamonds and gold, as well as valuable minerals that include chrome, manganese, platinum and palladium. The rush to harvest these precious materials has seen many international firms pour into the country, but there have been criticisms over the conditions in which mining industry employees have to work.

In recent years, labour issues have beset the industry, predominantly arising over unsafe working conditions. A 2007 strike organised by the South African National Union of Mineworkers saw 240,000 workers down tools all over the country, while a recent strike in August 2012 at one of platinum producer Lonmin’s mines saw violent confrontations with the police, leading to the deaths of 34 miners.

The strikes have had a significant impact on the mining sector’s output, with an announcement in early January by Gold Fields that gold production for the fourth quarter of 2012 would be 753,000 ounces, down on the previous month’s figure of 811,000 and much lower than the same period in the previous year, which saw 883,000 ounces produced. Gold Fields suffered strikes at two of its mines, and estimates that it lost a combined total of 145,000 ounces
as a result.

Job security was also under threat, with the world’s largest platinum producer, Anglo Platinum, announcing 14,000 job cuts in South Africa in early January. Such news has caused unrest in the industry, with workers worried about their futures and their incomes.

Planning for the future
While mining is a key industry in South Africa, many of the employees may leave their jobs without enough money to sustain them in the future. Despite enforced redundancy, workers are being encouraged to invest their money into pension funds so that they are prepared for the future.

Many South Africans do not reach retirement age with any significant pension provision, with some estimates suggesting that around 75 percent of the population retires with no pension benefits. Instead, they must rely on the government old-age grant, which represents a fraction of what they would have earned while working.

Some estimates suggest that around 75 percent of the (South African) population retires with no pension benefits

Ensuring that employees receive the best possible advice is vital in such an unpredictable industry, and many workers feel it sensible to pool their money together into a pension fund that will provide benefits once they retire. Two of the largest of these funds in South Africa that serve the industry are the Sentinel Mining Industry Retirement Fund and the Mine Employees Pension Fund (MEPF), which have been in operation since the 1940s.

World Finance spoke to MEPF and Sentinel’s CEO Eric Visser and Chairman Andrè la Grange about the challenges facing the industry, what strategies their funds take to pursue growth, and how they works with employees to ensure that they get the best possible benefits.

How are Sentinel and MEPF in tune with the specific needs of employees in South Africa’s mining industry?
Members of the funds are represented on the boards of trustees by organised labour (unions and associations) that provides a link between the funds and employees. The funds provide a flexible product offering that allows employees and employers to negotiate conditions of employment that meets their specific needs, such as normal retirement age. This, together with the funds’ advisory service that conducts regular one-on-one and group sessions at the workplace, ensures that member and employer requirements are catered for.

What long-term advantages does an innovative pension fund stand to produce when compared to the the competition?
Ultimately, growth in member numbers, and therefore assets under management, will impact directly on the sustainability of our funds. It also provides the basis for greater economies of scale and the platform from which further value-ads can be provided at no additional cost to the member. Serving an industry where members have the option of which retirement fund to join, innovation and resultant value-ads serve as the catalyst for growth in member numbers. Without this growth, longer-term sustainability would be jeopardised.

What have you picked up from your involvement in pension fund management?
Pension fund management, specifically the funding and payment of monthly annuities to individuals who are completely reliant on these annuities as their sole form of income, places a far greater focus and meaning on the phrase ‘longer-term’. A five- or 10-year plan is often regarded as long-term in many organisations, while we are faced with ensuring sustainability that spans probably in excess of 80 years. Strategies to support this type of time frame demand a complete rethink of traditional business planning methodologies and also one’s own views and strategic frameworks.

What have Sentinel and MEPF done differently to other funds to mitigate risk?
Risk management in itself is far more of a focus area than would normally be the case for a retirement fund in South Africa, as our funds have no ‘sponsoring’ employer. We weathered the global financial crisis rather well compared to many of our peers due to our robust investment strategy that provides for a highly diversified investment spread across different asset classes, geographic regions, currencies and manager mandate types that also includes a diversification of investment style and bias. In addition, derivative instruments and overlays are utilised to protect and enhance capital and returns. We further review our asset liability model and accompanying assumptions on a regular basis to ensure validity.

How important is retirement planning advice and what are Sentinel and MEPF doing in this regard?
The preservation of retirement capital is the only real way to ensure that individuals retire financially independent. To achieve this, the education of members is critical, and to this end we provide members with ongoing communication and education support, both written and through presentations.

The preservation of retirement capital is the only real way to ensure that individuals retire financially independent

We have further established an Advisory Services department, at no additional cost to members, which is responsible for advising and assisting members with their retirement planning and ensuring that members make informed decisions regarding their retirement savings and investments.

How do you ensure that Sentinel and MEPF have the most able asset managers?
Prior to appointment, managers are subjected to a strict due diligence process. The Investment Committee of the funds, chaired by an independent asset management expert, ensures that every appointed manager has an appropriate ‘fit’ in the investment structure. Managers are further incentivised through a performance-based fee structure, and are also subject to regular reviews of both performance, relative to their respective benchmarks, and the strategy required by the funds.

What prompted the decision to switch from publishing a traditional annual report to an integrated annual report?
Our commitment to transparency and good governance dictated this change, as the integrated annual report provides far more insight into the operations and strategies of the funds as opposed to the traditional annual report, which really only provides financial insight. The integrated annual report also allows for a broader spectrum of stakeholder to obtain relevant information, and therefore make informed decisions to better understand the DNA of the funds.

Looking ahead, what are the greatest challenges that Sentinel and MEPF are facing? 
Apart from challenging global and domestic economic conditions, the future of the traditional mining industry in South Africa, and imminent changes to the South African retirement fund industry, are huge challenges.

We will need to further enhance our business and strategies to ensure we retain our position as a leader in governance, compliance, innovation and investment management, to deliver on our promise of excellence – through a socially conscious approach – to the retirement savings business, and ensure our sustainability over the very long-term.