Q2 2020 - (released August 2020)
SA's quarterly Private Equity & Venture Capital magazine
Reg 28: “This time is different”
by Michael Avery
Q&A with Linda Mateza, CEO and Principal Officer of the Eskom Pension and Provident Fund (EPPF).
With issues around market volatility, and investing in private equity and prescribed assets keeping pension fund trustees busy this year, Catalyst caught up with Linda Mateza, CEO and Principal Officer of the Eskom Pension and Provident Fund (EPPF).
Mateza has pensions in her blood, having started out with the Transnet Pension Fund in 2002 and subsequently working in the private sector at Standard Bank and Momentum. She then moved to the EPPF for a while in 2008 before joining the Government Employees Pension Fund as Head of Investments and Actuarial Services from 2015 to July 2019. She now returns to the EPPF Fund as the CEO and Principal Officer.
Mateza holds a Master’s degree in Finance and Investments from the University of the Witwatersrand, and is a Fellow of the Africa Leadership Initiative. She serves on the Board of Directors of Batseta, the Council of retirement funds in South Africa.
Q: Did you always have a career in finance and investments as a childhood ambition?
A: In fact, I wanted to become a psychologist and my first degree, which I studied at Rhodes University, was Psychology and Anthropology. I happened to pick up economics as one of my electives and found that I was enjoying it a lot more, and I happened to be quite good at it. That really sparked my interest in finance and economics.
Q: The Eskom Pension and Provident Fund is a giant in the institutional investment space – SA’s second-largest retirement fund after the Government Employees Pension Fund (GEPF); what are your assets under management (AUM) and membership?
A: The EPPF has around 80,000 members, split evenly between active members who are currently employed by Eskom, and pensioners of Eskom. The AUM are around R144bn. At the peak, around mid-February, we reached R150bn and around the 23rd of March, we were down to R114bn, so we have managed to bounce back quite well.
Q: You have recently been appointed the new CE and Principal Officer of EPPF. What are your key priorities and strategies going forward, to ensure the fund achieves its goals and executes its mandates?
A: I worked for EPPF previously. I joined in September of 2008, just at the start of the global financial crisis, so I seem to have a knack for these global financial disasters.
I’m focusing on preserving value for members. I think at times like these, growing the assets is a very difficult task but, at the very least, what we should do is preserve value for them; to go beyond just treating members as numbers and actually taking an interest in their lives and being concerned about their wellbeing.
Q: The “hybrid” financial structure of the Fund, where the Fund has a Defined Benefit structure with a Defined Contribution financial underpin, remains a major risk over the long term, and measures to address this situation are still being sought by all stakeholders. How are you dealing with that long-term risk?
A: Yes, the fund is a defined benefit, but it is not guaranteed. The way we’ve approached this is that our investment strategy is premised on meeting the liabilities of the fund as they fall due into the future. Every year, we conduct an asset liability modelling exercise where the actuaries who consult to the fund project the liabilities well into the future. I’m talking about a 50-70 year horizon. We would then come up with a set of capital market assumptions with their assistance, and independent reviews as well, and from that process determine the optimal strategic asset allocation that would best enable the fund to meet those liabilities over the very long term. So we invest in a liability-driven manner because we are very cognisant of the fact that, should the fund become underfunded, we are not guaranteed to be bailed out.
Q: The Eskom Fund is a known supporter of private equity. One can count on two hands the number of pension funds that invest in the asset class. With respect, it’s poor.
A: And many of them use the excuse of liquidity which, with due respect, is not correct. If you’re only investing 5% into private equity, which is your prudential limit, you can manage liquidity through the rest of your portfolio very easily.
I think there is reluctance from trustees to take the trouble to learn about the asset class and a concern that, if they get it wrong, they may face certain legal liability issues, if they are seen to perhaps have been negligent. That is another tough nut to crack. The more capital you’ve got to invest, the more fund managers can put capital to work, the more growth you can get out.
Q: How do you see your role in deepening the pool of capital that flows to private equity and emerging PE general partners?
A: The EPPF has been investing in private equity for many years, and I think it’s a daunting space for pension fund trustees because it’s not as transparent as listed securities. It is also quite complex in the way the valuations work, and when it goes wrong, it can go spectacularly wrong; you could lose everything. So from a trustees point of view, bearing in mind their fiduciary duty, it’s a lot safer to stick with the known and tried asset classes. However, there is such a disjuncture between what is listed and the real economy of South Africa. If we are investing with the purpose of rebuilding the economy, the way to do it is to go directly through the financing of local enterprises, especially in the small and medium sector, as well as financing development opportunities that obviously will earn a return over the long term.
Q: There is a lot of convergence between the economic documents on the table of the ANC, Business 4 SA and Treasury around using infrastructure as a catalyst for growth. Where they diverge appears to be on funding this, and there is talk of using section 28 of the Pension Fund Act to prescribe to pension funds to increase investments into “real assets” and fund infrastructure and capital projects. It didn’t work during Apartheid, why will this time be any different?
A: This time is different because the government [during apartheid] was desperate for funding, due to sanctions. Now we have an open economy. However, having said that, the pensions community in general has been quite sceptical about the intentions behind these conversations around regulation 28. I think what’s likely to happen, from my engagements in the industry and with government representatives, is that regulation 28 will be amended to include a minimum threshold that must be invested in infrastructure. It wouldn’t go as far as prescribing actual investments that should be made and, as such, I don’t think it’s bad thing. It’s a nudge in the right direction. It forces us, as retirement funds, to consider infrastructure as a potential investment.
I must add that it all depends on the quality of available investment opportunities. If the pipeline is not strong, if there aren’t compelling investment opportunities in infrastructure, then I understand the reservations of those in the pensions industry who say that prescription would be a very bad thing.
My view, and that of the EPPF, is that the country is in dire need of infrastructure, and with blended financing between government, the DFIs (Development Finance Institutions), the financial institutions and ourselves as institutional investors, we can really make a difference. The current crisis right now shows us the effect of under-investment in infrastructure – hospitals are bursting at the seams, water and sanitation is hard to come by in many regions around South Africa, and that’s a result of having not invested enough when times were ‘normal’, and now we are living in very extraordinary times.
And so if, in partnership with the govern-ment, viable investment opportunities are created, I, in principle, wouldn’t have a problem with there being a minimum prescribed to us as pension funds to say, “invest in infrastructure and grow the economy”. Growing the economy also means growing the rest of our portfolio. We invest in listed companies and if the economy is weak and people are unemployed, and infrastructure is poor, that limits the prospects of the listed companies doing well and therefore it’s only to our own detriment as investors. In the interest of diversifying, as well, it makes sense to invest in the real economy.
Q: Where do you think the capacity constraints exist to help unlock some of these projects?
A: Structuring the projects is quite a skill and, at times, we may not have the capacity in the public sector to do that, and so it’s important that the private sector is also involved so that the structures make sense.
Q: What keeps you awake at night?
A: What keeps me awake at night is the prospects for young people in the country, given what the lockdown has exposed in our education system. I and my peers are in the fortunate position of having computers and Wi-Fi at home, so our children can continue to learn. However, that’s something that’s not available to the vast majority of people in our country. I worry that the inequalities will deepen and that youth unemployment, which was already a problem before the crisis, will be exacerbated. The things that keep me up at night are many. Another is being able to generate return for our pension fund members, to be able to retire with dignity. We target an investment return of CPI plus 4.5%. We are not likely to see that this year or next, and we certainly didn’t see it last year either. There are some real concerns right now and it all comes back to values as South Africans. We used to talk a lot about Ubuntu, which is a sense of community and recognising and supporting each other, and I think if we learn nothing from this crisis, we should at least learn the value of community.