The GEPF’s investment mandate has consistently delivered above-inflation returns, outperforming its benchmark over five years and resulting in a financially sound fund.

South Africa is one of the few countries where the state pension is guaranteed by government, and it cannot be reduced, under the current regulatory environment.

Unlike countries in Europe and the UK, where the government reduces the state pension when it runs out of money, the South African government is required by law to honour retirement benefits. This means government must pay the balance of the cost of the retirement benefits.

Bad investment decisions mean that government must take money from other vital areas of spending to make up for any shortfall in the Government Employees Pension Fund (GEPF). Not only does market performance impact government’s finances, but it also affects its ability to pay inflation-linked pension increases to retired members.

The good news is that since 2004, the GEPF has been fully funded and financially sound. This despite inheriting an underfunded GEPF in 1996 which only had enough money to pay out 72c for every R1 owed to members, with the government funding the shortfall through taxes.

In the last actuarial valuation in 2018, the GEPF had a 108% funding level – or R1.08 of value for every R1 of member benefits. The GEPF has maintained pension increases equal to 100% of inflation for the past nine years, which is above the guaranteed increase of 75% of inflation.

According to the 2020 annual report, for the period between 2011 and 2020, the GEPF’s accumulated funds and reserves grew at an average rate of 7.5% per annum and outperformed its benchmark by 0.22% over five years.

The investment mandate

The GEPF board of trustees, in consultation with the finance minister, determines the investment policy of the fund.

An investment mandate has been signed with the Public Investment Corporation (PIC), which is a state-owned asset manager responsible for investing assets on behalf of the GEPF. The mandate specifies the asset classes that the PIC may invest in and takes into consideration the investment risk-return objectives of the fund.

The Fund’s investment strategy must include taking market risk to get the returns required to fund members’ retirement. However, the PIC must implement appropriate risk management to ensure these risks remain controlled.

Diversification plays in important role in lowering risk and the fund invests across various asset classes including equities (shares), bonds, property, and cash, both locally and offshore.

The PIC invests around 75%- 80% of the fund in passive funds which track the average return of the markets, assisting in keeping the costs of the fund low. The remainder is allocated to active fund managers to provide enhanced returns. The PIC also takes direct stakes in non-listed assets, including property.

Social impact

As the largest fund in the country, with currently unaudited assets of over R2 trillion under management, the GEPF must also take into consideration the social impact of its investments.

A portion of the assets are invested in accordance with the Fund’s developmental investment policy, whose objective is to earn good returns for members and pensioners of the Fund while supporting positive, long-term economic, social and environmental outcomes for society.

In 2010 the GEPF launched the Developmental Investment Policy which includes investments in economic infrastructure, social infrastructure, and environmental investments, as well as black economic empowerment and job creation.

The fund also supports black economic empowerment fund managers and the development of an incubation fund for new black fund managers.

The challenge of size

As the largest fund in the country, the GEPF accounts for 17% of the Johannesburg Stock Exchange. Any significant changes in investment strategy would have a direct impact on the JSE and therefore on other investors and more broadly, the country’s economy.

One of the challenges faced by the GEPF is the 10% limit on offshore exposure. Currently the long-term strategic asset allocation has 5% invested offshore with an additional 5% invested in the rest of the African continent. This is substantially lower than the 30% limit on other retirement funds which can also invest a further 10% into the rest of the African continent.

This asset allocation is currently being reviewed, however, consideration must be given to the potential negative impact on local markets. This would need to be carefully managed while providing the GEPF with a more diversified portfolio in line with global best practice.

Members can obtain more information about the GEPF’s investments in the latest annual report.

This article is part of a member education series in partnership with the GEPF.