House arrest: How the GEPF lost out

South Africa’s largest pension fund has almost all its investments tied up in its home market – and it’s costing its 1.28-million members. Write-offs also increased in the year through March. That carries a risk for taxpayers, too.
2 mins read

The Government Employees Pension Fund (GEPF) claims its 4.9% return for 2024 is “satisfactory”. It’s not. With too much of its portfolio invested in South Africa, its members could be losing out.

The GEPF, which looks after the retirement savings of about 1.28-million civil servants, justified its performance for the year through year March 2024 because of the “tough and volatile conditions in the face of slow economic growth, and high unemployment amid the global challenges of conflicts, high energy costs and inflation”.

But investment professionals and fund members are sceptical, pointing out that global markets returned 23% over that period. The underperformance reflects a major diversification risk for the fund.

Its performance is well below the inflation rate, which averaged 5.5% over the GEPF’s financial year. It’s not yet time to panic; the actuarial position of the fund is still positive, but clearly red lights are flashing.

In its annual report, the GEPF says its assets under management have increased to a record R2.38-trillion in its latest financial year, up 2.6% from the previous year. The increase is in part due to an increase in the number of civil servants and increases in overall public sector wages. That added 10.88% in contributions to the fund, and though benefits paid out increased too, they did not increase at the same rate, which helped boost overall assets under management.

The GEPF, which outsources about three-quarters of its fund management to the Public Investment Corporation, is an enormous player in local markets, but it differs from most fund managers as government employees are obliged to invest 7.5% of their pensionable salary towards the fund, an amount matched by the state.

Keeping it local

Judging solely on the basis of the 2024 results, it’s obvious that the GEPF’s lack of international diversity crimped its performance dramatically.

The increase in the market value of the fund’s investments was 2.6%, which is well below most of the fund’s benchmarks. Even the JSE Capped Swix, the benchmark used by most fund managers for local equities, outperformed this level, and outperformed its return on local equities.  

The fund’s international equity investment handily outperformed the MSCI world index, but since the fund has only a little over 8% of its investments in this asset class, it wasn’t enough to outweigh its investment underperformers.

The fund is somewhat constrained by a general mandate to keep most of its investments in the local market for political reasons, but most investment funds in South Africa have for years sought to balance local and foreign portfolios.

It’s small potatoes, given the huge size of the fund, but since it does have a broad mandate to support local businesses, it’s worrying how badly these investments have performed. Impairments overall increased from R6.2bn in the 2023 financial year to R6.5bn.

One of the largest has been the decision to sink R4.3bn into technology firm Ayo. It has managed to claw back R619m as part of an out-of-court settlement reached last year, but its investment has deteriorated even further and is now valued at only R41m. 

This is far from the only disastrous unlisted investment. The fund has impaired its investments in Honsha Property, which part owns the Melrose Arch Precinct, Firefly Investments, which bought a stake in unsecured lender Bayport Finance Services, and South Point Management, a student accommodation property investor.

Numbers, they say, tell the story. During its financial year, the GEPF allocated 50% of its investments to local shares, 29% to local bonds, 3% to cash and money markets, and 4% to domestic property. Only 9% of its portfolio was in foreign shares and 2% in international bonds. Though its mandate caps overseas stock investments at 5%, the fund temporarily exceeded this limit due to fluctuations in the rand.

All of this again underscores the urgent need to drive economic growth. The GEPF is a defined-benefit fund, which means the benefits the members receive are guaranteed. With its fortunes so closely tied to its home market, it’s time for the government of national unity to deliver.

As the country’s largest pension fund, with the most members, the fund’s significance lies in the potential burden it could be on taxpayers if its returns continue to fall short of inflation and eventually erode its ability to meet its obligations.

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Tim Cohen

Tim Cohen is a long-time business journalist, commentator and columnist. He is currently senior editor for Currency and editor at large for the Daily Maverick. He was previously the editor of Business Day and the Financial Mail.

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