How to check that your retirement savings are invested in good causes rather than bad

Provided by Bowmans

By Deirdre Phillips

Topics Banking & Finance Law | Consumer Protection

11 Jul 2019

Most South Africans would not knowingly support activities that might harm the environment, endanger the health of others or violate the rights of workers. Still, unless you know where your money is going, how can you be sure that it is being spent or invested responsibly?

That is a question which the Financial Services Conduct Authority may help retirement fund members answer. By encouraging funds to make their investment policy statements available to their members, the Authority is enabling members to take a more active interest in how and where their retirement savings are being invested.

By law, every retirement fund registered under the Pension Funds Act, 1956 (PFA) must have an investment policy statement and must, before making any investment and while invested in an asset, consider any factor that may materially affect the long-term, sustainable performance of the asset. These factors include those of an environmental, social or governance (ESG) character.

Neither of these requirements is new and both have been contained in Regulation 28 of the PFA for many years.

What is new is that funds are now being encouraged to share these investment policy statements with their members. They are also being encouraged to be more forthcoming than before in describing how they take ESG considerations into account when making investments.

What funds should be saying about sustainability

On 14 June 2019, the Financial Services Conduct Authority issued a new Guidance Notice to the retirement fund industry, entitled ‘Sustainability of investments and assets in the context of a retirement fund’s investment policy statement’. In this notice, the Authority offers pointers to the boards of funds as to what ESG factors they should be considering and talking about in their investment policy statements.

For example, the Guidance Notice says that one of the ESG factors relevant to the South African context and for assets located specifically in South Africa is the manner in which broad-based black economic empowerment is advanced.

In showing how they take sustainability factors into account, funds’ investment policy statements should describe their general investment philosophy and objectives in relation to sustainability. This should include describing the extent to which they have considered ESG factors, the Guidance Notice says.

What’s more, where a fund holds assets that limit the application of ESG factors, its investment policy statement should explain how this limitation is to the advantage of both the fund and its membership. Alternatively, the statement should set out remedial action that the fund has taken or intends to take to rectify the position. Where no remedial action has been taken or considered, then the fund should give the reasons for this.

The Guidance Notice also makes suggestions on how funds should share their investment policy statements with their members. It encourages each fund to provide copies of its investment policy statement to members on request – and at no cost – and to post a copy on the fund’s website.

In addition, funds are encouraged to make a copy of their investment policy statements available to stakeholders, such as participating employers and unions, once a year. In this way, members will be able to see what, if any, ESG factors were considered in making a certain investment.

How will funds and members respond?

It will be interesting to see whether funds’ investment policy statements contain sufficient detail to enable members to assess whether investments are linked to companies with good or poor ESG practices. It will be equally interesting to see how many fund members make use of the opportunity to find out how responsibly their retirement funds are investing their retirement savings.

In South Africa, it is well known that the vast majority of occupational retirement fund members do not take control of their own retirement savings. Often, a member will merely glance at his or her payslip and note that a retirement fund deduction was made. Some members might go further and read through the member benefit statements that the fund issues. However, relatively few will take a deeper interest in their retirement savings, whether because such matters are ‘too complicated’ or ‘can wait until I am closer to retirement’ or ‘the trustees know what they are doing and will do the right thing’, and so on.

This is in stark contrast to the way many people go about purchasing a new vehicle. Here, it is common to conduct a ‘due diligence’ of sorts by asking questions such as, ‘What is the mileage per litre of petrol?’, ‘What is my motor plan?’, ‘What is the cost and what will my monthly repayment instalment be?’ and ‘How much is my monthly insurance premium?’ Much thought goes into buying a new car but, for some reason, the same does not always apply in relation to one’s own retirement savings.

The Authority’s latest Guidance Notice is another step towards encouraging fund members to be more hands-on with their retirement savings. Perhaps concern for ESG considerations will prompt more South Africans to take a more active interest. After all, unless you know where and how your savings are being invested, how can you be sure that they are being invested responsibly?