Business Maverick 09 January 2020
Rolling Eskom blackouts due to the lack of maintenance and dated infrastructure, and billions in government bailouts to cover the misappropriation and mismanagement of utility funds has cost the economy and the consumer a great deal. The same shenanigans are at play at the utility’s pension fund, apparently — the only difference being the integrity of that system is not a national priority.
Internal documents leaked to Business Maverick highlight grave concerns around the integrity of the administration system used by the Eskom Pension and Provident Fund (EPPF). It also alludes to potential collusion regarding a tender process for an upcoming system migration.
The documents expose risks to an asset base in excess of R140-billion, 43,571 active pension fund members, 33,317 retirees; 2,376 deferred beneficiaries, and here is the clincher: by default Eskom itself, and by extension government and the taxpayer, could be on the hook. But more on that later.
First, some context. The EPPF was established in 1932 and has grown from a small base to being one of the largest funds in the retirement industry.
The EPPF is registered as a self-administered pension fund in terms of the Pension Funds Act and is approved as such in terms of the Income Tax Act.
It is one of the largest quasi privately run funds in the country and is, overall, one of the three largest outfits in South Africa in terms of assets under management.
But it is only one of a handful of defined benefit (DB) funds still operational, joined by an estimated 20-30 other stand-alone funds including the GEPF and Transnet funds.
What that means is that the EPPF, Transnet and the GEPF provide guaranteed retirement, withdrawal, death and disability benefits to members — past and present — in terms of their fund rules. A member’s final payout is calculated in terms of a certain formula at the commencement of contribution and not dependent on any investment performance over the lifetime of the membership.
So benefits are predetermined and fixed. Theoretically, fund members will know exactly what they will get out when they enter their golden years. It doesn’t matter what the balance of the fund’s kitty is.
Eliminating these types of DB pension fund structures has become a global phenomenon with renewed determination to tackle legacy liabilities, according to PwC research. Because it doesn’t matter if money goes missing due to mismanagement of funds, values are miscalculated due to faulty systems or markets were misread over the years, the fund remains legally obliged to pay what was promised. For the company, it is a very high-risk system.
In the case of the EPPF, the potential liability is fully underwritten by the utility itself, so if it were ever to come to a point where the fund’s purse strings were too depleted to fulfil its obligations, Eskom itself will have to stand in for what is owed.
And if history has taught us anything in our land of rolling blackouts and bailouts, obligation is a commitment that Eskom can ill afford. So we all know who would have to foot that bill. But that is the worst-case-scenario ending of this path lined with red flags.
But the beginnings of such a horror story is brewing with the EPPF’s administration system, currently held together with sticky tape and chewing gum. Its source data is created and managed off the cuff, according to insiders.
A letter addressed to the board of trustees dated January 2019 by an unnamed source addressed to the fund’s custodians claimed it could face a “liquidity risk calamity” if the shortcomings of its administration system were not addressed with great haste.
In 2012 Deloitte assisted in implementing the Omni system — a modern pension fund administration system that was provided by a local company, Global ASP, which came with international backing and experience.
This system was used globally by major pension funds and was capable of managing the volumes that the fund administration generated. The new system was also able to run a defined benefit system.
The Deloitte lead on the initial project, Joey Sankar, is now the COO of EPPF.
Recent feedback from the vendor, however, indicates that the current version of Omni is more than five years old, despite software updates having been made available to the fund over the years.
This implies that the fund is therefore exposed to a system that has not benefited from periodic improvements in functionality, and most importantly bug fixes, with the above-mentioned letter laying the blame on the steadfast refusal by fund management to upgrade to the latest versions. The reasons for that remain unclear.
“Given the fact that functionality in later versions of the Omni system are not in place to be utilised by the fund there has been a massive proliferation of its systems, to 67 separate platforms, which has introduced great cost and complexity,” the letter states.
The EPPF only has about 120 employees, which means that there is more than one system for every two employees at the organisation, supported by an IT competency of six people, according to an insider.
The insider tells Business Maverick that Microsoft Excel has become the means of managing interrogating, reporting and moving data between discrete system platforms.
The main concern raised in the letter to trustees with this approach is the lack of version and quality control.
It is a stated industry norm that Excel spreadsheets, and in particular macros associated with these, have an average error rate of 70%, which means there is a huge likelihood of certain benefits being incorrectly stated.
Even if the accuracy of the spreadsheet — which sources close to the matter are questioning — is confirmed by the fund’s auditors, the last financial statements available on the EPPF website to confirm this fact is that of 2018, and where former CEO and principal officer of the fund Nopasika Lila was still running the show.
She resigned her post — allegedly under dubious circumstances — in 2019 following a vote of no confidence by the board of trustees, Business Maverick was told — and is now the group financial director at Barloworld. She also serves as a director on Nampak’s board.
For cash flow purposes, which is nowhere near as critical as fund solvency (which the last financial statements quote as a healthy 134%), the best of breed software is needed to determine a fund’s short-term obligations, yet according to revelations in internal documents, spreadsheets continue to suffice for assessing liquidity risk where unclaimed benefits, for example, are concerned.
With the advent of Protection of Personal Information Act legislation, there is a critical threat of severe penalties for data that is held in a manner that does not conform to very specific guidelines, with quality and security of data being at the core of this legislation. No reference to such compliance is made to this in any official documents.
No wonder that at the end of 2018, there was an incident where 126 pensioners’ monthly payments all ended up being paid into the bank account of a single member in Gauteng, due to ill-managed dates fixed, that were erroneously applied a global update to a number of records, which is revealed by the documents in the possession of Business Maverick.
Given the lack of accountability and proper control that comes with the use of what is essentially a desktop tool, what guarantees do members have that their data is correct and secure?
In the fund’s defence, it has recently embarked on a RFI/RFP process for the potential replacement of the Omni systems, but the clock is ticking as the contract with the current vendor comes to an end in April. But it almost seems inconceivable that this tender process per the timelines stipulated in the original tender document will be achieved. The information is no longer available on the website, but was distributed on 12 August 2019, the compulsory briefing session was held on 20 August and the queries for the RFP were closed a day after. The closing date for RFP responses was 27 August and respondent demonstrations and site visits were done between 3-13 September, and the preferred respondent was notified on 25 September 2019.
The preferred vendor is said to be a company named Everest Corporate Benefits (PTY) Ltd Fund Administrators, whose website is no longer functional. It was the preferred choice of Joey Sankar when he was in charge of the project at the beginning of the previous decade, and insiders say still is.
The EPPF did not respond to Business Maverick on the state of the tender process, or to confirm the preferred vendor, but in various conversations with stakeholders and insiders, the consensus is clear: in the absence of a clearly articulated plan, which is highly unlikely given the time constraints, EPPF will not be able to deliver on the planned systems migration.
If that tender process is not completed, it will put the EPPF at significant risk given the very real prospects of implementation failure. And to make it worse, there are risk mitigation problems because there is no effective rollback solution, which would allow the fund to correct errors.
So stakeholders are yet again being left in the dark by Eskom.