SPEECH BY MINISTER OF PUBLIC ENTERPRISES, JEFF RADEBE INTRODUCING THE SECOND READING DEBATE

TRANSNET PENSION FUND AMENDMENT BILL [B 57B-2000]

National Assembly, Cape Town, 19 September 2000

Let me at the outset thank the Chairman and members of the Portfolio Committee on Public Enterprises for processing this Bill speedily and efficiently so that we can dispense with the Second Reading today. I am also pleased that the Bill has the support of transport sector unions as well.

The Bill is very specific, but its passage represents an important moment in Transnet's transformation. It aims to eradicate economic inefficiencies in the Pension Fund, to provide more productive options for members, and to eliminate a major stumbling block to Transnet's restructuring. Over and above the existing Transnet Pension Fund, it establishes two new statutory pension funds: namely, a Defined Contribution Pension Fund catering for the 89 000 current active members on the one hand, and another, Second Defined Benefit Fund, designed for the 102 000 or so pensioners who are on the books. It allows for appropriate rules and mechanisms for members, if they so wish, to "cede their rights and transfer assets commensurate with those rights" from the current fund to these two new funds. This modernisation of the Transnet Pension Fund is in line with emerging best practice, both here and abroad, as it provides a range of options with varying risk profiles for the different categories of participants in the Transnet Pension Fund.

When Transnet Ltd was established in 1990, the Pension Fund was transferred from the former South African Transport Service to Transnet with effect from 1 April 1990 with an actuarially determined shortfall of R17.2bn, R10.4bn of which was addressed by Transnet issuing loan stock to the fund. This loan stock, in turn, was primarily in the form of T11 bonds and is currently reflected at R8.4bn on the company's balance sheet.

The Transnet Pension Fund, as of 31 March 2000, has an actuarial surplus of R2.4bn achieved through successful investment strategies, an increase in Transnet's contribution to the pension fund, and the issuing of the T11 bonds as referred to above. Whilst these strategies have assisted the pension fund itself, they have had a very serious financial impact on the status of the company as a whole in 4 main areas.

The profitability of the company has been reduced on a yearly basis to a loss making position in recent years, influenced by the R1.4bn annual interest payment on the T11 bond.
The company's debt/equity ratio deteriorated from 57% before the Bonds were issued, to 72% when they were incorporated. Critically, the issue of these Bonds restricted independent decision-making as the company now needed the consent of institutional bondholders before it could embark on major restructuring endeavors. One example of this emerged during the disposal of 20% of SAA to Swissair, where the T11 bonds created the debt-burden sharing- agreement that led to the SAA Unallocatable Debt Act with which you are all familiar.
The company had to make additional contributions to the pension fund of up to 9% until 1997 that were above the stipulated requirement of 7.5%. This meant an additional contribution of R500m per year. Since 1998, Transnet has, however, been able to reduce this figure to 4.5%, or R250m per annum.
The transfer of properties, including the V&A Waterfront, to the pension fund in 1994 to deal with the deficit, eroded Transnet's asset base.

The problem of the overall Transnet debt was further compounded because the present pension fund is structured as a defined-benefit fund that houses pensioners and active members alike, confining them to a single option. Whereas the ideal situation in a fund is to have more active members than pensioners, in our case the reverse is true. This has created problems for defining asset and liability models aimed at making strategic investment decisions.

The Bill presents solutions that will benefit Transnet as well as members of the Pension Fund. The market volatility on a base of R14.9bn creates a very serious investment risk that under a defined benefit fund is underwritten by the company whose obligations are guaranteed by the shareholder. Under the Defined Contribution Pension Fund, this risk is the responsibility of the members but is offset by allowing active members to seek a variety of investment options that can provide greater returns on mixed portfolios. The Benefit Fund provides fixed and stable income at low returns.

Converting from the benefit to the contribution plan requires the consent of members because the investment risk is transferred from the company to the member. Because of the risk transfer, and to encourage members to convert, the Transnet Board has agreed to pay an incentive of approximately R7 900 per capita for members who convert, with a ceiling of R700m if everyone moves across. Hence, if 50% of the members convert, this will result in a contribution from Transnet of R350million. The effective date for conversion is 1 November 2000. The reduction in the State's contingent liability and its guarantees can only be determined then, but already we are informed that nearly 2/3 of active members are likely to convert.

It is also important to note that up until 1974 black employees were not part of the Transnet pension fund. Instead, a fund for so-called "non-white" employees was opened and operated almost like a savings account, as the company was not contributing to this fund, or to any other retirement programme for black employees. Furthermore, widows of black employees or pensioners were also not entitled to pension fund benefits. The complicated racial architecture of the tricameral period had its effect on the structure of the fund as well, producing complexities that I do not wish to elaborate on now. Let me just say that it was only after 1990 that black employees were fully included with the rest of Transnet's employees as contributors and beneficiaries of the pension fund, and the company contributed towards their retirement.

Put bluntly, this means that black workers who toiled under exploitative conditions to build the transport infrastructure in this country were thus directly discriminated against. Since 1994 Transnet has explored innovative ways to deal with this historical problem. The projected improvements on Transnet's balance sheet as a result of the enactment of this legislation, coupled with its improved financial standing, has enabled the Transnet Board to level the playing fields by committing approximately R275m towards the account of these black members, so that their asset values in the pending contribution fund are brought on par with their white counterparts.

Government and Transnet are fully committed to honor the obligations we have to current Transnet pensioners. The Second Defined Benefit Fund is intended to focus on their needs. It will be a closed fund with a fixed number of members and precise cash flow requirements to service their needs. Presently about R2.2 billion is required to service pensioner needs and the T11 bond interest assists towards meeting this requirement. Actuarial advice to unlock value in this fund emphasizes a stable income to service pensioners, cash flow certainty and guaranteed products. The investment strategy on this fund therefore has to take these requirements into account. Recent negotiations with the Public Investment Commission to swap equities for government guaranteed bonds, subject to the approval of the Trustees of the pension fund, sees the need for the T11 bonds fall away. Pensioners will also now have representation on the Board of Trustees to ensure that their interests are protected. This improvement to the management of the fund is deepened through granting the Minister the authority to subject the fund to auditing and actuarial valuation from time to time to ensure that it is run and kept on a sound financial basis.

The enactment of the Transnet Pension Fund Amendment Bill, will enable us to modernise Transnet's pension fund arrangements and address the legacies of our past, where recognition is accorded to all our elder citizens, be they black or white, who have contributed to the development of our transport infrastructure in South Africa. This enactment also forms an integral part of Transnet's financial restructuring. As of March 1999, 43% of Transnet's total debt was due to its pension fund obligations and medical aid. The splitting up of the pension funds, the tailoring of investment strategies to suit the differing needs of groups of members and the accompanying reduction of risk to the company, will enable us to retire a substantial amount, if not all, of the T11 bonds worth R8.4bn in the coming months. This means that the R1.4bn annual interest payments would flow back into the Trasnet books for more productive investment. This will have a positive impact on Transnet's restructuring and boost its ability to fulfill its developmental role in our country.

In conclusion, let me express my thanks to the Inter-Departmental team comprising Leslie Maasdorp, Denzil Matjila and Siphiwe Matobela from DPE and Brian Molefe from Finance, and Gloria Serobe, Transnet's Finance Director, for their hard work in putting this arrangement together. Join me in congratulating Gloria, who celebrates her birthday today, and let us present her with the Bill as her birthday present!