According to media reports mutual societies are enjoying a renaissance in the financial services sector in some parts of the world. In Japan, mutuals and co-ops have 39.2% of the insurance market and in Canada, it’s 17.4%.
The Vanguard Group, the second largest money manager in the world, managing $8.4 trillion in assets is also structured as a mutual organisation. South Africa technically only has two pure-hearted mutual societies left, PPS and Avbob, following the de-mutualisation craze in the nineties which saw financial bigwigs like Old Mutual and Sanlam take their shares to market.
A mutual organisation or society is an organisation - which is often, but not always, a business - where members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship. According to Wikipedia: “A mutual exists with the purpose of raising funds from its membership, which can then be used to provide common services to all members of the organisation or the society around them.”
Mutual societies can hold several benefits for their members, ranging from voting rights to profit share, as they are typically customer-centric because their primary goal is to serve their members' needs rather than maximising profits for shareholders. This can lead to a focus on providing high-quality services and products. However, it's important to note that the specific benefits of mutual societies can vary depending on the organisation, and not all mutuals offer the same advantages.
There are also Mutual Banks, which Finbond, Bank Zero and the now defunct VBS are local examples of, which operate on a similar principle of mutual ownership, where the customers or members of the institution have ownership stakes and typically share in the profits and decision-making. However, there are some key differences, particularly pertaining to legal structures and scope of services.
But my focus is on mutual societies in its kind-of original form, which has a long history in many countries, dating back to the middle ages. They flourished in the 19th century and the beginning of the 20th century as a safety net for industrial workers and other socio-professional groups who pooled funds against social and property risks, and can be seen as predecessors of the modern welfare state. In some cases, mutuals took on an alternative role by developing voluntary health insurance schemes and maintaining or increasing their activities in other types of risk-coverage (for instance, car and motor insurance), just like PPS is doing with their wide range of offerings.
I spoke with Shaun Ruiters, CEO of PPS Investments this week, who is only a month into the job, to provide some context of the local scenario, and find out whether he thinks the mutual movement will see a resurgence in South Africa, a country where financial inclusion and upliftment is at an all time low.
Ruiters joins PPS Investments as only its second Chief Executive in its sixteen-year history after previously having held the position of Chief Executive of Sanlam Multi-Managers. Ruiters was also previously the Executive of Business Development in the Investments business of PPS.
He firmly believes that mutuals can play a much bigger role in areas where the state has failed to step up. He said that he was a strong believer in the need to tackle the challenges facing our society, and like many South Africans deeply sceptical about the ability of the state in its current guise to do much about it.
“While I am also sceptical that the incentive structures facing the asset management industry and private sector make it difficult for both to satisfactorily resolve many of these pressing social challenges, at the same time I am excited about how an inter-generational mutual organisation like PPS can increasingly play a purposeful and enabling role on behalf of our members,” he said
“Many of the pressing issues facing our society today are linked to state failure – either its inability to regulate the private sector adequately to prevent the private sector from over-supplying goods with negative externalities (e.g., tobacco, alcohol, or carbon), or the state’s inability to produce public goods with positive externalities (e.g., education, electricity, safety).
At its most basic level, then, the private sector responds to the price mechanism. In all the above examples, which fail to adequately price the true cost/benefit of the good provided, and consequently, the private sector will either over or under-supply the good. Importantly, the private company that pollutes the environment because it does not bear the full social cost, or the private company that only provides education to the marginal benefit of the individual user, is not a bad company or a company that hasn’t fully integrated Environmental, Social & Governance (ESG) into its decision-making, but rather a company that is appropriately responding to the price signal.”
“And likewise, the asset managers we appoint to manage our retirement savings are also incentivised to respond to the price mechanism. No matter how much we wish for it, and no matter how much they say they embed ESG factors into their decision-making, they are not paid to invest in something beyond its marginal (private) benefit or paid to take costs into account that are not captured by the (mis)functioning price mechanism.”
Ruiters added:“And this is where mutual societies are different and can make a difference. Mutual organisations like PPS and Avbob exist to serve both their present and future members. By implication, these organisations have a much longer time horizon than a typically private company (and many individuals) and need not respond predominantly to the shorter-term price mechanism.
“Such organisations should be better at building robustness and dealing with both positive and negative externalities and increasingly will be at the forefront of driving a more sustainable agenda,” PPS further said in a media statement.“
The failure of the state is also highly problematic in terms of building a just and equitable society, said Ruiters,. However, mutual organisations like PPS are trying to play an more important and enabling role, he said.
“The actuarial science behind mutuals has become a lot more purposeful it seems. They have taken this concept of assisting graduates and upcoming professionals - who we see as their members - and not just help them in a traditional sense, but also assist them with financial solutions that will help them in private practice, but also retire with dignity. They are also taking it a bit further, by advising members to pay it forward by reinvesting in the communities they came from, and build up intergenerational reserves via the extension of of risk benefits they provide. It sounds like a good plan to me, but whether listed financial institutions and their shareholders will agree, is a whole different story altogether,” Ruiters concluded
PERSONAL FINANCE