Finance minister Tito Mboweni was supposed to make an announcement about where South African retirement funds can invest in his emergency budget speech in June – but it was pulled at the last minute.

“There’s something that disappeared from the speech,” Mboweni said during the media briefing after the public announcement. “What happened to Regulation 28?” he asked an aide.

Mboweni said that the Regulation 28 announcement was still in his speech the night before. Talking to his fellow treasurers, he said from the podium: “You made me memorise it, it’s so unfair.” 

“We decided we would ease it in properly,” a clearly uncomfortable Dondo Mogajane, Director General at National Treasury, said, before abruptly changing the topic.

A couple of weeks later, the head of the ANC’s economic transformation committee, Enoch Godongwana, let the cat out the bag. He announced on Friday that the ruling party has had talks with the country’s top 20 pension funds, including the Public Investment Corporation. 

These talks were on the back of an ANC proposal, which leaked in mid-May, to amend Regulation 28 of the Pension funds Act to allow for greater investment in public infrastructure spending. 

Regulation 28 limits the extent to which retirement funds may invest in particular asset classes. The aim of this regulation is to “ensure that the savings South Africans contribute towards their retirement is invested in a prudent manner that not only protects the retirement fund member but is channelled in ways that achieve economic development and growth”. 

Currently, the regulations limit the underlying portfolios of RAs and Regulation 28-compliant unit trusts to exposures of 75% in equities, whether in South Africa or abroad, 25% in local or international property, 25% in foreign investments, excluding Africa, and 5% in Africa (outside South Africa) of the total capital invested.  

In addition, up to 10% of total funds may be invested in hedge funds or private equity. Combined exposure to both asset classes is limited to 15% in total. Retirement funds can also invest up to 10% of their assets directly into unlisted equities, rather than making the investment via a private equity fund. There is also a provision for investment in unlisted property, whether by holding properties directly or by investing in various pooled structures. And commodities are recognised as a separate asset class; subject to a 10% limit of total fund investments. 

There is no specific provision for infrastructure.

Globally and in South Africa, there is debate over whether infrastructure should be seen as a single asset class. This is because it is not clear whether it has a unique set of risk-return characteristics that makes it conceptually coherent, or whether traditional asset classes like debt, listed equity and private equity are the “real” asset classes and infrastructure a subcategory of each of those.

Speaking at a virtual media briefing on Friday, Godongwana said the ANC is not proposing that the state implements a policy of prescribed assets but that the party wants to relook Regulation 28. “If properly packaged there is no reason why pension funds should not invest in infrastructure directly instead of using third-parties in the form of asset managers.”

He said that the proposal will be an incentive for trustees to “make appropriate decisions” with regard to risk and returns on their investments. 

Godongwana told Business Maverick that the discussions are contributing to the bigger debate of getting the South African economy off its knees. 

“We are trying to find a solution to that problem,” he says, adding that there are still many points of view around Regulation 28 on the table. “Nothing has been firmed up yet and we are still open for discussion.”

Gondwana says as things stand the regulation provides for an investment of up to a maximum of 10% in infrastructure-type developments, yet the uptake has only been around 3%. “So something is definitely wrong, and we need to know what it is so we can sort it out. 

“We are looking at infrastructure projects and service lines across the board, whether a PPP-blend, self-funded or social infrastructure sponsored by the national budget, but we are looking at what is commercially viable,” he adds. 

He says that the party’s policy paper is deliberately non-prescriptive as it does not want to pre-empt the process, or congest it with ideology.

The party is also in talks with Batseta  –  Council of Retirement Funds of SA, the professional body that represents the trustees and principal officers of local retirement funds. 

Batseta’s Anne-Marie D’Altron says pension funds are already invested in infrastructure, so it is nothing new to them, but the issue is the limited availability of bankable projects that meet the criteria.  

“It seems that the Investment Infrastructure Office is trying to resolve that and bring those proposals to the table,” she says. 

Accelerating the development of new infrastructure projects is front and centre of the government’s effort to kickstart SA’s moribund economy. And it is painfully clear that someone other than the government will need to finance those projects that are commercially bankable. 

Just last month president Cyril Ramaphosa announced at the Presidential Infrastructure Summit that there are 55 “bankable and shovel-ready” infrastructure projects open to private sector investors.

D’Altron adds that there is scope for retirements to be pro-active, but they have to look at the situation holistically and address the barriers of entry to investment. “If it means the regulation needs to be tweaked, these conversations are a good place to start.”

The Southern African Venture Capital and Private Equity Association (SAVCA) has added its voice to the growing call for amendments to Regulation 28, to support South Africa’s economic recovery.

SAVCA is proposing two changes to Regulation 28 that it believes will support infrastructure investment, among others. 

The first is to separate hedge funds and private equity into independent asset classes, each with their own caps. Currently Regulation 28 places private equity in the same bucket of alternative investments as hedge funds “This would enable investment decision-makers to model the asset classes independently in their portfolio construction process,” says SAVCA CEO Tanya van Lill. 

By splitting out the asset classes one could encourage more investment into private equity. “Considering that private equity focuses on the real economy and on building successful companies through a combination of capital and strategic know-how, greater awareness is required to enable pension funds to direct capital to private equity and manage their investments appropriately,” Van Lill says. “We need private sector investment to support the economic recovery.”

The second step, SAVCA proposes, is to gradually increase the private equity cap from 10% to 15%. This step can be phased, allowing the industry and investors to scale up capacity in tandem, possibly by one percentage point each year. A gradual approach is also low-risk as unintended consequences can come to light before full implementation.

Of South Africa’s R4-trillion savings pool just 0.3% is invested in private equity.

Futuregrowth CIO Andrew Canter does not believe it is necessary to amend the regulations to facilitate further investment into infrastructure.

“Infrastructure is not an asset class, it’s a theme,” he says. “People are saying that Reg 28 needs to be amended to facilitate further investment in infrastructure – that is a giant red herring. The regulation is not the limiting factor, the problem is a lack of good deals, weak implementation and a poor economy.”

Besides, there are sufficient opportunities within the current regulations to invest in infrastructure – one could invest via the unlisted equity, listed and unlisted debt instruments, immovable property, even private equity asset classes, he adds. 

That is a significant amount, he says. All told it could mean that up to 35% of the entire pension fund pool could be invested in infrastructure if we wished.

It’s worth noting that changing the pension fund regulations is not an act of Parliament. It is an administrative law and requires that National Treasury puts out a proposal for change, accepts industry-wide comment, and then makes amendments – it’s a multi-year process. If you don’t do this administrative law cannot be changed. “This is opening up a can of worms that requires too much energy and too much time,” Cantor says.

“Peoples pension funds are not there to serve a national agenda,” he says. BM/DM