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The prescribed asset debate: What’s on the table?

In this three-part article series, the topic of prescribed assets in the South African context is unpacked: firstly, the existing content of the current debate; secondly, the reason the option has made its way on to the table in the first place; and thirdly, the risks and opportunities that the different possible outcomes bring for investors and their financial advisers. Keep an eye out for the series over the next six weeks.

In recent months the phrase “prescribed assets” has boldly fought its way back into news headlines and financial adviser commentaries. It seems it has been invited back to the economic policy party by the COVID-19 pandemic, which has undisputedly put government finances under even more severe pressure.

The decimation of an already struggling South African economy by the pandemic might have increased the intensity of the light shone on the topic, but the conversation has been alive in the policy-making domain for some time.

Headlines range from “Prescribed assets – why all the fuss?”, “Why prescribed assets are a bad idea“, “Should you be worried about prescribed assets?” and “Prescribed assets – too soon to panic“.

Clearly, any discussion around the way in which pension savings are handled should come with a prominent “handle with care” label. It is an extremely sensitive and emotional topic due to the fact that, for most people, this is the only savings they have.

“It is the primordial fear of older people: ‘I am going to be 60 in a few years’ time and if you rob me of my pension fund, I will die a pauper’,” says Max du Preez, South African journalist, author and political analyst. Du Preez says, however, that he is not of the opinion that this is what the ANC is planning, but that current indications point to a desire to find a more voluntary mechanism to tap into the pension fund asset pot.

Victoria Reuvers, managing director of Morningstar Investment Management SA, cautions against taking a speculative view that leads to undue panic.

“The best and the worst seldom happens,” she says, advising South African investors to remain calm about the ongoing debate. “Wait for the facts to become available to make an informed decision.”

Indeed, the head of the economic transformation committee of the ANC, Enoch Godongwana, conducted a webinar on the 17th of August and clearly stated that pension money would not be used to bail our ailing state-owned enterprises.

“We are moving from an environment from where there is no enforced prescription, but you create an environment where trustees can invest in infrastructure profits as long as these projects are profitable,” Godongwana said on the webinar.

“I want to dismiss and debunk the claim that we want to utilise the pension funds to bail out collapsing state-owned enterprises. The latest theory is that we want to (use the pensions) to fund the state bank,” he said.

He called the rumours “mischievous”.

Geordin Hill-Lewis, the Democratic Alliance’s Shadow Minister of Finance, is not convinced the ANC can be taken at their word. “I am absolutely certain that this [prescribed assets] is the direction that government is going in. The timeframe is up in the air and uncertain, but the direction of travel is absolutely certain,” he states.

Godongwana, however, used the webinar to indicate that the ruling party was rather looking at a way to tweak Regulation 28 of the Pension Fund Act, to allow voluntary investment in infrastructure projects.

The pension fund asset pot, according to latest available Annual Report of the Registrar of Pension Funds, holds around R4 trillion in assets, roughly equivalent to eighty percent of the size of South Africa’s total Gross Domestic Product as estimated by National Treasury for the end of this fiscal year.

One end of the debate spectrum offers the opinion that deploying some of these funds towards infrastructure projects could reignite growth in a country that desperately needs it. The opposing side argues that government’s track record as steward of public finances does not instil any confidence.

“Unfortunately, there is zero benefit of the doubt that any new money obtained by the government will actually be spent on productive investment in infrastructure,” says Hill-Lewis, referencing the track record over the last couple of decades where bailouts and investment into SOEs did not result in their efficient functioning.

South Africans above a certain age have encountered prescribed assets before. The Apartheid government used this practice between 1958 and 1989 to fund projects and provide liquidity. More than half of retirement fund investments were channelled towards government and parastatal bonds, 53% at one stage, and for the Public Investment Corporation’s assets it was 75%.

Basically, it means government forces investors to save and invest in specific projects and companies, taking away the owner of the savings’ discretionary power.

The Association for Savings and Investment South Africa (ASISA) has been very vocal against any form of prescription and released a statement last year outlining their concern. Among the reasons they highlight for the argument against asset prescription is that it jeopardises the fiduciary duty of asset managers and retirement fund trustees to make asset allocation decisions that are in the best interest of their members and clients. They also raise a concern that funding would no longer be incentivised by performance if investing in prescribed asset classes are mandatory.

But what is the actual proposal? Is this what is being touted?

Unfortunately, it is “as clear as mud”, says Du Preez.

Who is saying what?

In its discussion document titled “Reconstruction, Growth and Transformation: Building a New, Inclusive Economy” (published 10 July 2020), the ruling party outlines a policy framework for recovery centred around two pillars. The first pillar, it says, is “to mobilise society around an infrastructure-led recovery with new investments in energy; water and sanitation; roads and bridges; human settlements, health and education; digital infrastructure and public transport”. The second is to promote investment in key productive sectors, such as agriculture, manufacturing, mining and tourism and other services.

The funds for the above would need to come from somewhere. The document outlines that funding should come from the fiscus (currently constrained), local and international development institutions, domestic and international green funds, a crackdown from SARS on tax evasion and illicit flows, mobilising funds from the private sector into infrastructure and development finance institutions (DFIs). It is in the section discussing this last vehicle, that a possible amendment of Regulation 28 of the Pension Fund Act is touted to “help DFIs to access private savings in order to fund long-term infrastructure and high-impact capital projects”.

While Godongwana has now officially stated that prescribed assets is not the route the government wants to take, Hill-Lewis says the possibility of “prescription by stealth” still exist. “There might be one or two initial steps on the way. If there isn’t too much push-back for the original steps, the government might then move further ahead,” he says.

To get from ANC policy to government action does take some time, with input from stakeholders to be considered.

On the 7th of July 2020, the Standing Committee on Finance released its tabled report on the 2020 special adjustment budget. The report states that the majority in the committee believes that government should engage with all stakeholders, including the private sector, on how to unlock domestic investment through impact investments and Regulation 28 of the Pension Funds Act. “National Treasury needs to consider creating the necessary regulatory mechanisms to ensure increased pension fund investments directly into infrastructure projects including real estate, which can unlock capital that currently is not finding its way into projects,” the report reads.

Access to pension funds and prescribed assets were not mentioned at all in Finance Minister Tito Mboweni’s 2020 supplementary budget speech earlier this year. Amending Regulation 28 of the Pension Fund Act lies within Mboweni’s executive power, but best practice suggests that extensive consultation would precede such an amendment.

In search of clarity

Kevin Lings, chief economist at STANLIB, is hoping that this murky pool of uncertainty is clarified sooner rather than later.

“What makes the biggest difference to the private sector is not the policy, it is the uncertainty on policy,” he says. “We need to turn all of this into something much more categoric and provide clarity.” If the private sector can rely on a route to be prevailing policy, they will find a way to work with it. “A lack of clarity leads to a lack of confidence and that leads to a lack of investment and growth,” he says.

Though Lings also agrees that it currently appears as if government recognises the risk of prescribing assets outright and is rather suggesting a mechanism that works on a voluntary basis, he advises that the public be mindful of how the situation unfolds.

“Anytime that a government is looking to alter the way in which pension money is invested or allocated is a cause for concern and needs to be looked at very carefully. For the vast majority, their pension savings represents their life savings and represents their ability to survive post-retirement. Pensioners need to be aware of this, mindful of this and pay attention to how it evolves,” he says. DM

The whole picture

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  • David Weil says:

    I am definitely not in favor of prescribed assets and as the writer has outlined we would be going backwards as a free economy if we are forced to invest in prescribed assets. Trustees have a fiduciary responsibility to act in the best interests of their members and one has to question that by investing in government or semi government bonds that trustees would be fulfilling this sacrosanct responsibility.

    I do however believe that impact investing is a process that needs to be followed. The asset management industry need to come together collectively and engage with government as to how they can implement infrastructure projects. The issue is who is going to manage these projects! If infrastructure projects can be managed with strict governance processes and the right type of investment structure is created then you will entice the Pensions Industry to invest in these structures.

    By forcing the industry into investment structures that will be subject to the abuse of government personnel that we have become familiar with, that will be a disaster for the retirement fund industry.

    Investment returns have been under pressure for the last 5 years and under the current economic environment, investment returns will remain under pressure for some time to come. Trustees have a major responsibility in ensuring retirees have sufficient capital to retire with. As it stands less than 6% of members of retirement funds retire with enough capital to match their salaries at that date albeit retirees do not require the same level of income at retirement.

    Investments are among a number of important factors that members require to ensure they get to their investment goals. By forcing members into compromising investments will leave South Africans retiring in a destitute position.

    Impact investing is a very good solution to Government problems, provided they are managed according to strict governance processes.

    David Weil – editor Pensions World South Africa

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