Retirement funds that are correctly invested could boost economic growth and deliver returns, but it is how the money is managed that will matter, writes Maya Fisher-French

· CityPress - 14 Jun 2020 - Edited by Maya Fisher-French

The debate around prescribed assets grabs headlines from time to time, but when you cut through the hysteria, there is largely a consensus that pension funds could be used to boost infrastructural development in South Africa. It is just about how this would be done.

While the ANC’s manifesto last year spoke of an “investigation of the introduction of prescribed assets”, National Treasury has consistently stated that prescribed assets would not be introduced and retirement funds would not be coerced into investing in failing state-owned enterprises (SOEs).

This does not mean that retirement funds should not consider investing in viable infrastructure projects.

There are calls, even within the retirement industry, for pension funds to increase their exposure to unlisted infrastructure projects.

Infrastructure projects are excellent investment opportunities for pension funds, as long as the project is viable and delivers an above-inflation return.

All retirement funds already invest heavily in government bonds. This is in part due to the existing regulation 28 of the Pension Funds Act, which limits equity exposure to 75%, requiring bonds and listed property to make up the difference. However, South African government bonds have also delivered good returns for investors.

Janina Slawski, head of investment consulting at Alexander Forbes Investments, says the fear around prescribed assets is that pension funds will be forced to invest in SOEs with a potential lower investment return versus that sought by investors.

Prescribed assets are not new to South Africa, having been implemented by government from 1956 to 1986.

During that time, 53% of retirement fund assets and 75% of government pension assets had to be invested in government and SOE bonds.

These bonds paid returns well below inflation and were a cheap source of funding for infrastructure development.

According to figures supplied by the Association for Savings and Investment SA, prescribed assets paid returns of 13.5% in the 1980s compared with inflation of 14.5%. In the 1970s prescribed assets delivered only 7.3% compared with inflation of 11.3%.

Slawski explains that, at the time, funds were a “defined benefit”, which meant the liability fell to employers to ensure members received their promised pensions. Members were largely protected from underperforming investments as companies carried the losses.

Prior to 1996 the Government Employees’ Pension Fund (GEPF) ran a deficit and government pension obligations were funded by taxpayers. Slawski points out that, today, most pension funds are a “defined contribution” and the benefit received at retirement depends on market performance (except when it comes to the GEPF, which remains a defined benefit fund).

If forced to invest in low return assets, there would be a serious impact on the ability of South Africans to retire, so any discussion that forces funds to bail out failing SOEs is a nonstarter.

However, Zamani Letjane, the CEO of Akani Retirement Fund Administrators, which is the biggest black-owned retirement administrator in the country, believes there is an opportunity to use pension funds for economic development without reducing returns. Infrastructure projects are long-term investments with a predictable return profile. Asset managers could select infrastructure projects that they believe will both deliver a market-related return and provide for economic growth.

Letjane says that, while the ANCled government has developed good legislation, the policy implementation has left a great deal to be desired, as evidenced by the failure of SOEs such as the Passenger Rail Agency of SA and Eskom.

“Government will do better if it partners with companies already active in certain sectors of the economy through public-private partnerships. There are black fund managers already in infrastructure investments such as Mazi, Aluwani, Third Way and Mergence, which invest in the real economy through private equity funds.

“Government will do well to partner with these managers to foster economic transformation instead of relying on the big, established business all the time” says Letjane, who adds that they would never agree to simply handing over cash to poorly managed SOEs.

“If government goes ahead and prescribes that the industry invests in failing SOEs – this will lead to litigation. Funds will not be willing to give money to government without their involvement in the process; this would be a recipe for disaster.”

Large institutional investors and government have already developed a database of projects with a value of R2.1 trillion for investment over the next few decades as part of the Sustainable Infrastructure Development Symposium. These will focus on digital infrastructure, energy, transport, water and sanitation, agriculture, and human settlements.

Last week, the Southern African Venture Capital and Private Equity Association (Savca) submitted proposals to increase the prudential limits to provide more funding for private equity. Regulation 28 places private equity in the same category as hedge funds. Currently, up to 10% of funds may be either invested in hedge funds or private equity with a combined exposure to both asset classes limited to 15%.

Savca argues that, as private equity focuses on the real economy, offers pension funds attractive returns and is uncorrelated to listed equities, it should be provided with an independent asset class and gradually increase the private equity cap from 10% to 15%.

“We believe a case could be made for an even larger increase, however, pension funds will need to develop the skills to analyse the asset class and supply size may need to increase capacity,” says Letjane.

While Letjane and Savca believe the limit should be increased, Slawski argues this would increase the risk to members.

“This is already a huge allocation to an illiquid asset. The current environment is a stark reminder that there can be large unexpected payments out of retirement funds during times when companies are retrenching or going out of business. We do not necessarily see large additional investments going from retirement funds into unlisted infrastructure.”

The discussion of unleashing the power of the R6 trillion retirement pool to build the economy is an important one, but to explore the options without alarm and panic, we really need to drop the phrase “prescribed assets”.