The introduction of prescribed-assets requirements in the current environment may well encounter resistance, and even court challenges, from members and trade unions that take an active interest in the investments of funds that fall under their auspices.
The ANC’s 2019 Election Manifesto contained a statement that the ANC would “Investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities”.
This has been interpreted as the return of a prescribed assets regime, which was eliminated in 1989. Under the old regulation, 53% of a retirement fund’s assets were required to be invested in parastatal and government bonds, leaving only 47% to be invested in “growth assets” such as equities; no international investments were permitted. Unsurprisingly, this proposal has led to concern from the industry, particularly given the vague nature of the statement.
In reality, much has changed since the early 1990s, and the biggest change has been the move from defined-benefit to defined-contribution arrangements as a common legal structure for retirement fund provision. Under the defined-benefit arrangement, investment risk was borne by the corporate, and members were guaranteed a salary relative to their final salary at retirement. Consequently, individual members did not have direct vested interest in how the assets were invested, and they were also not represented on the boards of trustees. Under defined-contribution arrangements, the assets that a member saves and invests determines the amount of their final pension benefit. Members now also have the right to elect 50% of the board, and they have one objective, and one objective only – to maximise their returns subject to an acceptable level of risk.
The introduction of prescribed-assets requirements in the current environment may well encounter resistance, and even court challenges, from members and trade unions that take an active interest in the investments of funds that fall under their auspices. On the other hand, government may well argue that since retirement funds enjoy tax breaks, government should have a say over how the money is invested. If such an eventuality should take place, existing funds may demand “grandfathering” of existing investment strategies, i.e. a demand that savings to date are not affected by the new provision. Going forward, members may opt out of retirement funds altogether and choose to save directly, which could ultimately result in insufficient savings down the line.
Furthermore, prescribed assets are a blunt instrument that can fill the immediate gap in the funding of bankrupt SOEs but will also divert investments away from the funding of corporates that create jobs and contribute to growing the economy. It will also affect the revenue derived from the taxation of such corporates, so what is taken to fill one bucket empties another.
More importantly, the ruling party has engaged minimally with the asset management industry. Many socially responsible investment vehicles and infrastructure funds are already in place to deploy assets into viable projects that generate an acceptable rate of return. The problem is not an unwillingness on the part of the asset management industry to participate so much as it is a dire shortage of such projects and a complete lack of trust that the money will not be wasted for other purposes. Consequently, before deploying such short-term solutions it is imperative that the National Treasury and the Prudential Authority engage with the industry to find out what assets are available and what the breaks are on such investments. I think they will find the answers surprising.
If one is to consider deploying retirement fund savings, I would rather see the Government Employees Pension Fund’s (GEPF) assets being deployed. The GEPF is a defined benefit pension fund, and the liability to pay public servants’ pensions is a liability on all South African taxpayers. We have seen enormous destruction within that pool of wealth by nefarious characters, so instead of punishing the general public for the sins of the past, it would be more constructive to put the GEPF’s assets to good use. This would require a complete clean-up of the PIC or, indeed, the creation of a new asset management company staffed by professionals who have experience in deploying assets so as to target economic growth. While certainly challenging, it is a cleaner and neater solution that can resolve many problems. While the taxpayer remains on the hook, at least the potential impact of sub-standard returns can be smoothed over many years.
All this is still theoretical, of course: in the run-up to the May 2019 elections we are likely to hear a lot of political noise. Let’s see what actually transpires.