We will oppose them through whatever means are available to us.
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”.
We will oppose them through whatever means are available to us.
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”. The current Covid-19 crisis has brought this issue into the spotlight again, simply because we all know that the government has two priorities: to deal with a major tax revenue shortfall and to mobilise investment in domestic infrastructure projects as a job creation scheme and as a mechanism to fund debt-ridden state-owned enterprises (SOEs).
Not surprisingly, investors have started to panic about the reintroduction of the so-called “prescribed assets regime” and the security of their savings. While some of this alarm may be justified in time, we do not believe there is currently a cause for panic.
The prescribed assets regime introduced by the apartheid government in 1958 forced retirement funds to invest 53% of their assets in parastatal and government bonds, allowing the balance to be invested in “growth assets” such as equities; no international investments were permitted. This resulted in the distortion of local bond markets, and investors earned lower returns than would have been earned on preferred asset class investments. That prescribed assets regime was abolished in 1989, and much else has changed since then. In particular, the wide-sweeping transition from defined-benefit to defined-contribution arrangements means that investment risk is now carried by retirement fund members and not by the sponsoring employers. Maximising risk-adjusted investment returns to optimise their retirement outcome has become the only objective for members, and the introduction of prescribed assets would infringe on that objective and encounter much resistance – even court challenges – from members, trade unions and boards of trustees, who have a duty to protect members’ interests.
As retirement funds enjoy tax breaks, however, government might counter that it should have a say in how the money is invested – in which case, funds might well demand a “grandfathering” of existing investment strategies. While members could then choose to reduce their contributions to the lowest possible levels, some might well resign to access their savings. And hence the concept is actually a very blunt instrument.
Those employers still sponsoring defined benefit funds will also resist prescription as the prospect of lower investment returns would lead to higher employer contribution levels. Lower returns will likely also give rise to lower pension increases.
To be clear, the government is not currently considering a prescribed assets regime. Amendments to Regulation 28 (which limit retirement savings to particular assets and asset classes) are on the table to enable higher levels of investment in unlisted asset classes, such as infrastructure projects or “green projects” funded by debt. Any such investment would be voluntary rather than prescribed, however – an important distinction! In practice, we anticipate that individuals and small retirement funds, where liquidity is paramount, would not participate, and the higher limits would only be utilised by large retirement funds, many of them associated with SOEs.
In fact, at a webinar organised by the ANC’s Progressive Business Forum in August 2020, the ANC’s economic policy chief, Enoch Godongwana, stated: “You will recall in our ANC National Conference we emerged with a proposition which suggested we should look at prescribed assets. When we talk about tweaking Regulation 28, we are moving in a slightly different direction than what conference said. We are moving from an environment where there is no enforced prescription to creating an environment where trustees can invest in infrastructure projects as long as those projects are profitable.” Government has also conceded that such infrastructure projects would be run as public-private partnerships, rather than by government alone, which would introduce a level of governance and cost oversight absent from the ruling party to date.
The investment opportunities themselves will take the form of products or funds offered by asset managers to investors; to attract assets, some of these managers may offer liquidity to investors for a fee. The involvement of the asset management industry in managing investments in a variety of infrastructure projects, even at a fee, would require yet another layer of checks and balances . Furthermore, the tax advantages of saving through retirement funds remain substantial, and it would be foolish to give those up just yet.
Hence, panic is premature. Given that so many listed companies have opted to delist, though, a genuine investment issue worthy of concern is the dire lack of diversification within the domestic equity sector as an asset class. Another issue is the stringent 30% limit on foreign investments – without access to a diversified range of “growth” asset classes, investment returns are likely to remain in single digits.
Sygnia’s position on prescribed assets is clear: we would oppose them through whatever means are available to us – as, we suspect, would the rest of the financial services industry (including boards of trustees of retirement funds and trade unions). If no other options are available for South Africa, a form of “negotiated” solution might become necessary, but that would only be acceptable if carried out in consultation with investors (e.g. being allowed to invest 40% to 50% of assets offshore in exchange for a commitment to invest, say, 20% of assets in government-guaranteed debt). Either way, you have our ongoing commitment to always act in the best interests of South African savers.