Should government use pensions to fund its projects?

Government forcing pension funds to invest in its projects have long been a discussion in South Africa and the ANC promised to implement it after the elections to pay for economic development and industrialisation.

Dr David Masondo, deputy minister of finance, said at an Old Mutual event on Tuesday that government is committed to respect the investment mandates of pension funds to increase investment turnover based on acceptable risk.

Then he referred to Regulation 28 of the the Pension Funds Act that makes provision for long-term investment of retirement funds and said government believes that “investments in infrastructure will complement this long-term investment horizon of retirement funds”.

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Does this mean government is considering prescribed assets?

Was this a warning that government wants to implement it?

Mike Adsetts, chief investment officer of Momentum Investments Group, said the issue of prescribed assets has been a long-running discussion.

“I believe prescribed assets will act as a disincentive to save due to the perception that prescription would result in investment in uneconomic projects whether the projects or investments are bankable or not.

“Although retirement savings are compulsory, members still have choices related to accessing a portion of their assets and can choose different contribution rates. Therefore, negative perceptions can reduce the rate of savings in South Africa, which is already low.”

Adsetts said there is a real need for infrastructure investments and therefore, investments in these projects should be encouraged.

“The key is that the projects should offer economic returns that benefit investors, that the projects are bankable and well-managed and that there should be broader participation by the private sector.

“The reality is that South Africa’s infrastructure backlog is so great that a single source of assets such as pension funds would be insufficient. The projects should be selected and structured in such a way that they are attractive for local and foreign investors, covering the gamut of national and provincial government, municipalities, banks, development finance institutions, insurers, asset managers and other institutions.”

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Using prescribed assets will have very negative outcome – economist

Johann Els, Old Mutual Group economist, said using prescribed assets for infrastructure project will be a particularly bad idea.

“The private sector does not like to be forced into doing things. It will distort the markets and have a negative effect on local and foreign investor sentiment.”

Els said in a free democratic society with a market-friendly economic system, using prescribed assets is an even worse idea.

“The economic system in South Africa has moved more towards involving the private sector in projects such as electricity generation and helping Transnet with logistics or water supply, which are all very good for economic growth, as that will bring more employment.”

He points out that President Cyril Ramaphosa said in his state of the nation speech that government will make regulations looser so that it is easier for the private sector to participate in public/private partnerships.

“Th private sector will happily get involved if they can do it easily and make a profit, while sharing their expertise and capital, but forcing them to do it through prescribed assets will have a negative effect.”

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If an investment is good enough, forcing private sector is not necessary

Raazia Ganie, head of investments at NMG Benefits, said their view is that prescribed assets should not be necessary.

“If an investment option has the required return and reasonable risks, investors will invest based on the merit of the investment.

“Prescribed assets will artificially inflate prices and this will become a deterrent for foreign direct investment, which we need very much as a country. We believe infrastructure investments can be very positive for the country and may also meet the risk/return requirements for some pension funds.

“However, the list of bankable projects should be made available. Where there are government/private sector partnerships or blended finance solutions that can better achieve the country’s objectives we should be strongly encouraging these within the correct forums and with strong governance processes alongside,” said Ganie.

Ganie says if done well, this could lead to the essential economic growth and development South Africa needs, which should naturally have a positive impact on employment levels.

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Nothing to worry about – investment expert

Ann Leepile, CEO of Alexforbes Investments, said they do not interpret Masondo’s statement as a signal that government is considering prescription.

“We are in full agreement that a considered approach to investment in infrastructure will yield attractive returns, improve diversification and complement the long-term investment horizon of retirement funds.

“To that extent Alexforbes is a significant investor in private markets, including infrastructure and have recently launched an infrastructure fund that enables retirement funds to access an opportunity that has substantial investment merits and helps to develop South Africa.”

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FSCA is against using prescribed assets

Olano Makhubela, a divisional executive at the Financial Sector Conduct Authority (FSCA), who also attended the Old Mutual event, was asked on the sidelines of the event what he thinks about it.

He said that mandating pension funds to bankroll projects could compromise market returns and affect retiree’s outcomes.

“There’s a fiduciary duty in the Pension Funds Act, which requires trustees to exercise proper duty toward the fund and the members.

“Any interference with that is tantamount to a breach of the Pension Funds Act and so we remain of the view that prescribed assets are not something that we should be considering.”

Asked for further comment, the FSCA said it will not currently grant interviews on this topic.

The previous regime tried to implement the same policy in 1956 to force investment in government bonds but it was scrapped decades later. The pension fund industry criticised plans to revive it as they fear funds may be threatened if invested in under-performing state-owned enterprises. 

“You are compromising the overall return of the fund, and we don’t think that is right. The moment you weaken that due diligence because you have prescribed assets, you are going down a very slippery road,” he told Daily Investor.

He added that such a step is unnecessary as recent amendments already allow pension funds to invest as much as 45% of assets into infrastructure as an investment class.

“Government needs only to provide bankable and investable projects that can pass due diligence checks and provide attractive returns to lure investments. Prescribed assets are the prerogative of government and particularly Treasury but we are quite unequivocal on this one. We do not think prescribed assets are the way to go,” said Makhubela.