According to a study published last year by Willis Towers Watson, South Africa’s pension fund industry has assets under management of more than $250 billion. That puts the country’s pension assets to GDP ratio at 75.1%, which is higher than places such as Ireland, Hong Kong, Japan and South Korea.
Together with the assets held by life insurance assurers, this is a substantial pool of money that plays a significant role in supporting South Africa’s capital markets. By some estimates, 40% of the JSE is owned by local pension funds and life companies.
Some observers however question whether this money couldn’t be doing more to support the South African economy. Given the country’s socio-economic realities, is investing so much capital into the JSE contributing enough to long-term local economic development?
“Life and pension fund money globally is the source of a country’s long-term savings,” says Sanjeev Gupta, executive director of financial services at Africa Finance Corporation, a pan-African multilateral development financial institution (DFI), speaking on the sidelines of the AFSIC Investing in Africa conference in London. “By definition, long-term saving should convert into long-term capital.”
For many people, that means supporting sustainable economic development through the real economy, rather than just investing in listed securities. The ANC, for instance, has even gone so far as to propose the reintroduction of ‘prescribed assets’ that would set down requirements for institutions to invest in infrastructure, or even the development of mines.
The motivation is obvious. Such an enormous pool of money has huge potential.
However, as Gupta notes, there is a bigger picture that has to be considered.
“When it comes to infrastructure projects, or large, transformative, industrial projects, or big mining exploration projects, everybody looks at the pension fund pool and says there is so much money, why is that not being used?” he says.
But, he adds, you have to look at it from the perspective of the member whose pension it is, the trustee whose fiduciary role it is to look after the funds, and the asset manager whose role is to manage the investment. “Then you must look at what the regulator has said about what your asset allocation can or cannot be, what risks you can or cannot take, [and] what your liability profile is, which requires you to have certain cash flows at a certain point of time.”
Put another way, there would be no point in destabilising a pension fund pool, thereby threatening the long-term financial security of its millions of members, no matter how noble the intention.
The right involvement, the right way
That doesn’t mean that there is no role for pension funds to play, however. It means their involvement needs to be well-considered.
“There are obviously ways of managing it, and there should be ways of managing it, because it stands to reason that Africa’s infrastructure or industrial gap is not going to be filled by little bits of dollars coming from elsewhere,” says Gupta. “It is going to be filled from a country’s own local currency funding and long-term savings.”
Somewhat ironically, given the ANC’s policy position on prescribed assets, Gupta believes the South African industry is actually doing a lot more than those in other parts of the continent.
“South Africa has led from a pension and life fund point of view,” he says. “Companies like Sanlam and Old Mutual, who are the custodians of life insurance savings, do get involved.”
There may be a valid argument that more could be done, but there is no question that these institutions are looking at these opportunities and considering them seriously. The best way to get them to do more, however, is not by forcing them into investments. Rather it is by creating better incentives and reducing the risks.
“The source of savings and the pool of capital is big and cannot be dismissed,” Gupta notes. “But for it to come in, the state has to play a role, the private sector has to play a role, and we as DFIs must play a role. That’s when pension funds will come in. They cannot be the catalyst, but they can be the providers.”
Something for everyone
Pension funds are not in a position to invest in projects that are still at the development stage, for instance. There is far too much risk involved at that point, which they cannot take on behalf of their members.
That’s rather where DFIs, with support from governments, are better placed to provide capital. It is once these projects are operational that pension funds can step in.
“Then pension funds get an asset in the real economy, with a cash flow, with a proven operating model,” Gupta says.
When those cash flows are backed by government guarantees, as is the case with South Africa’s renewable energy independent power producer programme, these become extremely attractive investments for pension funds. That is because they have long term pay-off profiles that perfectly suit their investment goals.
By replacing the debt advanced by DFIs with their own money, pension funds also support a virtuous economic cycle. That’s because the DFIs can then recycle their own capital to support other projects. Ultimately, this creates an ecosystem where everyone benefits.
“It’s not just a pension fund problem,” says Gupta. “They are part of the solution, but the development risk has to be taken by someone else.”