In replies to questions in parliament last week, President Cyril Ramaphosa said the issue of prescribed assets needs to be looked at. Prescribed assets refer to the government forcing pension funds to allocate a portion of their portfolios to specific investments, such as government or parastatal bonds.
“We need to discuss this matter and we need to discuss it with a view to actually saying what is it we can do to utilise the various resources in our country to generate growth in a purposeful manner,” Ramaphosa said. “We are facing a situation where our developmental needs are enormous, and in a number of other places pension funding is utilised for developmental purposes, for infrastructure, and quite often those pension funds make good returns out of infrastructure developments.”
The president noted that the proposal, which is contained in the ANC’s election manifesto, has the support of Cosatu. However, it is not clear that he and the country’s largest trade union federation are necessarily talking about the same things.
Ramaphosa is quite clearly referring to the funding of infrastructure projects. Cosatu, however, is on record as saying that prescribed assets could be used to support Eskom.
How pension fund money could be more effectively used to fund economic development is a discussion worth having. While the answer is not to force pension fund money into prescribed projects, but to make investing in those projects more attractive, at least that debate could be constructive.
Looking at using prescribed assets to support Eskom, on the other hand, would create market distortions that even the short-sighted apartheid government eventually realised was a bad idea. It would also prejudice savers in those pension funds – many of whom are Cosatu members – who would undoubtedly see depressed returns.
As Peter Brooke, head of MacroSolutions within the Old Mutual Investment Group, points out, prescribing assets would also go against the kinds of steps that government has been taking over the past few years. Regulation 28, which sets the asset allocation limits for pension funds, has been significantly relaxed, not tightened.
“If you have a look at what the government has done, they have done the exact opposite to prescribed assets,” says Brooke.
“They have been freeing up exchange controls, allowing more money to go overseas, with the allowance now up to 30%. So the evidence would suggest that it’s not likely.”
He also notes that the most critical stakeholder in any discussions would be the Public Investment Corporation (PIC), which manages the Government Employees Pension Fund. Recent changes within that organisation suggest that prescribed assets would be hard to sell to what is now a far more independent body.
“The PIC has just got a reconstituted board, with a very strong chairman, where the deputy minister of finance is no longer on the board, and where labour has two seats on the board,” Brooke explains. “This is going the opposite way to prescribed assets. That is a positive signal. They are not going to vote to have their returns hurt, to give government money at a lower return.”
What is the risk?
He therefore feels that the risk of prescribed assets being implemented should probably be ‘de-emphasised’.
“Obviously there is always a risk, but the truth is South Africa is a small, open economy,” Brooke says. “We need global capital. It’s unlikely that we are going to shut ourselves away from that. In fact, the actions we have taken suggest the opposite.”
Grant Watson, head of Customised Solutions within the Old Mutual Investment Group, agrees.
“If you look at why any government would have prescribed assets, it’s typically because they couldn’t get prescription for their debt – that there are no takers,” he points out. “That’s not the case in South Africa. There are definitely people who want to buy local bonds.”
Particularly given the high yields on local bonds, they are attractive.
“So I don’t see, financially, the logic behind it,” Watson says. “I don’t see it as a near-term risk.”
The role government should be playing
For Jon Duncan, head of responsible investment at the Old Mutual Investment Group, the real issue is to have a discussion around how to encourage more private funding of projects that will support economic development in South Africa.
“Government’s role is to crowd in private sector capital to participate in big infrastructure programmes,” Duncan says. “And what we’ve seen is that they can actually do that very successfully.”
The renewable energy programme in this country is often heralded as the most successful in the world in terms of engaging private sector participation. There is no reason why a similar approach can’t be used more widely.
“Government’s role is to create the opportunity and the incentive,” Duncan points out.
“We know how to do it, we have a great case study in making it happen, and it’s just finding a way to replicate that.”