The South African government should consider impact investing, rather than prescribed assets as a way to fund state-backed projects.
This was the view backed by Alexander Forbes, in its ‘A prescription to change investment focus: the role of alternative developmental investments in our economy’ webinar, on Wednesday.
Using prescribed assets – a regulatory mechanism where a government stipulates where pension funds must invest – as a means to drive its spending priorities is controversial. It essentially amounts to the government mandating where and how pension money should be spent, with the returns on these investments coming second to the needs of the state.
In recent years the ruling ANC has mooted adopting prescribed assets to fund its development agenda. If it did so, it would be adopting an Apartheid-era policy that has been criticised for depressing earnings for pension funds.
Alexander Forbes believes the government should instead back a policy like impact investing, where incentives and structures are put in place to improve social and economic well-being, and funders are free to pick and choose what they want to invest in.
Head of investments consulting Janina Slawski said that there are several problems with the government pushing prescribed assets onto pension funds, such as limiting the number of investment propositions they can get involved in, as well as the increased risk of not meeting the need for higher returns.
She said this could be seen effectively in the reduction in returns from the 1960s to the end of the 1980s, when the return on equities and inflation is taken into account for this period. (The Apartheid government instituted prescribed assets from 1956 to 1989.)
There is also the governance issue of the trustees being forced to invest in projects that will deliver lower returns for members. “Trustees have a fiduciary duty to ensure members’ interests are always protected,” Slawski said.
Though it’s understandable that the state is looking for alternative sources funding to address the need for social change, following the impact investing route is a lot better, as it will be able to reach its developmental goals without limiting the number of investments they can invest in or hurting the returns on these investments, she added.
Slawski points out that government has in a sense already embarked on such a strategy, with the Sustainable Infrastructure Development Symposium (SIDS) initiative, organised by the Investment and Infrastructure Office (IIO) in the Presidency. Through SIDS, over 200 infrastructure projects to the value of R2.1 trillion have been identified, many of which have attracted private sector and multi-lateral development institutions which are keen to invest.
“The scale of this initiative is massive. It’s exactly what SA needs,” she says.
Unlike with prescribed assets, investors are free to pick and choose what and how much they want to invest in the SIDS projects. This means they can come up with funding arrangements that can provide the best returns to the members of their funds, as well as help the government facilitate its development agenda.
Slawski cautioned, however, that the only way to get these projects off the ground is if international investors are comfortable investing in SA, and this would be unlikely if prescribed assets is forced on them. “The projects have to be structured in a way that is attractive to investors. It has to have the appropriate governance. It cannot be part of any prescription, as it would make international was well as local investors extremely unhappy.”
In an environment where the country has to compete for funding with other developing countries, if prescribed assets become policy it could make sourcing this funding more difficult.
Slawski noted that the structure of how South Africans save for retirement is also an issue when it comes to pushing through prescribed assets. As the country tends to save in a defined contribution fund, it favours flexibility, meaning people can get their money out quickly. Investing in these projects, however, doesn’t allow them to do this easily.
Voluntary investments provide better returns
Slawski is clear about where she and Alexander Forbes stand on prescribed assets. “We as Alexander Forbes oppose anything that drives suboptimal investment outcomes for members.”
She says the evidence is already clear that providing funds with choice, is the best option. “Make it voluntary. The more voluntary investments are, the more creative investment structures can be. It’s not going to be a lack of capital coming to these investments, [rather] you are going to line up lots and lots of opportunities.”