Prescribed assets is not the answer – Alexander Forbes

Government should rather consider impact investing.
Private sector looking to be part of infrastructure projects worth R2.1 trillion. Image: Shutterstock

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.

Source: Alexander Forbes

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.)

Source: Association for Savings & Investment SA (ASISA)

Governance issues

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.

Infrastructure boon

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.”

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Magda’s all for prescribed assets, to bail out her golden squirrel.

Please elaborate?

rfrock
Not even close. Why don’t you just make your point instead of writing in riddles and then sending people to a link requiring membership to access? Get real.

Move out of mommy’s basement and buy a subscription please (or actually read MW articles while they are still free-access and current).

I thought you had a point to make, seems like you are peddling a MW subscription instead!

I actually asked her on Twitter if she was in favour of implementing prescribed assets on the pensions that Sygnia manages, and got some vague and meaningless answer back.

Pretty vague and meaningless question.

It is indeed the ideal answer for LootFreely House and just another avenue to “channel funds” into selected pockets.

Before even suggesting this get rid of BEE and put these projects in the private sector.

Investors have the right to invest with people they trust.

Where in history did a socialist government ever listen to good financial advice? The socialists will implement those strategies that are the complete opposite those that make economic sense. They wouldn’t need prescribed assets in the first place if they were able to follow good advice. They don’t suffer under sanctions. They did not experience any natural disasters. This dire economic situation was caused by the collectivist mindset disaster. The same mindset that drove the implementation of BEE policies will drive the policy for prescribed assets.

Yes, as AF states, ‘prescribed assets’ is not the answer.

However, the ANC will try that anyway, in one form or another (whether they force it, or not. And it could merely be an amendment to Reg.28)

The ANC has very little other ‘workable’ options left on the table, in order to pay back IMF, Brics bank & other loans. The pension fund pot IS THERE.

(And instead to raise income tax further, it will be much less upheaval to ‘borrow’ retirement fund capital…as you won’t see the adverse impact immediately…unlike higher income tax, which you’ll feel now)

Make prescribed assets for Govt employee pensions funds alone. That would be appropriate.

Not really, The Government Employees Pension Fund (GEPF) is a defined benefit fund which means if there is not enough assets to pay for the retirement benefit promised then the employee needs to pay in extra.

So if the Government Employees Pension Fund returns are sub-optimal then the state (thus the tax payer) gets to make up the difference.

Caught between a rock and a hard place. Prescribed assets vs incompetent impact managers with little or no track record.

Infrastruuuuuucture.

End of comments.

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