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Prescribed assets not necessarily a train wreck

Scraping away emotional arguments reveals few changes in investment options, for now.
‘Confiscation’, say some – but the latest policy document proposes amending Regulation 28 to allow (not force) pension funds to invest directly in infrastructure assets and development finance institutions. Image: Shutterstock

The mere mention that government is considering changing regulations pertaining to prescribed assets – which will compel pension funds to invest a certain percentage of their assets or new cash flows in specified assets – has led to heated debate and accusations about crooked politicians planning to grab pensions and investments.

Moneyweb approached Izak Odendaal, investment strategist at Old Mutual Wealth, for his views on this very sensitive and important subject.

One of his first answers puts the issue into perspective: “The fact that the ANC considered prescribed assets caused a huge uproar and a lot of uncertainty. This is indicative of the low level of trust in the government following the revelations of state capture and other problems. South Africans are very sceptical of government’s financial management and some of the more alarmist commentary has described prescribed assets as a form of confiscation.”

He points out that this is not strictly true, and that pension funds already have to comply with investment limits set by Regulation 28 of the Pension Fund Act.

While not forcing pension funds to specifically invest in government bonds, the regulations limit exposure to the stock market to 75%, prompting fund managers to consider government bonds. Odendaal indicates that bonds are suitable investments for pension funds, as is exposure to infrastructure projects that offer regular returns, such as renewable power projects.

Odendaal’s further insights and opinions are detailed below.

Why we’re talking about prescribed assets again

The debate flared up after the ANC’s January 2019 election manifesto contained a single line on the matter. It stated that the party would: “Investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development.”

It did not specify which financial institutions (banks, pension funds, insurers or asset managers) or what funds, resources and investments would or could be involved.

However, recent developments suggest that regulations to enforce prescribed assets are not currently on the cards.

The ANC’s July 2020 post-Covid-19 economic recovery policy document makes no mention of ‘prescribed assets’ per say, but proposes amending Regulation 28 of the Pension Funds Act to allow (not force) pension funds to invest directly in infrastructure assets and development finance institutions such as the Development Bank of SA and the Industrial Development Corporation.

The percentage they have in mind is not stated, but is unlikely to be more than 10%. It is not clear if and how this will apply to unit trust-based retirement products that have a daily liquidity requirement.

In other words, having considered implementing prescribed assets, the ANC appears to have been won over by the arguments against it.

Instead, the approach to be taken is to look at changing Regulation 28 to allow for greater investment in development assets, including project bonds.

ANC policy head Enoch Gogondwana was quoted in Business Day on August 18 as saying: “When we talk about tweaking Regulation 28, we are moving in a slightly different direction. We are moving from an environment where there is no enforced prescription to creating an environment where trustees can invest in infrastructure projects as long as those projects are profitable. I want to use this opportunity to dismiss and debunk the claim that we want to use the pension funds to bail out collapsing state-owned enterprises [SOEs] or fund a state-owned bank.”

Listen to Ryk van Niekerk’s interview with Enoch Godongwana, head of the ANC’S economic transformation subcommittee:

Previous regime of prescribed assets not comparable

South Africa had a prescribed assets (PA) regime from the 1950s to the late 1980s that compelled pension funds and insurers to invest a minimum portion of assets and cash flows mainly in government bonds and SOE debt.

The minimums changed over time, reaching a peak late in the 1970s. In 1984 the minimums were significantly relaxed, and in 1989 PA rules were replaced by prudential investment guidelines (commonly referred to as Regulation 28).

For a few years in the late 1970s, when government finances came under severe pressure, PA minimums were increased with the intention of channelling more funds to the government. However, PA mostly served as prudential guidelines, aimed at ensuring that pension funds invested appropriately to meet long-term obligations.

Comparisons with the past are problematic since there was not a liquid bond market prior to the 1980s. The government had only two annual auctions of bonds, with no secondary trading.

Today the local bond market is large and liquid, with an average daily turnover of more than R100 billion, several times that of the JSE equity market. South Africa was also not nearly as integrated in global capital markets as is the case today.

Ultimately, the return on bonds will be primarily driven by global yields and the outlook for local inflation and monetary policy. When prescribed asset limits were increased in the 1970s the world was experiencing rising inflation, with negative real yields and rising rates. Most countries experienced a massive bond bear market.

The situation today is different. Though there is no old-style PA regime in place at the moment, pension funds must still comply with prudential limits on asset allocation in terms of Regulation 28.

Most notably, pension funds (including retirement annuities) may only invest 30% abroad (plus a further 10% in Africa), with the rest in local markets. There is also a total limit on equity exposure of 75%, which means the rest has to be invested in interest-bearing assets.

Global assets (particularly US equities) outperformed local assets over the past few years, partly due to the weaker rand, so Regulation 28 has potentially cost local investors, but at other times local assets have outperformed global assets.

Still, in an ideal world, investment professionals would like to manage asset allocation decisions for pension funds based on liability structures, return objectives and market conditions without any dictates of regulators.

Pension funds love long-term returns

Globally, pension funds love infrastructure as an asset class because of stable and predictable long-term returns.

The problem has never been a lack of funding for infrastructure projects, but that the government tends to monopolise these projects.

Opening up the market for private participation would ‘crowd in’ private capital and expertise, resulting in growth and development.

The government’s renewable energy programme has been a huge success, attracting billions of rands of local and foreign capital. It should be used as a model for other infrastructure projects.

The head of the new infrastructure office in the presidency, Dr Kgosi Ramakgopa, confirmed to an Actuarial Society conference in August that there is no shortage of funding in South Africa, but that the issue is the limited pipeline of projects.

Confiscation and returns

The fact that the ANC considered prescribed assets caused a huge uproar as well as a lot of uncertainty that could unfortunately lead to people making ill-informed and premature financial decisions.

However, investors would still earn a return if PA rules were introduced. Government would not be confiscating their money.

If prescribed assets rules were to create a larger ‘captive’ market for government bonds, that could result in higher prices and lower yields.

This would be good for existing investors, but lower yields mean new investors would expect a lower future return.

However, with close to 40% of government bonds owned by foreign investors, the local bond market would still be priced in a global context. The government also issues a small amount dollar and euro bonds in global markets, and the pricing between these offshore and onshore bonds cannot completely decouple.

Despite PA concerns, government bonds are an attractive asset class, currently offering high real yields to investors.

Read:

Pension funds and insurers can and do already own non-liquid assets. However, a large portion of retirement savings is in unit trusts, which require daily liquidity. Government bonds are highly liquid, but infrastructure assets by nature are not liquid at all. This lack of liquidity could therefore be a problem for unit trusts (though of course not all unit trust funds are used in retirement vehicles). This would need to be addressed.

A PA regime would likely result in asset allocation changes for pension funds, but the extent of the change, and therefore the extent to which the new asset allocation is potentially suboptimal, will of course depend on what is prescribed.

Changes not imminent

It is still early days in what is likely to be a lengthy process. The ruling party seems to have decided on its own stance, no doubt after heated debate internally.

It now has to instruct its officials in government to take the necessary step to turn it into law, a process that will allow for public input. Union buy-in, particularly the public sector unions, would be necessary.

These unions are likely to oppose any changes that could be detrimental to members’ funds. The investment industry, through the Association for Savings and Investment SA (Asisa), will similarly engage government on its concerns.

Conclusion

The introduction of PA would send the wrong message and would be negative for investor sentiment.

Though foreign investors would be unaffected, they would see it as a backward step in terms of the overall investment climate in SA.

Domestic investors are already deeply concerned about the prospect of prescribed assets, and the uncertainty is potentially damaging. Government is fully aware of this.

It is important to reiterate that we do not need prescribed assets. There is more than enough local capital available to fund the government and investment in development projects on a voluntary basis.

The missing link at the moment is trust and confidence.

Izak Odendaal is an investment strategist at Old Mutual Wealth.

Listen to Nompu Siziba’s interview with Nicholas Riemer, head of investment education at FNB:

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LOL –And Prasa is also not a train wreck ne !!!!!!!!!!!!!!!!

How shall I put this diplomatically: the person approached for comment has a very direct personal and professional interest in downplaying the serious risks involved, and talking up his product. Taking his words at face value, is like asking an insurance agent whether his company will pay up for the next pandemic, and believing him.

Old Mutual and Liberty will put a positive spin on prescrubed assets, they have to, if they dont they lose money with everyone cashing in their pensions to escape the ANC. By them telling their clients ots not so bad in my mind constitutes terrible advice, its clear that they actually dont give a damn about their clients well being at all. Im with Magnus Heystek on this one, get your money out of SA and fast. Dont say you werent warned.

I agree and think I understand how OM etc could love PA. Suddenly there is a chunk of investment you do not have to worry about selection – it is prescribed. Fees will remain the same and you can get rid of some staff making more loot for the executive. Where are the customers yachts? Screw them, again.

As for the joke about the REIPP programme that is getting stale. Fantastic returns for the few and the BEE but selling power for way more than the baseline cost of production and subsidised by the consumer leaving Eksdom still struggling on all fronts. Hit him again.

If it wasn’t the ANC and BEE in between pensions and ‘not necessarily a train wreck’, there may be a point.

Well, let’s put this briefly. Investment is all about ability, integrity,honesty,and trustworthiness.
The ANC have demonstrated they have none of the above qualities.
Er, and it’s not about emotion, it’s people future.

Who will willingly participate in ANYTHING where the stench of the rotten to the core ANC hangs in the air?

Not me thank you. But there are many. Its like saying Mirror Trading International is a sure thing and not a train going down a mine shaft.

Snake oil salesman; both these gentlemen (from OM and ANC). “Which government projects are profitable?” Maybe Telkom yes

If they are profitable; private funders will be queuing up.

Bwahahahahaha….is this article for real? The country’s finances have systematically been decimated through looting and mismanagement to the point where prescribed assets are a necessity. During a pandemic, billions of rands set aside to save lives has been subject to looting. What possible justification could there be to think funds from prescribed assets will be any different. No thanks…my bucks will continue to be invested offshore directly by myself, and outside of any fund even remotely at risk of prescribed assets.

Would be nice if I could decide what to do with my money.

During 1950’s and 1980′ pensoons were paid as defined benefit, not defined contribution as it is today. So return on investment actually matters.
And the one notable exception today is the GEPF which remains defined benefit. The dark hole which is PIC investment strategies tells you all you need to know about how prescribed assets will work under the ANC.

People keep making the same mistake that Anthea Jeffrey and Frans Cronje has called out again and again and again – the ANC tests the waters. When there is pushback, like with prescribed assets, it deflects and retreats and pacifies.
For now. But make no mistake about what the intent is. The waters will be tested again in future until reaistance is weak enough or distracted enough that they can slip it through.
No way the comrades will simply sit and abide 4 trillion plus rand being dangled just around the corner.

Izak Odendaal, how do sleep at night slewing such drivel? Seriously? You likely the same sale person in the 80’s and 90’s who sold expensive investments to the poor, knowing full well they will loose due to ridiculous fees, but your commission is guaranteed.

OM is akin to ANC, lying to you with a smile, while stealing your hard earned money.

Both pigs at the trough

When the shills start telling you everything is fine, get your money out yesterday.

Sorry Adrian, this is an idiotic argument you make. Please go and read RW Johnsons article on Politicsweb. The country has run out of capital for a reason. The government has badly mismanaged the economy over decades. How does introducing prescribed assets actually fix the situation? All it does is kick the can down the road, and when the day of reckoning eventually comes (and it will!), not only will the country have a massive debt pile to pay back, but it will also have millions of middle class people without a retirement to speak of. Prescribed assets is a disastrous option, and the very mention of it points to how desperate our situation really has become. We need to face the fact that the best option for us now would be to approach the IMF for a bailout and handover control of the economy to their specialists for a period.

Will you make a personal loan to anybody in Luthuli House? If not, you cannot invest in infrastructure bonds or government bonds because ultimately, that is tantamount to investing in Luthuli House.

The most trustworthy person in Luthuli House, the one who holds the highest office, did not repay the money that he borrowed from Lonmin. He did not even use the special dividend that he received to help him to service the interest payment, to pay down the debt. Long story short – The loan bankrupted the largest platinum mine in the world. Now. if the largest platinum mine in the world can’t afford to lend to Luthuli House, how will I survive if I do?

No sane person will invest in Luthuli House, so they will force insanity upon us to “motivate” us to lend to them. Don’t forget, we already have BEE laws that force businesses to part with their capital. The next step to do this with pension funds is merely a small one. Socialism is about the confiscation of assets. An ethical socialist is someone who steals your money in a stealthy manner, by using the law in the process.

You have to watch your back and cling to your purse if you are a capitalist in a socialist country. Good luck my friends.

https://www.news24.com/fin24/finweek/business-and-economy/lonmin-how-cyril-never-paid-back-the-money-20151022

Surely this is not a big deal.

@ReginaldWatkins I think it is a great idea, if your a anc looted then it’s the perfect way for more self enrichment and less public service, let’s face it those poor people don’t really need the basic services or help in leading a less hardship life.

Plus those pensioners and working class folk they have enough money, they will not need it either.

So here is my advice:
Wake up from your communistic selfish ideas and just for one second realise the a free market will solve all the problems we have by its natural order of supply and demand.

Believe OM or any other insurance company at your peril. These companies and their clever actuaries know EXACTLY what prescribed assets will do to your long-term returns.
If you are older than 55 and have ANY money in RA’s or preservation funds, my advice would be to get it out soonest. The ANC are not going to give investors fair warning what they are going to do with their money and pensions. If you u don’t believe me, have a look at the announcement by Treasury regarding withdrawal from pensions when you financial emigrate.

Agree 100%, they didnt even give a warning they were shutting the bottle store a few weeks back, when it actually affects their ability to get their hands on YOUR money you got no chance.

No. This is dribbling sophistry. Prescribed assets are very much a train wreck, not because of the technical arguments against that position made by the writer, but because of the reason for the proposal.

And the reason is that the ANC, through incompetence and wilful, sustained criminality, has plundered the fiscus. It now seeks alternative funding to avoid full default and IMF bailout which would probably see the civil service cut by half and social grants slashed to a pittance. That would obviously cost the ANC power, and since the majority of ANC parliamentarians have no other profession other than politics, leave them destitute.

Hence they seek other sources to plunder. But without radical changes to the way the ANC spends the fiscus’s money, they will soon empty the pensions treasure chest too.

So the prescribed assets proposal must be resisted at all costs. Rather, the ANC must go back to basics: stop stealing taxpayers’ money, provide good value to citizens, and run a fiscal surplus, since they cannot be trusted with deficit management.

Perhaps time for Toyota Corollas instead of BMW,s & Mercs for MP,s , Mayors and other connected Comrades .

“Not necessarily a train wreck” RSA’s Investment outlook could not look more dire.

Endless failures from SOE’s (still asking for more money)

Corruption running riot

stage 4 load shedding as we start our “economic recovery”

Only looks attractive if you an ANC politician !

Disgustingly detached from reality, which you know and talking your own book!

What utter drivel. Of course it’s a train wreck.

In the era of DC schemes investors should have FULL control over what they do with their retirement savings, and Reg 28 itself should be scrapped. Those saving for retirement have lost untold amounts by being unable to capture global returns.

Local exposure through other assets and tax rates may vary for each person – but for me it has worked out positive to forego the tax deduction available with RA contributions and place any additional retirement savings offshore in low cost investment vehicles. I’ve taken into account that the tax deduction on retirement savings is partially a deferment to tax payable in retirement.

Would rather see Old Mutual focus on areas where they can add real value where they perform mortality calcs and risk pooling for the benefit of investors. For example, I would still like to have the option of buying a deferred annuity which would pay out an inflation adjusted pension from a late age like 75 or 80 and zero if I don’t make it to keep the upfront cost down. A product like that – widely available in the US and elsewhere – would take a lot of stress out of defined contribution pension planning.

“prescription will only apply where there’s attractive investment and people do not want to invest for whatever reason” Enoch Godongwana ANC. Because of course stupid investors need to forced into attractive investments. Regulation 28 has already cost investors (incl me) dearly in terms of inferior returns, we are poorer and future govt tax take is poorer, because to an ANC cadre, it’s always better to eat NOW. Izak and anyone arguing for prescribed assets is putting the MORE into MORON.

Few people are aware of just how PAs will fleece them. The ANC regime issues bonds because it cannot live within its means. They cannot stop spending and nor can they tax people more – at least directly. The next step is to steal the value of your pension fund to fund the voracious plundering beast of Luthuli house. The ANC wants to borrow to spend. There is no cognisance of tomorrow. The ANC is wily enough to know that if they default on their debts, it’s tickets or curtains for borrowing any more. The lenders know of the risks and demand high interest rates. This is bad for the ANC as more money is required to service debt and there is less for the gravy train. How can a risky cabal borrow at a low rate? That is the ANC dilemma. All totalitarian governments solve these problems by fiat. They pass laws concerning PAs. What this does (apart from restrict YOUR freedom to invest YOUR money where YOU see fit) is increase demands for bonds. When demand for bonds increases, the price goes up and the yield goes down. The ANC gets to borrow below what should be the prevailing market rates. The different between the true market rate and the PA manipulated rate is the ANCs gain and the pension fund holder’s loss.

Allow me to explain with a real life example. I know a fine gentleman that retired as police Colonel after 45 years service in Zimbabwe. He had sufficient pension benefits to have been able to convince his bank (he was their client for also the same period) to finance a brand new Mercedes Benz E200. In 2007 he had to sell the already paid-off Merc to buy food as his pension was reduced to USD20 per month. Personally I don’t have a problem with prescribed assets. However, in our case it will ultimately just feed heavily B-BBEE-geared companies and will rather result in the re-allocation of wealth from one racial group to another without any real benefits to the country or tis people. You’ll just see more Bentleys and Lamborghinis and nothing else. My advice: Take whatever you can and get involved in the SME world as soon as you can. Stay healthy and live your dream. If your dream was to always work for somebody, please press the reset button next to your head and re-dream my China. Not qualified to do anything? Get yourself positioned in basic food supply; there will always be hungry people looking for something to eat. However, stay away from franchises for the time being. Oh, and one more thing, get your kids educated. Skill them up to a point where they can sell their skills anywhere in the world. Always leave your kids with options nè? Kids to lazy to study? Moer them till they are willing…

The ANC are masters at this.
The rumours start. The public objects.The ANC retracts and states that these are nothing but rumours. But the seeds are planted. “Can invest” and not “should invest” seems fine. Right? Wrong.

The same thing happened with BEE. It is only 5%, then 10%, then less than 50%. Look at where we are today.

While you are not looking they turn up the heat, and before you know it you are the frog sitting in boiling water, saying “everything is fine”

Wake up.

IMHO SA is now a completely lost cause. The daily media deluge of anger, speculation, opinion and advertising does nothing but push up one’s blood pressure.
The only sensible solution IMO is to ignore all local noise and continue to live in our high security fortified homes in our paradise bubble in the WC until we have to jump on a plane and leave. Invest every cent you can outside SA as quickly as possible. Cry the beloved country.

When this ANC government prescribes anything it can only ever end up being a train wreck.

Is it possible to name a single entity, or service, or public function, that the ANC actually runs well?,

What he really means: “Please, please don’t pull your money out or I will be out of a job!”

More like a shipwreck

This is classic ANC tactics – drop a bombshell, act like they are listening to the furious debate, wait a year or two and continue on as before… Yes they are coming for your hard earned money.

End of comments.

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