South Africa has a pension fund pool of around R4 trillion. This is a significant collection of assets.
However, speaking at the Alexander Forbes Hot Topics Summit in Cape Town last week, the head of the Alexander Forbes Research Institute, Anne Cabot-Alletzhauser questioned whether this money is currently being used in the most optimal way.
“Our savings are the biggest potential driver of economic growth,” said Cabot-Alletzhauser. “How can you take that power and transform it into something even more significant?”
Currently, pension funds are invested predominantly in listed markets. There are two well-accepted reasons for this.
“From the individual’s perspective, my reason for investing in stock markets is that I’m hoping to be able to get growth out of those assets that exceeds inflation,” Cabot-Alletzhauser said. “Secondly, from the point of view of the government and also basic economic thinking, the notion is that I can use this money to fuel economic growth and create employment.”
However, she suggested that it may be time to question those assumptions.
Who is making a difference?
Significantly, there is little in the markets that you can control. The ability of asset managers to deliver any consistent out-performance through skill is now understood to be almost non-existent.
At the same time, particularly in the local context, one has to question how much investing in the JSE really supports this country’s economy.
“We know that 65% of revenue generation on the JSE comes from abroad,” Cabot-Alletzhauser pointed out. “So when I put money on the JSE, am I creating South African jobs?”
In addition, it is widely accepted that large listed companies are not the primary vehicles for job creation in any economy. In fact, they are more likely to shed jobs in the search for greater efficiencies.
“Where job creation is taking place is in smaller, emerging, disruptive companies,” said Cabot-Alletzhauser. “These are mostly unlisted companies.”
A question worth asking is therefore whether pension funds are currently investing in a way that is most impactful for their members. Is it enough to just build their retirement capital, or should they not be contributing to the development of the country so that the society their members retire into is better than it is now?
Addressing the reality
This is a particularly relevant question in a country like South Africa, which has significant social and economic challenges.
For example, Cabot-Alletzhauser pointed out that South Africa has a severe shortage of facilities offering long term care to those who need it. The country has 4.4 million people over the age of 60 and a further 1.5 million with mental health problems, but only 44 000 subsidised long-term beds.
“What if I told you that we could use retirement savings to solve that problem?” Cabot-Alletzhauser argued. “If I can use retirement funds to create community-based solutions to take care of people, not in some retirement village, not somewhere that is culturally unacceptable, but in their own communities, am I not doing something incredibly powerful?”
She added that the additional value of this kind of solution is that it not only uses pension fund assets in a way that is directly relevant to members, but that it has a wider benefit to the country. These centres would have to be staffed by trained individuals, and that has an impact on building skills and reducing unemployment.
“So I don’t just solve for the aged,” said Cabot-Alletzhauser. “I solve for the health of that community, for unemployment in that community, and I create a multiplier effect. That is a very powerful investment.”
The opportunity for a re-think
In addition, these kinds of investments offer an opportunity for asset managers. The reality is that it is incredibly difficult for any equity manager to describe a value proposition that is materially different to any other.
This is one of the reasons that smaller firms find it difficult to gain a foothold in the industry. Why should any pension fund take a risk on a new asset manager when it can use the tried and tested services of a company that has been managing money for decades?
“In a world where you really can’t tell whether a manger has skill or not, we need a new type of asset manger,” Cabot-Alletzhauser argued. “We have asset managers sitting in the wings trying to get a place at the table, so what if those asset managers focused on adding value, impact investing, and in so doing creating real value over time?”
This, she said, would be a far more relevant and noteworthy use of their skills:
“We need professionals that know how to do valuations, that know how to determine if something is going to work, and use that skill-set to do something that aligns with the interests of the investor,” she said.
Of course there are risks in unlisted investments, but it is worth considering the greater risk of business as usual. That is essentially ignoring the greater context in which pension funds operate, and that members may retire into a society that cannot meet their needs.
“The challenge that we are up against is that until we can make the concept of impact investing sound like just investing on the JSE, it’s not going to happen,” Cabot-Alletzhauser acknowledged. “But what we are trying to do, not as private individuals or as government, but in a multi-stakeholder collaboration, is to get together to make impact investing not a new asset class or an add on that solves my transformation tick box, but something you live and breathe in investing. For every rand I put on the table, we should be asking what impact is this going to have both economically and socially.”