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Can pension fund money do more?

Do we need to question our assumptions about investing?

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.”

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“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?”

Yes it is enough, I do not see where the returns from the “social security” investment will come from, we have government for those things. Anne Cabot-Alletzhauser, rather spend your time and effort lobbying government to stop wasting money and to use our tax money where it is needed, thanks.

Truth of the matter are rather that current conditions in S.A. dictate that investors will not be able to see any real growth on investments above inflation and that value protection against a depreciating Rand and an economy that has stagnated, has become the current reality.

There are no sensible, coordinated solution targeted to reignite economical growth and healthy employment as well as to decrease the very high count of illegal immigrants with its immense impact on public services, the health sector, housing, schools, roads, employment, policing, etc. Without such workable solution, things will get even worse over time.

Who would pay for the patients in these facilities? The state? From even more taxes? I hope you do not expect that the people living on state pension would be able to pay for it. Also, in lot of the poor communities entire extended families rely on the old people’s pension to survive. As somebody said it, they “farm” old people.

Retirement savings is meant to secure the saver a retirement in dignity and independence.
So investing for the social good is fine but there still has to be a return on investment.
Reg 28 does allow pension funds to invest 10% in private equity and imoact funds.
Theoretically, pension funds have the right time horizon for this type of investment but there has to be return on investment.
This is peoples life savings, not charity.

That said — there is also section 18A non-profit centres and this will be a more powerful vehicle to address social needs. In fact it already attempts to do that — Dennis Hurley, Abraham Kriel, etc.
Also, personally it would make sense to me if there was a portion of taxes that went to state owned retirement housing/ beds for those who cant afford it themselves.
There are options before raiding private pensions for zero return welfare. They simply arent being utilized.

She is sounding more and more like an ANC minister.

Such a lot of money – they are just itching to get their greasy hands on it.

The argument put forward is wrong at so many levels that it should not be even published. The retirement pool of money may be large but most people are underfunded. She advocates putting funds that into investments that have a stakeholder impact. Who decides which stakeholders are relevant (employees, customers, community members, government officials, environment, terrorists, blackmailers and thieves?).
No doubt Alexander Forbes has an impact investing division and would love to divert some funds in that direction.

The argument is not worth the electronic paper it is written on. These are problems that should be adressed through the effective use of tax money, as simple as that. These theories are laughable and should be treated with contempt. We should stop suffering fools lightly.

Maybe it can do more but pension money is already doing a hell of a lot. Can Government do more? Most definitely, a hell of a lot more.

“This is a particularly relevant question in a country like South Africa, which has significant social and economic challenges.”

The only challenge we have is getting rid of a rogue government. First steal the land, then grab the pension funds.

You can put your pension money into this rubbish that you espouse, but that’s not my problem. I have a family to look after. Let the ANC look after the people who voted for them.

I can already see a change in Reg 28 coming:

-25% of pension fund allocation towards SOE “equity”

Looking at it from satellite height, we need a far greater proportion of national savings targeted at fixed capital formation, job creation.

At present there is a recurring inflow managed by fund managers with a short term mindset and 99% of them (and their bosses) have no real experience beyond finance, insurance, banking backgrounds. So R10 a month inflow is chasing R4 of new equity capital needed meaning R6 of resale and volatility.

If the nation could get over itself and the assorted tinfoil hat rubbish that attaches race to almost every industrial incentive, we could direct that 10% of savings must be invested in private equity or venture capital for manufacturing, mineral beneficiation, etc. convertible debt, term debt, restricted stock, normal equity, private or listed.

Before making silly proposals like this, rather make proposals to the RSA government about ways to reduce corruption, wastage of taxpayers’ money and regaining investor confidence so that the economy may grow and government can fulfill its role in “development”.
So-called development investments by the PIC have already caused losses of Billions of Rands to the GEPF fund.
Also ask yourself why private funds are so reluctant to invest in “development”.
Pensioners contribute to pension funds to safeguard their welfare during retirement, not for a government to squander on hare-brained investments

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