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The potential unintended consequences of prescribed assets

Impacts could be far-reaching.

In the ANC’s 2019 election manifesto, the party noted that it intends to “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments”. This would mean requiring pension funds and other large institutions to invest a certain percent of their portfolios in things such as housing, infrastructure and social and economic development.

Read: ANC still eyeing pension assets

It is almost impossible to find anyone outside of the ANC who thinks this is a good idea.

South Africa had prescribed assets for many years leading up to the late 1980s, and they were abolished for good reason.

History provides a stark reminder

As Gill Raine, senior policy advisor at the Association for Savings and Investment South Africa (Asisa) told the Actuarial Society’s investment seminar in Cape Town on Thursday, it is possible to examine the cost to investors of the prescribed assets policy in the 1970s and 1980s. The 1970s in particular provide a stark reminder of the impact the policy had.

Over that decade, inflation in South Africa averaged 11.3%, and prescribed bonds delivered a negative real return of 4% per year. Equities returned 13.2% above inflation over the same period. As pension funds were forced to invest at least 53% of their portfolios in government and state-owned company bonds, they had to be exposed to their relative underperformance, even though local equities were enjoying such a strong run.

Source: Asisa

It is extremely difficult to align this with the responsibilities placed on pension fund trustees under Regulation 28. The regulation insists that trustees have a “fiduciary responsibility” to manage the fund’s assets responsibly and to deploy capital into markets that will “earn adequate risk adjusted returns”. They simply can’t do this with one hand tied behind their backs.

Read: Prescribed assets won’t work – industry

It is primarily for this reason that the general feeling in the industry is that prescribed assets are unlikely to be implemented. The potential impact on ordinary South Africans would simply be too great.

Bond liquidity

However, Raine argues that the likely consequences would go far beyond just the obvious impact on retirement outcomes for savers. There are a number of potential unintended repercussions that also need to be considered.

Firstly, the abolishment of prescribed assets had a significant impact on the local bond market, particularly in terms of liquidity.

It’s impossible to tell how much liquidity would be sucked out again if the country returned to that kind of regime.

“In the era of prescribed assets, bonds were valued at the lower of their cost or redemption value,” says Raine. “Bonds were issued at a huge discount and hardly traded, because investors didn’t want to sell a bond at a loss. If they did, they would just have to buy more to top up on their prescribed requirements.”

Around 38% of all government bonds are now owned by foreigners. If liquidity dried up, that would be a major disincentive for them, and would potentially lead to capital flight. That is not something South Africa can afford.

Asset managers

Raine also notes that the abolition of prescribed assets led to a material change in the structure of the local asset management industry, as it allowed for genuine competition. This is what allowed the rise of independent asset managers.

“Prior to this you didn’t have any peer review comparison and you certainly didn’t have benchmark performance,” she says. “Surveys only emerged once you had independent asset managers.”

One therefore has to question what a return to prescribed assets would mean for an industry that has grown highly competitive and diverse. Would the many boutique managers that are now managing assets be sustainable?

“We don’t know what the unintended consequences would be,” says Raine. “Just as when prescribed assets were abolished we had no idea what it would mean for the dynamics of the asset management industry in South Africa.”

Systemic risk

There is also the problem that implementing prescribed assets would require pension funds and institutional investors to materially change their current asset allocation. According to Asisa, the funds held in vehicles that could potentially be impacted total R10.96 billion.

“Any change in asset allocation has potential systemic risks,” she says. “A sale of equities to move into fixed income would have huge wealth effects across the industry.”

Even a regulation that required these investors to move just 10% out of equities into prescribed assets would mean a figure of R1.1 trillion. That is equivalent to more than 7% of the JSE that would have to be sold.

It’s extremely difficult to see how this would be done in an orderly fashion, without have an obvious impact on stock prices that would be felt not just by these funds themselves, but investors across the JSE.

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With either Prescribed assets, quantity easing or ratings downgrade (or worse a combo of them), the end results look like:

Capital flight
Weak returns
Depreciating currency

As returns keep worsening, people lose confidence and stop contributing towards RA funds and start desperately trying to get their money out of SA exacerbating the trend.

The threat of this death spiral seems to be getting more real by the day.

Just because it’s not a good idea doesn’t mean the fools in charge won’t do it.

The country has been broken and pillaged by the previous regime (of which many remain.) How do they get money? TAKE IT. Hold on South Africa. God help us

If you care about this country and your own pensions savings, please write to the company managing your funds and the government finance department to express your opposition to this plan.

If it is such a good idea, then let them use the government pension fund’s money to invest in their state owned enterprises and projects. The average person have a defined contribution plan and not a defined benefit plan, thus we care more about returns.

Who do you think guarantees the defined benefits of the state pension funds?

The state does not have money, so it is you and me.

The cunning plan is to redistribute these pensions into failed social development projects, BEE schemes, ANC funerals, etc. and then to print money to make up for the inevitable shortfall.

Next week a man with Stockholm syndrome will tell the nation that everything is going to be awesome.

exactly – we know what happened to the transnet pension fund – something similar – what was contributed by employees the anc see as their own, and dump it into useless state owned / semi-state owned entity /bee etc with no return on it – still gets the votes but when the cookie hits the fan, they pull up the shoulders and say “sorry lets try again” – by then the pension fund is depleted and what is said to the pensioner who lost his money? SAL and eskom are typical examples of entities which have no right to exist in business terms but kept alive by government to keep jobs for pals

mobilise funds within a regulatory framework for “socially productive investments”.

with reference to the above as quoted from the article – I have never seen or heard of a “social” entity that is “productive” – by dumping money into a social productive investment sounds like donating the investor’s money into a local sports club or welfare organisation and then hope its gone generate income – dream on

Our municipal rates already go into “socially productive investments”. Read “upgrading land invaded squatter camps with free services” ….

Whatever the government does turns into an absolute disaster. They are fast running out of places to turn to for loans and a downgrade from Moody’s could be a final nail in the coffin. So what will they do? Print money and grab the pensions. There will be no other option.

All these bright spark ideas they come up with adds to policy uncertainty that leads to political instability that leads to capital flight. Domestic and foreign.

I fear that you are correct. To bail out Eskom and SAA etc. the simplest pot steal from will be pension funds. So amend Reg 28 to have 5% in “economic transformation bonds” and the immediate cash flow problems are in check. Sustainable no-but then what is what comes from the party of Ace and Carl Niehaus

Can we just pit something straight. Prescribed assets were not abolished. Maybe lightened, yes, but not abolished.

Can I invest 100% offshore? No
Can I invest 100% in equity? No

But marketing PR made us believe that the current form Prescribed Assets are not that, but rather protection on you behalf.

So we have always had it.

Good article Patrick.
Now how about an analysis on the impact on pensioners and extent of enrichment of the Ramaphosas and other beneficiaries of all the BEE deals? Stinking rich. Tell us how many times richer than the average nett asset value of ‘previously advantaged groups? Hidden ‘ANC A-Nationalisation and capture of control, associated share dilution and cost of deals… What about intended and unintended consequences e. g. lower asset values, lower share prices,, much less foreign investment etc…

Simples really – live in SA, don’t let your money live here though.

“It is almost impossible to find anyone outside of the ANC who thinks this is a good idea.” Could it be because this is the source their personal income via “consultancy fees”?

My pension belongs to me. The fact that it is invested in a ‘fund’ doesn’t make it less so. Govt gets its slice through the tax I pay.

The fact that govt has f*cked up royally, without so much as even a nod at contrition, does not make me think, for one moment, that they will not f*ck this up as well.

Prove to me, definitively, that you are worthy of annexing a portion of my money and I might be more receptive. In the meanwhile let those who wish to participate in this self-serving hare-brained scheme do so on an elective basis.

Nice Speech mmmm : However you fail to realise that whilstthepension my be yours , getting your hands on it is another matter . You have a very limited ability to get at your pot & the Govt can direct via “laws” how it is invested.
Even the “F” word wont help you , no matter how much u use it !!

So the 1% VAT increase still wasn’t enough to cover the theft/inefficient use of capital received? Now this? What next Dear Cyril?

The retirement industry is sleepwalking into a disaster, thinking this won’t happen. But it will, and when it does, they will simply shrug and say it wasn’t them but the ANC—but keep on charging you fees. And then, dear reader, there will be NOTHING you can do about your declining pension values.
Please go to the IRR website and see what dr Frans Cronje has written about the coming move on pensions. There is a full-blown attack coming on all your assets.
See what Reg 28 has already done to your pension funds. Show me a Reg 28 fund that has beaten the inflation rate after all costs over 5 years.
If you are over 55 and have any money in any fund that you can withdraw, do it immediately and start controlling your financial future. The attempt by Ace to change the SARB mandate last week might be clumsy, but it nevertheless remains ANC policy. Even CR said as much and added that it won’t happen right away, but it will happen. The final two bastions that the ANC would like to conquer and rule are the SARB and the pensions industry.

the ANC is struggling to support pensioners with a R1500 stipend and now they want to create a whole generation of pensioners without any income….how foolish. Why is it that the ANC does not have think tanks like other organizations, it’s like any cadre who think a policy might be a bright idea is allowed to float it and they have no experts to advise them. Worse none of them is studious enough to even bother taking a MooC to understand basic economics.

So on point its scary…

Private sector needs a million licences to operate each can only be awarded on the back of detailed impact assessments. Can we not start banging the drum, to make the government have to play by the same rules? even politicians, before you are allowed to take a public position on a matter/policy it must be backed up by a detailed independent and audited impact assessment… Free houses for everyone and here is our policy on HOW to achieve it and the impacts on everything else…

Excellent article – clarifies many aspects.

(The author did the ANC a big favour by doing their investigation FOR them -free research that they don’t have to pay for. Not that the party is known for heeding sound advice…)

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