The ANC is once again eyeing the notion of prescribed assets, where money managers will be forced to invest a portion of their funds in state-mandated areas and/or companies.
In its 2019 Election Manifesto, the party says it will “Investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities”.
In a note to clients, Intellidex’s Peter Attard Montalto says that the “more specific language on prescribed assets than expected” was a “surprise”.
He says that while the idea is in line with Nasrec policy “its more explicit exposition again shows a win for the Zuma faction in the manifesto formation process, and should be a wake-up call for the local asset management community that the issue of prescribed assets is alive even if it will not be pushed forwards with the current leadership of National Treasury”.
Among the resolutions adopted at the ANC 54th National Conference in 2017 was that: “Government should introduce measures to ensure adequate financial resources are directed to developmental purposes. A new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions funds be invested in public infrastructure, skills development and job-creation.”
Montalto cautions that “the issue is current however because the hunt for solutions to Eskom will likely lead to a debate around the need to dictate that the asset management community and banks lend to Eskom to keep it afloat.
“This is very much a topic that will rear its head in 2019 – even if we don’t see the policy move forwards in the short term, the risk is there in the long term.”
‘Instruments of state policy’
The total pool of pension savings in the country is about R4 trillion. Futuregrowth, which manages R185 billion in client assets, has previously pointed to “pension industry concern that government may be seeking to make retirement funds instruments of state policy, channelling investor capital into certain preferred sectors or instruments while avoiding the discipline of financial markets and fiduciary asset managers, and thereby imposing lower-than-market returns”.
It says the “industry would naturally be opposed to prescription since it limits the rights of pension funds when it comes to making choices concerning asset allocation, asset selection and risk reward.
“The large-scale channelling of funds toward ‘preferred’ sectors would likely create an imbalance of investable projects and money – thus increasing the risk of making losses which could result in eroding the value of pensions. What’s more, while the government has been seeking to promote savings, it is likely that tampering with retirement fund investments will be seen as a threat, and may reduce the willingness of members to save for retirement.”
Futuregrowth says that in its experience, “there is sufficient capital in South Africa to fully fund appropriate, well-conceived, planned, executed and managed projects. The success in funding over R200 billion of power projects (i.e. the REIPP [Renewable Energy Independent Power Producer Procurement] programme) in a mere three years is testament to the effectiveness of suitably partnering the public sector with the competencies and capital of the private sector. Prescription would fly in the face of those strengths, and likely politicise investment decision processes”.
It argues that it “is not the role of ordinary pensioners to be directly responsible for national development, except through the normal capital investment process”.
“One way pension funds can contribute to development is by partnering with development finance institutions (DFIs) who receive funding from government to provide subsidised finance to facilitate infrastructure development. By partnering with DFIs, institutional investors can choose how to deploy their money and the type of projects they wish to invest in – thereby responsibly targeting an appropriate risk-adjusted return to compensate for the related risk.”
For South Africa, a policy prescribing investment is not a new idea. From 1956 onwards, the apartheid government forced pension funds to invest in its schemes and state-owned companies. When the Pension Funds Act was introduced in that year, a significant percentage of assets had to be invested in state-owned enterprises (including Sasol, Iscor and various Homeland Development Corporations) and government bonds. For public investment commissioners, this allocation was 75%, while for long-term insurers it was 33%. Prescribed assets, in this form at least, were scrapped in 1989.
Regulation 28 of the Pension Funds Act already prescribes limits in terms of particular assets/asset classes. The main limits are 75% equity, 25% listed property, 10% hedge funds and 30% in offshore assets (the last of these is a limit prescribed by the Reserve Bank).
* Hilton Tarrant works at YFM. He can still be contacted at email@example.com.