Hands off my pension

The debate has shifted to whether pension fund assets can be used more effectively to support economic growth
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In recent commentary the ANC’s head of Economic Transformation, Enoch Godongwana has made it clear that the party is moving away from the term ‘prescribed assets’ as economic policy and to rather focus the conversation (and potential policy changes) on finding ways to unlock South Africa’s pensions to assist with the country’s infrastructure goals.

Read: ANC’s proposals to change Reg 28 ready by mid-September

The issue of prescribed assets started gaining traction after the ANC’s 2019 election manifesto, which tabled the introduction of prescribed assets on financial institution funds for social productive investments including: housing, infrastructure for social and economic development and the development of townships and the village economy.

The current debate has now shifted to whether pension fund assets can be used more effectively to support economic growth and provide much needed funding for economic development, without prescription i.e. “should Regulation 28 of the Pension Funds Act have a minimum allocation to infrastructure” to “does Regulation 28 allow sufficient flexibility to invest in infrastructure?”

Regulation 28

As Regulation 28 remains central to the debate it is important to gain a better understanding of its influence, objectives, and current parameters.

Regulation 28 applies to pension funds, provident funds, retirement annuities and preservation funds. Thus, the impact and reach are significantly broader than the “pension fund” industry and in some way impacts most savers and investors.

Regulation 28 provides guidance of where pension fund managers, investors, and asset managers should invest their retirement savings. Most retirement savings are invested in balanced funds where the pension fund and asset manager has to ensure adherence to Regulation 28.

The primary objective of Regulation 28 is to manage investment risk and ensure investors do not take undue risk with their retirement savings. This is achieved through providing investment maximums to manage investment risk. Some of these broad parameters include a maximum of 75% invested in shares; a maximum of 25% in property and a maximum 30% invested in international assets (excluding Africa). Each one of these broader categories are then broken down further limiting the exposure to i.e. any share or exposure per debt instrument.

Unlisted infrastructure trends

Regulation 28 currently allows investment into infrastructure; these investments are most often structured as private equity funds and as such between 10% and 2.5% can be invested in infrastructure-related investments (this does depend on the underlying legal structure). Currently South African pension funds invest +/- 1% into unlisted infrastructure. At face value South African pension funds and asset managers are significantly under invested in infrastructure.

However, a 2019 survey by the OECD provides some more insight into the allocation of large global pension funds to infrastructure. Even though the allocation to alternatives has continued to grow globally (now at 14.4%) there has only been a marginal increase to unlisted infrastructure during recent years, from 1.8% to 2% in the most recent survey.

The reason for this lower allocation can certainly not be attributed to performance. A number of South African- and global Asset managers have established infrastructure funds, investing into a range of opportunities including renewable energy, housing, village “developments”, education, roads rail and ports and also venture into areas such as agriculture. Some of these have now established exceptional track records over the last 10 years.

In order to invest more in the “real” economy and directly into infrastructure projects, the challenge is not the current limits of Regulation 28 or the availability of opportunities but rather the structure of the pension funds and also the structure of the underlying alternative (infrastructure) investment opportunities.

The following are some of the structural challenges in allocating more pension fund assets to infrastructure:

  • Pension funds require liquidity.
  • Pension funds require liquidity to provide regular member pay-outs and claims. Private equity and infrastructure related investments traditionally have a very long-term time frame 7 to 10 years with limited liquidity during the period.
  • The SA market is still relatively concentrated.
  • Even though some asset managers have ventured into this market, the investable universe is still relatively small limiting the available opportunities. This increases risk and makes it difficult to implement a diversified strategy.
  • The retail market can’t access infrastructure opportunities The retail market can only access debt (or bonds) associated with infrastructure projects as they require daily liquidity.

In order to allocate more pension fund capital to infrastructure, the real issue is not the regulation, but rather finding innovative structural solutions and investment opportunities to allow pension money to flow into infrastructure investments.

Pension fund managers, principle officers and trustees of pension funds (including pension funds, provident funds, retirement annuities and preservation funds) have a fiduciary responsibility to manage pension assets on behalf of members and to appropriately manage the risk within the fund.

In a constitutional democracy it seems inconceivable that these fiduciary obligations will be infringed upon. I suspect we will see more public–private partnership collaboration and the development and deepening of the industry to broaden the infrastructure opportunity set available to pension investors.

Wynand Gouws is a Certified Financial Planner at Gradidge Makhura Investments.


Listen to Ryk van Niekerk’s interview with Enoch Godongwana below, or read the transcript here.

COMMENTS   16

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Does not matter how you sugarcoat it or change the conversation.

This is the ANC we are talking about that would be spending your pension fund.

These are corrupt thieves??? You have to be retarded to allow that to happen.

@Mmmm you are correct the usage of a change to rule 28 is just sugar coating the pill of prescribed assets, as the end result is exactly the same. Rule 28 is supposed to make pension investments less risky not dictate that pensions are invested into extremely risky government infrastructure projects.

If someone does not display the ability to budget efficiently or work well with money, why would you give them more of it? It would tantamount to giving alcohol to an alcoholic.

In view of recent, COVID-19 et al, developments eg.
– zero dividends from JSE investments;
– 4% (inflation being 10%) interest on money in the bank.So I lose more than I earn.
– tenants at our properties requesting rent relief, thus reducing rate of return to 2%;
– Sanlam RA stagnant. No growth for obvious reasons. Sanlam’s financials the other day showed big losses. Despite this, Sanlam the losses Sanlam paid some dude R160m.
– the chap that owes me R500 said that b/c Covid-19 he cannot pay me.
So for me, any investment (cANCer govt generated or not) that is going to pay market related returns (and protecting capital) will be more than welcome.

They loot into bankruptcy every single Parastatal, they’ve destroyed Municipalities into bankrupt oblivion, Service delivery has come to a complete halt.

Not one cader has been taken to task because they all have dirt on each othe. The looting is endemic, the rollercoaster cannot be stopped due to weak leadership. A President thats but a mere puppet

Now they’re eying prescribed assets..OUR money to bail out what was stolen in the first place, to squander more to , amongst other pathetic things, keep SAA afloat

This is nothing but regulated theft..They’ve bankrupted the country, now they want to bankrupt every citizen pulling us all into this failed state

The abyss of destruction is so deep, only a massive loan from the IMF can save the day, and even then, whilst the ANC is at the helm, they’ll steal that too

SA, once the darling of Sub Saharan Africa, an Economic Powerhouse, reduced to junk in less than two decades

Pathetic and a crying shame to say the least

You might want to focus on the return OF your money rather than the return ON you money.

Under the ANC government, any investment in infrastructure will in fact be a donation to Luthuli House.

Their socialist policies have drained the Treasury. Now, the system is feeding on itself, to stay alive, the dog started eating its tail. Unionised government employees will be funding their salaries with their pension funds. We have arrived at the ultimate destination on the path to socialism where those who benefit from the system, pay for those benefits with their pensions initially, and with their living standard later.

I have been retired for 9 years and age 68. I am fully supportive for the Goverment to use a portion of Retirement funds to unlock the potential of South Africa and develop our Nation. If this is managed properly and I get a fair return I would be more than happy. No to using my money to bail out SAA or other SOE’s. So Clean Energy, Building dams and harnessing our scarce water including huge Desalination plants along our coast line such as Israel has done to name a few has my go ahead. Worry is corruption but Fund managers could play it’s part.

WJS

I retired at age 48, now age 64. Why? I refuse to pay tax to a bunch of corrupt hooligans. Unfortunately I can’t escape paying vat. You trust these mofos at your peril.

Whatever communistic speak you want to use, there are no rabbits to be pulled out of the hat.
They just want your money, and the ANC have demonstrated their prowess in dealing with other people’s money.
No, no and again NO.

hereshoping,
You could look at buying the banks pref shares, they give near to 10% after the 20 % dividend tax

Pref shares fall in the same asset class as nappies. They are the appropriate investment for pensioners and babies.

So now that there is no more easy money, lets try and direct some from the pension pool of assets towards “development”? What has changed that the masters of Lootuli House suddenly have figured out how to create long-term value? These sorry individuals cannot even fill in long-drops, never mind build a road.
“Finding innovative structural solutions and investment opportunities” – what does that mean in plain English? Talk of public-private partnership blah blah. I prefer not to get into business relationships with untrustworthy partners.
An ignored fact seem to be the fact that the bond in South African pension funds are government bonds. The include entities like Eskom, SAA, Transnet, Sanral, Prasa ect which all have developmental agendas. So in reality, pension funds are already heavily invested in infrastructure projects of some sort. What do the long term returns from these projects look like?
The author wishes a favorable outcome, when this depends on a business partner whose objectives are very different.

Basic question :

As most funds are normally virtually fully invested, what do the geniuses think they should sell in order to buy the new prescribed assets?

There is one pool of capital, changing the rules does not create a new pool of investable capital!

This debate has not shifted. There is no debate at all. The econimic achievements of the ANC include stealing and mismanaging the economy to its knees, and dishing out my taxes to its preferred beneficiaries. This track record is not more deserving of a cent of my money. May as well burn it all myself.

This government will do what they want when they want.

End of comments.

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