The Association for Savings and Investment South Africa (Asisa) says that prescribing pension funds to invest in certain assets “did not work when introduced by the apartheid government and Asisa and its members maintain that it would have negative effects on the country should it be introduced now”.
It would “force the savings and investment industry to deploy the savings of ordinary South Africans into entities that have over the recent past been mired in State Capture and lack of delivery. As custodians of these savings we have to oppose this.”
In its 2019 Election Manifesto, the African National Congress on Saturday said it would “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 response to questions from Moneyweb, CEO Leon Campher says: “Asisa and its members have publicly stated that we believe that ‘prescribed assets’ would not be beneficial for our country.”
While Campher first publicly criticised ‘prescribed assets’ in September, he was referring to prescription in the context of placing more assets with black-owned/-run managers. He was responding to calls from some quarters of government to accelerate transformation in the asset management industry.
Campher says that, to date, “the savings and investment industry has engaged extensively with various relevant parties on the potential impact of prescribed assets, including directly with government ministers tasked with infrastructure development, via Business Unity South Africa (Busa) into the National Economic Development and Labour Council (Nedlac), and via the CEO initiative.” He says the body is “empowered by a mandate from members that manage some R7.8 trillion of the nation’s savings and investments and is therefore recognised as a significant and relevant partner around government’s negotiation table”.
He points to evidence that government under President Cyril Ramaphosa has been very collaborative and says “if prescribed assets are tabled for discussion by government, we believe engagements with our industry will be equally constructive.”
Magda Wierzycka, CEO of Sygnia, has a more philosophical view. “If we look at it pragmatically, South Africa doesn’t have money. One only needs to look at our debt burden as a percentage of GDP to see that’s the case.
“If that is the case, one needs to look at the pools of capital available in South Africa as liquid cash.”
She says one of these is obviously the funds managed by the Public Investment Corporation (under mandate from the Government Employees Pension Fund). “That pool of assets is – in theory – available to government, and given that it is a defined-benefit fund, it is ultimately taxpayers who would fund any shortfall in its ability to pay pensions.”
She points to many countries that run such funds with only a partial reserve, meaning pension payments are being funded by the contributions of current taxpayers.
“The problem with the PIC,” says Wierzycka, “is that it hasn’t deployed its capital particularly effectively to date. There have been quite a number of ‘deals for pals’ instead of it and government applying their minds to how to utilise that capital in the best manner to grow the economy.
“The other pool of assets we have is the retirement savings pool. In effect, there is an inherent pact with government here: you save for retirement through these vehicles and, in return, you benefit from a preferential tax treatment.”
The question of whether prescribing how assets need to be invested within these investment vehicles is ‘right or wrong’ is a very difficult one: “Everything is a negotiation,” says Wierzycka.
“Government could say ‘We’re putting tax concessions on the table, and in exchange you might have to deploy some of these savings in a specific manner’. This is all very theoretical, of course!”
The fundamental problem with looking at past ‘evidence’ of prescribed assets under apartheid, says Wierzycka, is that these rules existed when most retirement funds were defined benefit funds. “The liability for the payment of pensions fell on corporates – hence the requirement affected corporate balance sheets rather than individuals.”
She says that under this regime, individual members didn’t really have a voice in how the money was managed. “It was just an underpin to their future pensions.”
Fast-forward to today, and virtually all funds have converted to defined contribution arrangements.
“Your pool of assets is your pool of assets; you effectively retire with what you have accumulated. Maximising investment returns at an acceptable risk level should be the only consideration.”
In this scenario, mandating the concept of prescribed assets could be very problematic, says Wierzycka. “Members could claim that these are their assets, and that they should determine how their assets are invested.
“Rationally and irrationally, there would be a massive outcry if prescribed assets were to be introduced.”
She says that removing rights retrospectively, without something like ‘grandfathering’, could be legally problematic and open to challenges. It would also lead to reduced savings levels with people simply opting out of saving through retirement funds, which would create social problems later on.
More than enough funding available
Wierzycka says the issue has not been a lack of funding for suitable, well-managed projects. “There are funds and products with a particular focus on socially responsible investments, and money is available.
“Rather, there has been a shortage of viable projects and a shortage of credibility in how these projects are managed.”
Campher echoes this: “Asisa and its members believe that many of our country’s challenges can be overcome through effective public private partnerships (PPPs).”
He says members have deployed over R1.3 trillion in capital in support of government, local authorities and state-owned companies (primarily via bonds), as well as direct investments of R200 billion into projects, including renewable energy, township development, affordable housing, urban regeneration, student accommodation, water, roads and emerging farmers.
“Our industry is very keen to invest in the country and its infrastructure, provided government provides viable projects.”
Herein lies the rub.
“What you should first test,” says Wierzycka, “is the appetite of retirement funds for investment in infrastructure. There are [only] a handful of asset managers to speak to, so this won’t be hard! I think government will find there is more than enough appetite.”
All this talk of prescribed assets smacks of a knee-jerk reaction to find money, believes Wierzycka.
Instead, she says, government should be asking why the money hasn’t been deployed and trying to identify the brakes in the system that have prevented investment.
She also makes the point that the reference to prescribed assets in the manifesto document “is a very broad, blanket statement that doesn’t [actually] talk to government debt”.
Wierzycka says one can expect noise in the run-up to the elections in May. It won’t be clear how much is real and how much is rhetoric until later.
“But we’re certain to hear a lot more of it in the next five months.”
* Hilton Tarrant works at YFM. He can still be contacted at firstname.lastname@example.org.