Finweek_English_Edition_-_March_19,_2020__

40 finweek 19 March 2020 http://www.fin24.com/finweek

t

he South African government is finding itself

between a fiscal Scylla and an economic

Charybdis, where state debt is burgeoning, and

the economy is stalling. In order to try and plug

holes in its fiscus, and those of public enterprises

such as Eskom, Transnet and a sleuth of others,

National Treasury is now turning to South Africans’

retirement money.

Treasury plans to reintroduce a notorious and

widely contended asset management policy of

prescribed assets which was abandoned in the late

1980s. Prescribed assets in SA were first introduced

in 1956 through the Pension Funds Act, when

retirement funds were required to invest more than

half of their assets into government and state-owned

enterprises’ (SOE’s) bonds.

Prescribing where assets should be invested was a

way of compelling fund managers to invest in certain

sectors or companies. The National Party government

utilised the retirement funds of domestic savers to

fund capital projects of parastatals such as Eskom and

the construction of Sasol’s coal-to-liquid plants; and,

recently, the ANC has been increasingly likely to go

down this route too, as the state continues to spend

more than it earns and can afford.

During the years of prescription, the prudential

investment guidelines (PIGs) required that 53%

of retirement fund assets, 33% of assets of

long-term insurance companies and 75% of the

Public Investment Commissioners’ (now Public

Investment Corporation or PIC’s) managed assets

be invested into government and SOE bonds, says

Janina Slawski, principal investment consultant at

Alexander Forbes Investments.

The opportunity cost of prescribing assets

Gill Raine, senior policy adviser at the Association of

Savings and Investment SA (Asisa), says that during

the 1960s to 1980s when prescription was in place,

there was an opportunity cost to investors holding

bonds rather than equities (see table). The opportunity

cost of investing in prescribed assets rather than

equities at the time was consistently negative over the

decades in which the policy was enacted.

To date, no detail has been provided by the

government or ruling party in terms of the form

that the prescription should take, except that it is

on the cards and will most likely fund Eskom’s split

into separate units for generation, transmission and

distribution. President Cyril Ramaphosa on 3 March

during a meeting with editors and journalists held by

the SA National Editors’ Forum said that the money

to help reduce the government’s debt obligations,

such as Eskom’s more than R450bn load, lies in the

country’s retirement funds.

“The Reserve Bank estimates that there is over

R8tr in pension funds. Imagine if 10% of that went into

alternative investments – that’s R800bn for Eskom

and water projects,” Ramaphosa said at the meeting,

according to Fin24.

Parliament’s portfolio committee on public

enterprises on 4 March heard from the Congress of

SA Trade Unions (Cosatu) that the Development

Bank of SA and the PIC, which has R104bn invested

in government-guaranteed Eskom bonds, could both

increase their exposure to Eskom debt, according to a

Fin24 report.

What could possibly go wrong?

The reintroduction of prescribed assets could have a

profound effect on ordinary South Africans, inflicting

damage that goes far beyond just the obvious impact

on retirement outcomes, says Kevin Lings, Stanlib’s

chief economist.

“In general, it would undermine domestic and

international investor confidence, encourage foreign

capital outflows, discourage discretionary savings,

weaken SA’s international credit rating, and undermine

the country’s ability to raise foreign finance,” he says.

The reintroduction could lead to a potential

reduction in investment returns and would leave

pension fund members poorer, contrary to the positive

changes achieved to date through the retirement

reform initiatives, says Slawski.

“It [the prescribed assets policy] would be

introduced in a period of expected low returns, when

it is critical that all focus should be on maximising

returns,” she says.

in depth prescribed assets

By Timothy Rangongo

Kevin Lings

Chief economist at Stanlib

Janina Slawski

Principal investment

consultant at Alexander

Forbes Investments

Opportunity cost of forced investing

may outweigh developmental needs

The government is pondering how to fix its finances and boost demand for the debt of state-owned enterprises.

Forcing retirement money into battling the problem may not be the solution.

“The Reserve Bank

estimates that there is over

R8tr

in pension funds. Imagine

if 10% of that went into

alternative investments –

that’s R800bn for Eskom

and water projects."