At the beginning of March, Stats SA reported
that the SA economy slipped into a recession during
the second half of 2019. Real GDP shrank by 1.4%
quarter-on-quarter on an annualised basis during the
three-month period. This resulted in economic growth
averaging 0.2% in 2019.
On the additional plausible perils of
reintroducing prescribed assets, Isaah
Mhlanga, executive chief economist at
Alexander Forbes, says that prescription is
pursued because something is not working,
with reference to SOEs.
“Return on equity for all SOEs has been
negative; making use of this tool means
that investors risk getting negative returns
on their investment,” he says.
Mhlanga says there are four
considerations at play when discussing
prescribed assets. Firstly, introducing
prescribed assets may deter savers and investors
further because of the opportunity cost involved.
Secondly, there are already significant challenges in
encouraging individuals to save sufficiently for their
retirement and to ensure that they preserve their
savings on exit.“Return on equity for all
SOEs has been negative;
making use of this tool
means that investors risk
getting negative returns
on their investment.”
Thirdly, the introduction of prescription will result in a
reduction in member confidence in the retirement system.
And finally, a point may be reached where individuals prefer
to save outside the retirement system where greater returns
can be achieved, even though retirement funds provide
better tax incentives.
Trustees of retirement funds have a fiduciary
duty to act in the best interests of members and
“prescribed assets will limit the extent to which
trustees can fulfil these duties”, says Slawski.
“Prescribed assets would go against the intention
of prevailing legislation and the requirements of
trustees.”
If enforced, the nature of the investment will
be problematic, as investors would not have
the opportunity to negotiate better terms for
the investment or be able to walk away from
unfavourable terms, she says.
The policy will likely leave people with a
smaller pension pot when they do retire or having to work
for longer than they had planned to, says the Institute of
Race Relations' Marius Roodt.
“A large number of people will be affected,” he says.
“Between 11m and 13m South Africans either contribute
to or draw from a pension fund.” ■@finweek finweek finweekmagazine finweek^ 19 March 2020^41in depth prescribed assets
Rather than dictating to pension funds what
assets they should invest in, Alexander Forbes
proposes attractive developmental investment
opportunities – with no prescription required.
“Alexander Forbes is opposed to any
regulation, including prescription, that could
lead to sub-optimal investment outcomes
for investors,” says Janina Slawski, principal
investment consultant at Alexander Forbes
Investments.
On a scale from bad to great, she says
prescribed investment into specified
developmental assets could be a promising
compromise that is “not so bad”.David Moore, head of alternative investments
at Alexander Forbes, suggests that investors
be required to invest into new, specified
developmental assets. For example, “investing
in bonds issued by Entity X whose mandate
it is to seek investment into developmental
opportunities”.
Investing in appropriate developmental assets
would ignite social and economic development
and job creation, says Moore.
One such promising alternative investment,
according to Moore, is the Renewable Energy
Independent Power Producer Procurement
Programme (REIPPP), which is a competitivetender process designed to facilitate private sector
investment into grid-connected renewable energy
generation.
He says that, over a period of eight years, the
REIPPP has attracted R209.4bn in committed
private sector investment and has made a
significant positive impact on the economy,
job creation, community upliftment, economic
transformation and climate change.
Moore says that if opportunities to invest into
these assets with attractive returns were to be
made available then capital would flow as it is not
the availability of capital that is the issue, but the
availability of opportunities. ■Is there an alternative to prescribed assets?
There could be a compromise that sees specific investment into developmental prescribed assets.1960s
Inflation averaged 3%, while
prescribed assets earned positive
real returns, they earned -6.4% p.a.
versus equities over the decade.1970s
Inflation averaged 11.3%; prescribed assets
earned 7.3%; equities returned 24.5%; the
opportunity cost of investing in prescribed
assets versus equities was -17.2% p.a.1980s
Inflation averaged 14.5%; the
opportunity cost of investing in
prescribed assets versus equities
was -6.7% p.a.EQUITIES PRESCRIBED ASSETS INFLATION EQUITIES VS. PRESCRIBED ASSETS = “OPPORTUNITY COST”
1960s 11.3% 4.9% 3% -6.4%
1970s 24.5% 7.3% 11.3% -17.2%
1980s 20.2% 13.5% 14.5% -6.7%
SOURCE: Gill Raine, senior policy adviser at Asisa/Alexander Forbes.Pho
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