Why the ANC is eyeing your pension

According to the ANC’s 2019 Election Manifesto, the party 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”. That means that the pensions and savings of ordinary South Africans could be used to build houses and roads – but they could also be used to prop up state-owned enterprises such as Eskom and SAA. While MoneyMarketing acknowledges that the prescribed assets regime is presently only on the ANC’s wish list, we believe there is no certainty that it will die a quick death. There is clearly a faction within the ANC that wants to continue having access to more funds.

MoneyMarketing has pursued this issue in depth, speaking to various players in the savings and retirement industry. Unsurprisingly, not one of these people thought that the imposition of prescribed assets was a good move.

‘No need to panic’

We also asked Minister of Finance, Tito Mboweni – at a briefing that took place shortly after the publication of the ANC’s election manifesto – if National Treasury would be in charge of an investigation into the feasibility of a prescribed assets regime. He replied that he had noted, from his position as the Minister of Finance of the Republic of South Africa, the contents of the ANC manifesto and that he was due to have a conversation with Treasury’s Director-General, Dondo Mogajane. However, the minister said they would wait for all the political parties to submit their manifestos and only then would they begin the process of costing each and every manifesto. “We are civil servants, that’s our job,” Minister Mboweni stated. All the political parties would then be briefed as to what the financial implications of their manifestos would be if they won the election. The minister added that there was “no need to panic” about a prescribed assets regime. “What I know about prescribed assets, historically, is that you have to be very careful how you go about imposing them, because the Prudential Authority at the SA Reserve Bank has to look into this very, very carefully.” He explained that the Prudential Authority considers limits for both offshore investments and domestic investments, and even limits of domestic investments into state entities. “At the end of the day, the institutional investors are custodians of people’s money and need to make sure that, wherever the funds are invested, there is preservation and growth of the investments. We’ll look into all of those things… but there’s no need to panic as we have a Prudential Authority in South Africa.” While MoneyMarketing acknowledges that a prescribed assets policy is unlikely to be implemented while President Cyril Ramaphosa is leading the country, there is indeed reason to be cautious in the long term. “The mention of prescribed assets is in line with NASREC policy but 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 the National Treasury,” says Peter Attard Montalto, Head of Capital Markets Research at Intellidex.

Hunt for solutions for Eskom

“The issue is current, however, because the hunt for solutions for 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,” Attard Montalto adds. Eskom and its debt are undoubtedly the greatest risks to South Africa’s economy. Investors have lost confidence in the power utility that is rated at sub-investment grade, leaving it struggling to borrow funds. A faction in the ruling party appears to consider that one of the ways to stop the rot is to use the savings and pensions of the country’s citizens to prop up Eskom.

Prescribed assets nothing new

The idea of a prescribed assets regime is nothing new and is similar to the tactics used up until 1989 by the National Party during apartheid. “Under the old regulation, 53% of a retirement fund’s assets were required to be invested in parastatal and government bonds, leaving only 47% to be invested in ‘growth assets’ such as equities. No international investments were permitted,” says Magda Wierzycka, CEO of the Sygnia Group.

“In reality, much has changed since the early 1990s, and the biggest change has been the move from defined-benefit to defined-contribution arrangements as a common legal structure for retirement fund provision. Under the defined-benefit arrangement, investment risk was borne by the corporate, and members were guaranteed a salary relative to their final salary at retirement. “Consequently, individual members did not have direct vested interests in how the assets were invested, and they were also not represented on the boards of trustees. Under defined-contribution arrangements, the assets that a member saves and invests determines the amount of their final pension benefit. Members now also have the right to elect 50% of the board, and they have one objective and one objective only – to maximise their returns subject to an acceptable level of risk.” Wierzycka warns that the introduction of prescribed-assets requirements in the current environment may well encounter resistance, and even court challenges, from members and trade unions that take an active interest in the investments of funds that fall under their auspices. “On the other hand, government may well argue that since retirement funds enjoy tax breaks, government should have a say over how the money is invested. If such an eventuality should take place, existing funds may demand ‘grandfathering’ of existing investment strategies, i.e. a demand that savings to date are not affected by the new provision.

Smaller retirement industry

“Going forward, members may opt out of retirement funds altogether and choose to save directly, which could ultimately result in insufficient savings down the line,” she adds. Peter Armitage, CEO of Anchor Capital, believes that a possible outcome of a prescribed assets policy would be a smaller retirement industry as concerned contributors put away as little as possible into pension funds and withdraw their funds as soon as allowed. “A move of this nature might also have negative consequences for the SA bond and equity markets. If fund managers are forced to allocate a portion of funds into a prescribed asset, it has to come from somewhere else, resulting in lower absolute demand for other listed assets. Hence, a move of this nature has the risk of having an impact on the value of investments that are currently held,” he adds. His expectation, though, is for a watered-down version of prescribed assets. “The government desperately needs funding to solve many balance sheet issues for state-owned enterprises and growth projects.

Hence, it is not surprising that the government sees prescribed assets as a method to fund these. As it stands in the manifesto, the ANC will be under pressure to have a form of prescribed assets implemented. However, the finance minds in the ANC and government will be well aware of the negative implications of this and therefore it is likely to result in a compromise policy, which is partially palatable to investors. “It is clear there are different factions within the ANC and a great deal of compromise is required. The precarious situation of SOEs means that the government needs to keep all its options open. Raising capital for certain SOEs and growth initiatives is challenging, but not impossible. This would be part of the solution set.”

Pension funds can assist

While all South Africans should work in unison to solve the country’s issues, Armitage says pension funds cannot be viewed as a funding pot on uneconomic terms. “The asset management industry has been very supportive of the fund-raising programmes of many state-related entities, but on a basis where the risk and return is priced on an arm’s-length basis. Removing this element from the investment decision of fund managers would not be viewed in a positive light. Pension funds can assist by playing a role in funding growth projects and initiatives, but on terms that are reasonable from a risk/return perspective.” Wierzycka points out that many socially responsible investment vehicles and infrastructure funds are already in place to deploy assets into viable projects that generate an acceptable rate of return. “The problem is not an unwillingness on the part of the asset management industry to participate, so much as it is a dire shortage of such projects and a complete lack of trust that the money will not be wasted for other purposes. Consequently, before deploying such short-term solutions, it is imperative that the National Treasury and the Prudential Authority engage with the industry to find out which assets are available and what the breaks are on such investments. I think they will find the answers surprising.”

SA’s Minister of Finance, Tito Mboweni

IMAGE: Russell Roberts