Prescribed assets: debate far from over

South Africa’s R6tr savings industry is braced for the imposition of some form of prescribed assets, but fear that asset managers will be forced to channel capital into failing state-owned enterprises (SOEs) in a desperate bid to prop them up may be misplaced.

There is widespread acknowledgement within the private sector that meagre levels of investment into the country’s infrastructure must be ramped up to enable the faltering economy to grow and to preserve social stability, which is rapidly being undermined by widening inequality and soaring job losses.  

But industry leaders say that this outcome could be achieved without forcing pension funds, insurance companies and other financial institutions to pump the money they manage into assets with poor prospects of decent returns – a step which would spook investors and trigger large capital outflows.

“If the intention is to force South African savers to knowingly buy an instrument whose creditworthiness is poor that is, by definition, a misappropriation of funds which will distort capital markets. It should not be allowed,” says Old Mutual Investment Group’s managing director Khaya Gobodo.

“There is merit to the discussion – we should all agree that there’s a big gap between what is required in terms of social and physical infrastructure and what we have. Our argument is that there is no shortage of capital – the issue is a shortage of bankable projects.”

The head of economic transformation at the ANC, Enoch Godongwana, alarmed the financial industry in August with remarks that the party was investigating the use of prescribed assets from pension funds to avoid going to the International Monetary Fund (IMF) for an emergency loan.

His IMF reference was puzzling because at present the government has no problem selling its bonds – which are used partly to finance capital spending – to domestic and foreign investors. Last month Treasury raised $5bn overseas in its biggest eurobond sale to date, boosting the amount from a planned $4bn after the deal was heavily oversubscribed.   

Shortly after Godongwana made his comments, President Cyril Ramaphosa said that the country “should discuss” using worker pension funds to finance development and infrastructure projects, and that the proposal had the backing of Cosatu, SA’s largest labour union. But he did not say that those investments would be a regulatory requirement – which is what would make them prescribed assets.

“We interpreted that to mean he is looking for ways to get more money into development assets and we see that as positive,” said Alexander Forbes principal investment consultant Janina Slawski. “We also believe that there’ll be a lot more consultation before anything gets implemented, so we wouldn’t expect anything soon in terms of draft regulations.” 

SA had prescribed assets between 1956 and 1989, when pension funds were required to invest more than half of their assets into government and SOE bonds. The returns lagged inflation and return on equity for most of that period, which made pensioners poorer.

Both Gobodo and Slawski say that the government needs to create a more enabling environment with the kind of development projects and incentives that attract capital. One good example was Eskom’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP), which drew R200bn worth of investment into the domestic power sector, they said.

Elias Masilela, who runs economic research thinktank DNA Economics, pointed out that there are already activities and frameworks for developmental investment in place at pension funds which are intended to achieve the same objectives as prescribed assets. 

“Instead of bringing in a new policy intervention, why don’t we just incentivise what is already there, and grow it to scale? Scale is one of the most important variables that guarantees implementation will be efficient,” he said. 

One of the challenges to prescribing assets was the absence of trust between government and the private sector, which needed to be sorted out, he said. 

“If we go down this road, we need to make sure that the people who make decisions about capital allocation – your trustees, your asset managers and the like – have the ability to anticipate the risks they are going to be taking and to be able to manage those risks. If you don’t have that you are brewing disaster,” he said.

Nonetheless, debate over the topic within the ANC is heating up. On 1 October Godongwana drew a link between the need to fund new electricity investments and introducing prescribed assets for retirement funds. The aim was to firm up a view on the issue so that it could be debated at the November meeting of the ANC national executive committee, he said.

Gobodo said he would be surprised if the policy went ahead, as it would be a fundamental shift away from long-term government policy of creating an enabling environment. 

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 10 October edition of finweek magazine. Buy and download the magazine here or subscribe to our newsletter here.   

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