There could be room for compromise in the prescribed asset debate

Asset managers have long been warning that prescription could be disastrous for SA.
Asset managers have long been warning that prescription could be disastrous for SA.
Asset managers have long been warning that prescri
  • South Africa is looking at infrastructure development as the catalyst to recover from the economic slump caused by Covid-19.
  • But with the projects identified by President Cyril Ramaphosa requiring more than R2 trillion in funding, this has created a debate on where the money will come from.
  • The asset management industry, which controls most of South Africa's savings pool, says pension funds should not be coerced to invest in a particular way.
  • But Old Mutual Investment Group's chief economist, Johann Els, says there could be a compromise.

The infrastructure-led recovery strategy that has been touted by the government, Business for SA and the ANC has returned to the table the uncomfortable debate about prescribed assets.

With the 276 infrastructure projects unveiled by President Cyril Ramaphosa during Sustainable Infrastructure Development Symposium (SIDS) in June requiring more than R2 trillion to come to life, the ANC's Economic Transformation Committee suggested pension funds should be roped in.

From mobilising pension funds to taking over certain Eskom assets to amending Regulation 28 under the Pension Funds Act so South Africa can access private savings for infrastructure, the committee's discussion document ignited a new debate on how South Africa should fund its recovery.

This week, during its savings webinar, one of the country's biggest asset managers, Stanlib, argued there was indeed a lot of money sitting with pension funds and asset managers.

Stanlib chief economist Kevin Lings said South Africa's "bizarre" bias towards saving through retirement funds and unit trusts had created "very high contractual savings on a net basis".

Before Covid-19 wiped out trillions of dollars in pension funds' assets around the world, South Africa's savings and investment pool was sitting at more than R8 trillion, 27four Asset Management's 2019 BEE.CONOMICS survey showed.  

Meanwhile, South Africa is expected to find it increasingly hard to attract foreign investments to fund the proposed infrastructure projects.

But does that mean the government should turn to pension funds?

Coercion won't work

Lings said the local asset management industry can "do a lot" to direct savings in a more productive and more efficient manner given that it controls a large pool of the country's savings.

However, the industry should not be coerced to invest in a particular way. For instance, when the government identified projects, the industry should have a choice to go for those that have an economic benefit rather than projects chosen to serve a political outcome, he added.

"You want the choice of these investments to be as impartial as possible and as thoroughly thought through as possible," said Lings. He added the reason why the private sector had held back on investing in South Africa was because it was waiting for "better policy clarity" and for the government to lead infrastructure development.

Alexander Forbes' head of investments consulting, Janina Slawski, said there was no question South Africa needed to invest in critical infrastructure that would enable stable electricity supply and businesses in outlying areas to get their goods to the market on time. But the key point the country should be discussing is how to grow the economic pie, and thus the number of people who contribute to pension funds and tax collection.

"If you look at infrastructure projects that are being considered in terms of the SIDS initiative, you are talking about R2.1 trillion. There isn't that amount of money sitting idle somewhere.

"Any pension fund that wants to put money in will take away from something else. People may disinvest from government bonds, for example. We've got to actually find new sources of investors."

Slawski said with a clear policy in place, the government showing commitment to correct some of the things that went wrong in the independent power producers programme, South Africa might attract international investors again, just like it did with renewable energies and the N4 toll road to Mozambique.

"But talk about prescription actually scares away international investors," she added.

Finding a compromise

The chief economist at Old Mutual Investment Group, Johann Els, said while he was strongly against traditional prescribed assets as used in South Africa in the past, he added there was room to bring a voluntary prescribed assets programme to the table.

Els said if the policy reforms that Finance Minister Tito Mboweni promised in the June adjustment budget were announced in the October medium-term budget and duly implemented, asset managers could commit to invest more into infrastructure, over and above what they have invested in education, renewable energies and other impact projects.

"What I don't know is whether that social compact should include specifying investment levels because then it makes it more prescription. But pension funds will only do this if there will be decent returns which is why the policy reforms are urgent."

Els said given the trust deficit between the government, business and labour, there should be an infrastructure fund with an independent board of trustees.

"You need checks and balances so that everybody is happy that the money will be invested in projects agreed upon, that it will be all well-run and audited and that people in charge are above board. It might be difficult to get off the ground, but it's not impossible."

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