Will we be funding growth or corruption?
2018 proved that given the right conditions, the South African economy can be extremely fragile. Improving this has been one of the key ambitions of President Cyril Ramaphosa since he has taken power.
A key part of improving the economy is to improve State Owned Enterprises (SOEs). At the beginning of January 2019, Ramaphosa announced that government was considering targeting private pension funds as a means to increase investments into the SOEs; FAnews spoke to Rowan Burger, Head of Strategy at Momentum Investments to find out more about what this means for the industry and the public.
What does this mean when the ANC says it will target private pension funds?
In instances where there are tax benefits when investing in retirement savings vehicles, government feels that they are entitled to apply certain restrictions to the underlying investment exposures.
These are primarily to ensure a long-term investment horizon (without any gearing) and diversification where there are restrictions on the maximum exposure to assets to avoid concentration. This is often referred to as Regulation 28.
A consequence of these restrictions is that government effectively directs investment. It is therefore possible for government to change these investment restrictions to channel retirement savings into certain asset classes. This will allow them to direct investment into certain government projects or to help fund ailing SOEs.
How does this affect the man on the street?
Other than government employees, most South Africans are invested in defined contribution (DC) pension funds.
The retirement benefit is the accumulated value of the fixed contributions to a personal pension account plus investment returns on these contributions. If the restriction was such that a meaningful part of your account had to be invested in prescribed assets, you would retire with a lower benefit.
It would be reasonable to assume that prescribed assets would only yield a return equal to inflation rather than equities which generally yield 5% to 7% above inflation.
A redirection of 20% of the investment strategy would reduce returns by (20% X 5%) 1% a year. While this may not sound like much, compounding this over a working lifetime of 40 years leads to an end pension 30% less than what it could have been.
Is there a lack of support for government initiatives building the economy?
No, existing pension funds have many investments in programs generating employment and developing the economy.
The grievance from managers is a lack of bankable projects that will be delivered on time and within budget. The Association of Savings and Investments South Africa (ASISA), has committed to actively creating public/private partnerships with government and supporting these projects with capital to meet the broader employment and development policy objectives.
There are many good examples such as renewable energy producers, toll roads and student housing where pension monies have been used to enhance the country and still deliver great returns.
We are currently working as an industry to find ways to improve water provision using pension monies as a further example of the benefits of the current interactions. Momentum is an active participant in both these conversations and in these investments.
What would be a better proposal?
It is critical for a country to have large investment pools which can be deployed to fund investment in jobs and the betterment of living standards.
Our pension industry could be significantly enhanced if government adopts the proposals regulators have put to them which will keep money invested in pension funds.
This large pot would create a big opportunity set for government to partner with the private sector to build these projects. Equally the levels of oversight of certain investments have led to a better outcome for the country because of the activism that the asset managers applied.
Editor’s Thoughts: Burger would not comment on the reluctance of the public to invest in SOEs that are bleeding money or are known to be involved in corrupt activities. The recent revelations of Angelo Agrizzi at the Zondo Commission of Enquiry into state capture has opened a can of worms and has proven that SOEs could well have been involved in corrupt activities. Will this put a hold to Ramaphosa’s plans? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Article published courtesy of FAnews
