Impact Investments - a viable alternative to prescribed assets to boost growth and job creation oppo

Many proposals and suggestions have been raised to mobilise funds to support developmental imperatives in South Africa. Several have focused on enforcing investment through a prescribed asset programme that would, for example, require retirement funds to invest a portion of their assets in specified assets.

Forced investment in SOE debt

There has been significant concern that these would include state-owned entity, and specifically, Eskom-issued debt. Recent discussions on restructuring Eskom’s debt appeared to be driving the developmental investment conversation towards prescribed assets. However, reports that government, business and labour have reached an agreement in principle on voluntary mobilisation of funds to support development objectives have allayed these concerns somewhat.

Any discussion on solutions to our electricity crisis and the need to create new job opportunities can only enhance the debate, leading to potentially better solutions.

But let’s regard with grave concern any comments on support for a prescribed assets policy. This includes any actual proposal on prescribed assets managed for funds such as the Government Employees Pension Fund (GEPF) or retirement funds that employees across South Africa belong to.

Why prescription will not work

A prescribed assets policy implies that investors are being forced to invest in assets that they would not voluntarily choose as an investment. This is because:

• the risks or returns of the asset are unattractive to the investor, or

• the asset does not meet their investment criteria for other reasons

Prescribed asset policies have previously been used in South Africa in the 1950s to 1980s and delivered significantly lower investment returns than could have been earned in an unconstrained investment environment.

How does this affect retirement funds?

Trustees of retirement funds have a fiduciary duty to act in the best interests of members. Prescribed assets will limit the extent to which trustees can fulfil these duties since they would go against the intention of current legislation.

Introducing prescription, resulting in potentially lower investment returns, would leave defined contribution members poorer, contrary to the positive changes achieved to date through retirement reform initiatives. If introduced now in a period of expected low investment returns, this would be particularly concerning as it is critical that the focus should be on maximising investment returns.

What does this imply for defined benefit funds such as the GEPF?

If investment returns are insufficient to keep pace with the increase in the cost of providing benefits, then a deficit could arise that the employer would need to fund. For the GEPF that would mean the government, and ultimately the South African tax base.

Alexander Forbes disagrees in principle with a policy of prescription that prevents investors from investing in assets that meet their risk and return profiles. It is, however, useful to step back from the distraction of the prescribed assets debate and to focus instead on what could mobilise assets to meet developmental objectives.

Impact investment could boost growth and job creation

We believe that a focus on impact investments that represent attractive investment opportunities could make a significant difference to the growth and job creation initiatives that the country so critically requires. If compelling investment opportunities to invest in growth and job creation were to be created, then retirement funds and other investors would be enthusiastic potential investors in these initiatives.

It is not a lack of capital for investment in initiatives that is the issue, but rather a lack of investible opportunities. Alexander Forbes is highly supportive of efforts to drive voluntary mobilisation of funds to support developmental objectives.

ENDS