It’s too early to panic over plans for South African pensions: asset managers

The topic of South African pensions was raised again this week after the Democratic Alliance (DA) called for comment on its proposed Private Member’s Bill to amend the Pension Funds Act.

The party wants to amend the Act to enable pension fund members to access a percentage of their pension fund before retirement as a guarantee for a loan.

This will help alleviate financial pressure during an emergency such as the coronavirus pandemic or any other emergency similar to Covid-19, it said.

“By enabling a member to access a pension-backed loan, that member will be able to leverage their pension fund investment before their retirement date, without eroding their provision for eventual retirement.”

The DA said that lending institutions will be enabled to offer loans to pension fund members at competitive interest rates and over extended or deferred payment periods, given that the loan is fully guaranteed.

“The draft bill provides for a registered pension fund to offer a guarantee to a pension fund member of a maximum of 75% of their share in the value of the fund.

“By enabling a member to access a pension-backed loan, that member will be able to leverage their pension fund investment prior to their retirement date, without eroding their provision for eventual retirement.”

The ANC, pensions and prescribed assets 

The DA’s proposed bill should also be understood in the context of the ANC’s proposal to use the country’s pensions – despite the two parties having radically different ideas on how the money can be leveraged.

The topic of pensions and prescribed assets came about following the ANC’s 2017 policy conference – and subsequently its election manifesto in 2019 – where the party listed the introduction of ‘prescribed assets for pension funds to mobilise funds from financial institutions for social infrastructure’.

The announcement incited concerns from investors and members of retirement funds because of the possible implications it could have on investment portfolios and investment outcomes in the country.

The party has since publicly walked back on the idea, ANC treasurer-general Paul Mashatile told Bloomberg last week.

Mashatile rebuffed suggestions that the government change rules for pension funds to force them to invest in state infrastructure projects that are a central tenet of an economic recovery plan being drafted by the government in consultation with business and labour groups.

“It is not viable,” he said. “I think it just creates challenges between government and the investors because when you do prescribe assets you are basically saying to fund managers: ‘You shall invest in this project.’

“You need to give them the flexibility to choose. I think it is better not to prescribe, but to create an environment for the pension fund to invest.”

This has been echoed by the ANC’s head of Economic Transformation, Enoch Godongwana, who explained that the policy of prescribed assets came as a result of the challenges in South Africa, which have resulted in sub-optimal economic growth.

“Unemployment and the country’s recent credit rating downgrade to junk status are just some of the issues that have created this economic environment,” he said in an interview with Alexander Forbes.

“We have learnt that there are two main problems that have led to this precarious economic and social environment that we find ourselves in.”

Godongwana said that there is a high level of underdevelopment and poverty in the country that needs attention, and this is where infrastructure plays a critical role.

The central point of contention is how this infrastructure will be funded – and if prescribed assets would be introduced to force the private sector into participating in capital provision.

The possibility of prescribed assets was referred to as something ‘to be investigated’ and it is not something that could be instated without substantial consultation and a robust review process by the government.

Seed of doubt? 

While the ANC has publicly backed down from its plans, there is doubt as to whether the ruling party could still return to the idea later down the road.

Asset managers such as Sygnia have made it clear that it strongly opposes prescribed assets within retirement funds. “We will oppose them through whatever means are available to us,” the group said in a statement.

However, it indicated that while some of this alarm may be justified in time, it does not believe there is currently a cause for panic. “To be clear, the government is not currently considering a prescribed assets regime,” it said.

“Amendments to Regulation 28, which limit retirement savings to particular assets and asset classes, are on the table to enable higher levels of investment in unlisted asset classes, such as infrastructure projects or green projects funded by debt.”

Any such investment would be voluntary rather than prescribed, however – an important distinction, it said.

“In practice, we anticipate that individuals and small retirement funds, where liquidity is paramount, would not participate, and the higher limits would only be utilised by large retirement funds, many of them associated with SOEs.”

Sygnia said that investment opportunities themselves will take the form of products or funds offered by asset managers to investors; to attract assets, some of these managers may offer liquidity to investors for a fee.

“The involvement of the asset management industry in managing investments in a variety of infrastructure projects, even at a fee, would require yet another layer of checks and balances,” it said.

“Furthermore, the tax advantages of saving through retirement funds remain substantial, and it would be foolish to give those up just yet.”

This means that panic is premature, it said.

“Given that so many listed companies have opted to delist, though, a genuine investment issue worthy of concern is the dire lack of diversification within the domestic equity sector as an asset class.

“Another issue is the stringent 30% limit on foreign investments – without access to a diversified range of “growth” asset classes, investment returns are likely to remain in single digits.”

The group added that its position on prescribed assets is clear and that it would oppose them through whatever means are available. It added that this will likely be the case for the rest of the financial services industry.

“If no other options are available for South Africa, a form of ‘negotiated’ solution might become necessary, but that would only be acceptable if carried out in consultation with investors.

It cited the possibility of being allowed to invest 40% to 50% of assets offshore in exchange for a commitment to invest, say, 20% of assets in government-guaranteed debt.

“Either way, you have our ongoing commitment to always act in the best interests of South African savers,” it said.

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