News flow in recent months indicates that prescribed assets continue to be a topic of debate.
In an article in January 2020[1] “The ANC’s dirty dance with your pension” by Stephen Cranston, Associate Editor of the Financial Mail, he outlines various views in the market, the majority of which agree that the notion of prescribed assets is a serious threat to the finances of ordinary South Africans. He refers to the ANC’s 2019 manifesto, which describes a new framework to mobilise funds for "socially productive investments, including housing, infrastructure for social and economic development and township and village economy, and job creation". He also provides a stark reminder that prescription was evident in pre-apartheid South Africa and notes the dire consequences that resulted in the erosion of savings during that period. These are outlined below.
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Figure 1: Consequences of prescription
How savings were eroded under prescribed assets from 1956 to 1989
Association of Investment Savings in South Africa (ASISA)
The investment management industry represented by the Association of Investment Savings in South Africa (ASISA) firmly supports the view that prescription is not the answer. Their public statement in August 2019[2] outlines the rationale for this:
“The savings and investment industry, as represented by ASISA, has engaged extensively with various relevant parties on the potential impact of “prescribed assets”, including directly with Government Ministers tasked with infrastructure development, via Business Unity South Africa (BUSA) into the National Economic Development and Labour Council (Nedlac), and via the CEO initiative.”
The key points for opposing prescription are:
1. “Prescription of assets interferes with the capital allocation function of the capital markets, which should always be objective and driven by performance. Forcing the market to invest in low yielding and/or high risk projects could have two direct consequences:
- The incentive for these projects to compete would be removed as funding would no longer be incentivised by performance.
- Given that capital is a finite resource, deserving projects could be deprived of funding. These projects that would otherwise have driven growth and created sustainable employment would now not happen anymore.
2. Prescription would have a negative impact on the country’s credit rating. If South Africa loses its investment grade rating [which happened in March 2020], foreign investors, many of whom are pension funds, would be forced to withdraw their money from South Africa. This is something the country can ill afford.”
Futuregrowth’s position on prescribed assets
In recent years, Futuregrowth has been vocal on many non-financial issues (Governance at State-Owned Enterprises (SOEs), JSE Debt Listing requirements etc.) affecting clients’ funds within the capital market, including the matter of prescribed assets.
There is a concern that government may be seeking to make retirement funds instruments of state policy, channelling pension fund capital into certain preferred sectors or instruments while avoiding the discipline of financial markets and fiduciary asset managers, and thereby imposing lower-than-market returns.
Pension funds should be concerned with prescription. It is our collective fiduciary duty to ensure the preservation of capital. The preamble to Regulation 28 states that, “A fund and its agents have a fiduciary duty to act in the best interest of those for whose assets they are responsible. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn them adequate risk adjusted returns for the fund’s member profile, liquidity needs and liabilities".
"Prudent investing should consider any factor, which may materially affect the sustainable long-term performance of their investments, including those of an environmental, social and governance character. This applies across all asset classes and should promote the vested interest of the fund in a stable and transparent environment.” [3]
Futuregrowth believes that prescription is a threat to retirement fund savings and is not the answer to national development. Regulation 28 already creates an enabling environment for South African pension funds to invest in alternative or impact investments as up to 35% of a pension fund can be allocated to unlisted assets. There is sufficient evidence to confirm that pension funds have directed capital into impact funds for more than 20 years, thereby supporting national development according to their risk profile. As a case in point, Futuregrowth manages a total of R48 billion[4] on behalf of clients, invested in a range of developmental impact funds.
Futuregrowth is opposed to prescription since it limits the rights of pension funds to make choices concerning asset allocation, asset selection and risk reward. Apart from undermining the prudence and accountability implied by Regulation 28, prescription may result in funds making investments that may be inappropriate for their specific risk profile. The large-scale channelling of money into ‘preferred’ sectors would likely create an imbalance of investable projects and capital – thus increasing the risk of making losses, which could result in eroding the value of pensions.
In Futuregrowth’s experience, there is sufficient capital in South Africa to fully fund appropriate, well-run, planned, executed and managed projects and companies. Furthermore, the success in funding over R200 billion of power projects (i.e. the REIPPP programme) in eight years, is a testament to the effectiveness of suitably partnering the public sector with the competencies and capital of the private sector. We have a role to play as institutional investors: it is to ensure objective asset allocation and the funding of sustainable and well-run companies.
“In SA capital is not the problem, but rather the capacity to deliver is the issue and finding bankable deals or companies to invest in that are able to generate commercial risk-adjusted returns.” Andrew Canter, Chief Investment Officer
Government (through its departments, SOEs and development finance institutions (DFIs)) has a substantial budget to facilitate national development, and it is not the role of ordinary pensioners to be directly responsible for national development, except through the normal capital investment process. One way pension funds can contribute to development is by partnering with DFIs who receive funding from government to provide subsidised finance to facilitate infrastructure development. By partnering with DFIs, institutional investors can choose how to deploy money on behalf of pension funds and the type of projects they wish to invest in - thereby responsibly targeting an appropriate risk adjusted return to compensate for the related risk.
“Prescribed assets violate property rights”, says Futuregrowth's Andrew Canter.
The investment industry needs to be clear that the right to choose how retirement fund savings will be deployed is a matter of principle, and should be appropriately exercised through fiduciary investment processes. We cannot abdicate responsibility and treat the threat of prescription as somebody else’s fight. Therefore, it is entirely appropriate for the investment industry to engage government on this matter since it could affect the retirement savings of all South African pension fund members. As institutional investors, we have a role and fiduciary responsibility to ensure the preservation of capital on behalf of our clients, by asserting that prescription is a threat, which we believe will erode retirement fund savings.
Note: Part of this article was adapted from an earlier article entitled “Responsible investing and the issue of prescription”, during Nov 2017 by Angelique Kalam: Sustainable Investment Practices and Andrew Canter: Chief Investment Officer at Futuregrowth Asset Management.
PDF version, Pension fund savings can be used to address national development without prescription
[1] The ANC’s dirty dance with your pension by Stephen Cranston, https://www.futuregrowth.co.za/newsroom/the-anc-s-dirty-dance-with-your-pension/
[2] ASISA prescribed assets,
https://www.asisa.org.za/media/gtvmlhco/prescribed-assets-asisasview-20190828.pdf
[3] Regulation 28, http://www.treasury.gov.za/publications/other/Reg28/Reg%2028%20-%20for%20Budget%202011.pdf
[4] Futuregrowth’s total developmental AUM as at 30 September 2020
