What does this mean for pension funds?
The issue of prescribed assets is raised every so often as a potential means of channelling retirement fund members’ savings towards meeting national developmental objectives.
The concept of prescribed assets would require pension funds to invest a set amount of their funds in instruments such as government or SOE bonds, or possibly specific projects or sectors deemed “developmental” by government. In recent months there has been increased news flow indicating that prescribed assets continue to be a topic of debate in government circles.
There is pension industry concern that government may be seeking to make retirement funds instruments of state policy, channelling investor 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.
Why should pension funds be concerned with this issue? The preamble to Regulation 28 states that “a fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets... This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities.”[1]
The pension industry would naturally be opposed to prescription since it limits the rights of pension funds when it comes to making 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 which may be inappropriate for their specific risk profile. The large scale channelling of funds toward ‘preferred’ sectors would likely create an imbalance of investable projects and money – thus increasing the risk of making losses which could result in eroding the value of pensions. What’s more, while the government has been seeking to promote savings, it is likely that tampering with retirement fund investments will be seen as a threat, and may reduce the willingness of members to save for retirement.
In Futuregrowth’s experience there is sufficient capital in South Africa to fully fund appropriate, well-conceived, planned, executed and managed projects. The success in funding over R200 billion of power projects (i.e. the REIPP programme) in a mere three years is testament to the effectiveness of suitably partnering the public sector with the competencies and capital of the private sector. Prescription would fly in the face of those strengths, and likely politicise investment decision processes.
Government (through its departments, SOEs and 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 development finance institutions (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 their money and the type of projects they wish to invest in - thereby responsibly targeting an appropriate risk adjusted return to compensate for the related risk.
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. It is entirely fitting for the investment industry to engage government on this matter. We cannot abdicate responsibility and treat the threat of prescription as somebody else’s fight. It could affect the retirement savings of all South African pension fund members.
[1] Regulation 28 of the Pension Funds Act
