Edition: April/June 2019
ABC of prescribed assets
Momentum Investments head of strategy Rowan Burger believes
it’s important to distinguish between ANC policy proposals, actual
government policy and the regulators tasked with implementation.
When there are tax benefits for investing in retirement vehicles (pension, provident, preservation and retirement-annuity funds), government feels that it is entitled to apply certain restrictions to the underlying investment exposures to ensure their policy intentions are delivered. These are primarily to ensure a long-term investment horizon (no gearing) and diversification (restrictions on the maximum exposure to assets to avoid concentration) to deliver a prudent investment outcome.
Many people will be familiar with these restrictions, 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 pension-fund investment into certain asset classes. This would allow it to direct investment into certain government projects or to help fund ailing state-owned enterprises.
Why does this affect me?
Other than government employees, most South Africans are invested in defined-contribution 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 is 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 real returns by (20% x 5%) 1% a year. While this may not sound like much, compounding it over a working lifetime of 40 years leads to an end pension 30% less than what it could have been (or half the value in the case of a lump sum for this period).
Has this been done before?
When SA was a pariah state under the National Party in the mid-1980s and could not enter international capital markets, a large allocation was required of pension funds to invest in government bonds. In those days funds were defined benefit. It meant that the retirement benefit was fixed and corporates had to pay higher contributions to funds to compensate for lower returns.
This situation has now changed. Individuals will bear the consequence of a restricted investment opportunity.
Why is there this proposal?
A number of asset managers have refused to fund certain parastatals, where there have been governance concerns, as well as other infrastructure projects where there are social and environmental concerns. The lack of support and feeling that the private sector would be dictating terms to government is probably a key driver behind the prescribed-assets proposal in the election manifesto.
Is there a lack of support for government initiatives?
No. Existing pension funds have many investments in programmes 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.
In fact, ASISA (the industry body representing asset managers and life insurance companies) has committed to actively creating public/private partnerships with government and supporting these 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.
As another example, we are currently working as an industry to find ways to improve water provision using pension monies. Momentum is an active participant in the conversations and investments.
Are prescribed assets likely to be implemented?
The proposal has been ANC policy for some time. In previous manifestos, policy was more strongly worded in terms of directing retirement outcomes with proposals for a compulsory national pension fund. On many occasions, the private-sector industry has engaged with regulators on this matter. General agreement has been that prescribed assets would not be a desirable outcome. As the latest proposal suggests a discussion rather than firm policy, turned down in the past, it is less likely to become a reality.
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 – already put to it by the regulators – that will keep money invested in pension funds.
This large pot would create an attractive opportunity set for government to partner with the private sector to build these infrastructure projects. Equally, the levels of oversight of certain investments have led to better outcomes for SA because of the activism that the asset managers apply.