Issue: Mar/May 2011
Editorials

NEW GROWTH PATH

Decent job done

Where government wants to go, financial institutions and retirement funds are already going. There's a happy convergence, although there might be potholes.

In the frenzy of national debate, consensus can be an achieved. Such an achievement is in the New Growth Path introduced by Economic Development Minister Ebrahim Patel, erstwhile champion of prescribed assets for retirement funds. The achievement is that nowhere does the NGP refer even obliquely to prescribeds.

Just as well. For too long has it obsessed retirement funds, fearful that the state appropriating a chunk of their assets would diminish returns for members. Rest in peace, prescribeds, and farewell to the market-undisciplined investments that they would have provoked.

That's at face value. It doesn't necessarily follow that retirement funds are entirely off the hook.

Endorsing the NGP in his State of the Nation address, President Zuma mentioned that a government paper on social-security reform would be released this year for discussion; yet more discussion, because the first discussion paper was released by National Treasury in 2004. Fresh drafts have floated between National Treasury and Social Development, with constant inputs from the private sector, ever since

What's now happening is intervention of the Economic Development and Labour departments as well. The paper to be released, Zuma noted within the NGP's job-creation theme, will focus on issues that include how private-sector retirement funds will fit into a new regulatory structure.

Zuma announced economic measures of R39bn to stimulate transformation and growth, inclusive of R20bn in allowances and tax breaks for job creation. Patel says that, to meet the objective of 5m new jobs within the next 10 years (perhaps still insufficient to accommodate the floods of school-leavers and immigrants annually entering the job market), more measures are to come

The problem can be resolved only partially by throwing money at it. But the tax base isn't a bottomless trove, and Patel's unwavering infatuation with statism doesn't sync with the record of poorly-capacitated state organs using the money any better than they have in the past.

To the bones of noble intentions must be added the flesh of hard money. This awaits the 2011-12 Budget of Finance Minister Pravin Gordhan (due as TT went to press). The report of the national planning commission, chaired by Minister in the Presidency Trevor Manuel, is still awaited too.

The NGP does say that government will look to ways that it "can mobilise resources from retirement funds". It singles out the Government Employees Pension Fund.

Patel

Patel . . . nothing on prescription

Bear in mind, though, that the GEPF is a defined-benefit fund. As the employer, government is responsible for payment of promised benefits defined upfront. Thus any shortfall between the fund's returns and its promise to members is for the account of taxpayers. Were the proposed development bond to be forced on the GEPF, at a rate that it considers too low for it to meet its liabilities, government would merely be taking with the one hand and having to give back with the other.

The overwhelming majority of SA fund members are less fortunate. Being in defined-contribution arrangements, they're at risk. Thus fund trustees' discretion to subscribe for a development bond would turn on their fiduciary duty, related to the purposes of the bond and the return it offers, unless a sinister plan to resuscitate prescribeds under another name is in the wings.

There's no need for this to happen. Initiatives recently or soon to be launched are market-friendly and market-driven, promising consistency with NGP objectives and bristling with job-creation implications:

  • The revived Financial Sector Charter, reached by negotiation with financial institutions. It provides for "equity equivalents" and "targeted investments". The former means that, as an alternative to pushing direct black ownership from 15% to 25%, institutions will devote significant assets to finance enterprise development and the like. The latter relates to financing of infrastructure projects in a wide range of sectors. Minimum goals, underpinned by gazetting of the charter, are clearly set out;
  • The redrafted Regulation 28, to apply once National Treasury has considered public comments. It offers prudential guidelines for retirement funds' investments. In the old version, socially-responsible investment was viewed as a separate asset class in the "other" category, with minimal exposure permitted. In the new, there's nothing explicit about SRI. Instead, and much better, principles of environmental, social and governance (ESG) criteria are in the mainstream across all asset classes. In their investment policy statements, funds will have to say what they mean by ESG and disclose how they apply it. This in itself will force trustees to think through ESG – the necessary starting point – while opening up unlisted securities for investment will similarly challenge trustees to evaluate opportunities beyond their conventional favourites.
  • The imminent Code for Responsible Investing in SA, for adoption mainly by asset managers. A core principle is that institutional investors incorporate ESG considerations into their investment analyses and activities "as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries" (TT Oct '10-Jan'11). Note how carefully this has been crafted: ESG does not imply diminished returns for fund members who're the ultimate beneficiaries of the investments; in fact, it's the opposite because securities that don't meet ESG criteria and don't offer the prospect of superior risk-adjusted returns needn't be bought. The concept of long-term "sustainability", in the case of companies and for the sake of the country, comes up against the knee-jerk devotion to selected gilts and high-liquidity JSE shares.

In a nutshell, they imply a wider range of institutional investment. Directly, and through the asset managers representing them, trustees of retirement funds are stimulated to explore alternatives less subject to market volatilities and more likely to enrich society. This might be anywhere from infrastructure development of transport and agriculture to projects supporting smaller businesses and rural communities, all being catalytic in fostering job creation.

The beauty of it is in a concept of public-private partnership switching from the idealistic to the realistic. For instance, the success of a government bond issue will depend on its market acceptance. Compulsion is out of the equation. Similarly, retirement funds and their mandated institutions have greater leeway to swing their weight behind initiatives that promise positive social and environmental impacts.

It's been a long time coming, ever since the idea of government targeting "5% of investable assets" originated at the Growth & Development Summit in 2003. Spurred by organised labour and the SA Communist Party, vociferous in their dissatisfaction with "imbalanced investment" in the economy, prescribed assets were punted. But problems with this approach were soon identified. Amongst them:

  • The arbitrariness of 5%;
  • What was meant by "investable assets";
  • Which institutions, other than pension funds, would be affected;
  • Why pension funds should be forced to accept lower returns;
  • Who would decide on the sectors and projects for investment;
  • Whether policy objectives of the state would mesh with private-sector preferences and investment requirements.

What's now emerged is an elegant solution. What now remains is to make it work.

THOSE ELUSIVE SAVINGS

One way or another, at the end of the day grand projects must be financed by tax or savings. Governance has much to say about tax. It has little to say about savings. In his State of the Nation address, President Zuma didn't even mention it.

He did, of course, say a lot about the need to create decent jobs. So too does the New Growth Path. It at least recognises that SA relies on borrowings form abroad to sustain its spending because domestic savings "remained below the levels required for sustained growth" i.e. the prerequisite for job creation. What then does the NGP propose to improve the level of domestic savings?

Lots of things:

  • "To achieve profound changes in the structure of savings ... government must steadily and consistently pursue key policies ..."
  • "Stakeholder commitments require a national consensus on ... savings in order to ensure a significant increase in the number of jobs ..."
  • "Mechanisms to reduce the cost of capital for the job drivers would involve mobilising savings around developmental investments ..."
  • "To improve levels of private savings ... government will build on existing progress in discussions ..."
  • "Personal savings would be improved through proposed changes in the structure and regulation of retirement funds ..."
  • "EDD (Economic Development Department) will work with Labour, Social Development and Treasury to enhance personal and community savings through appropriate combinations of incentives, including retirement fund reforms ..."

So what else is new?