Edition: Sept / Nov 2017
Funds aren't fun
They face myriad hardships that defy exaggeration. The climate to stimulate savings grows colder by the day.
SA retirement funds are stuck in a
quicksand. The tax incentives to save
through these vehicles are obliterated by
disincentives outside the funds’ control.
For topical evidence, look no further than the
attempt in July by fresh finance minister Malusi
Gigaba to start building trust in his policy intentions.
At best, the attempt offers hints of structural reform to
waylay a ratings downgrade and worsening recession.
At least, trust can only improve when trust in his boss
comes off the lowest base imaginable.
Then contrast his efforts with the ANC national
policy conference. Marked by divisiveness in
leadership and evasiveness on corruption, little respite
was offered to the confidence-sapping damage of a
one-way economic trajectory. Party policy and fiscal
policy are joined at the hip.
Most obviously, people save when they can afford
to save. Such are the levels of consumer indebtedness,
as survey after survey makes plain, affordability is
subordinated to debt repayments. Where saving is
mandatory, as through occupational retirement funds,
it’s undermined by the propensity for premature
Short-termism is nationally pervasive in the
behaviour of consumer and government alike. The one
infects the other.
Also obviously, people save when they foresee
better reward in saving than in not saving. It’s well and
good to haul out historical records, which demonstrate
the advantages in starting early and staying the
distance, but these days they’re a silver lining to the
dark cloud of SA’s political economy.
Riddled by uncertainties and unpredictabilities,
differing mainly in shades of negativity, retirement
funding cannot be viewed in an isolated silo. Much as
a potent element within the government hierarchy is
philosophically averse to markets, yet paradoxically
hoping to draw investors, it’s unavoidably at the mercy
To behave in denial is to choke off prospects
for economic growth, worsened by redistribution
without prosperity. One consequence is to diminish
the potential for inflation-beating returns that are the
predominant reason to attract long-term savings in the
|Zuma casts a long shadow. . .
The advance of policy formulation around the
vocabulary of a “developmental state” bristles with self-defeating
ambiguities, hostile to markets and hence to
investors. The neglect to attack wasteful spending, and
worse, make the rhetoric to redress “unemployment,
inequality and poverty” more propagandistic than
pragmatic. Victims are as much the poor as the middle
An era of subdued returns, already embedded,
looms for retirement funds. They’ll increasingly
chase rand-hedge stocks, that aren’t in the forefront of
domestic job creation, for fears that currency weakness
will be accelerated by the mooted government
interference with such SA institutional strengths as
property rights and Reserve Bank inflation targeting.
Portfolio flows from abroad have helped to
sustain JSE equity and bond indices. But their relative
buoyancy (merely to have held at 2015 levels) is
deceptive because it disguises, rather than reflects, the
dangerously low levels of domestic fixed investment
and real economic activity that in turn rely on savings.
Specifically in the environment of retirement funds:
- Foreign investment into local equities and bonds
can turn off as quickly as a tap, and reverse as into
a drain. Should it happen, there’d be no place to
hide. Investment returns will rapidly take a beating,
hurting the funds’ millions of members in terms of
benefits. Current debates on fees and strategies will
pale against the strain on fund managers to reach
performance targets. Feel pity for trustees having to
- To date, SA has been spared the worst of junk
status by the rating of the local currency being held
at investment grade. Were the next move to be a
full-blown downgrade of SA’s sovereign debt to
sub-investment status – perhaps more likely than
not, given the contradictions and confusions from a
factious Zuma government – an immediate impact
would be the algorithmic flight from SA capital
markets, driven by exclusion from key emerging-market
indices, to the detriment of the rand and
the economy as a whole;
- The revised mining charter, if implemented against
severe contestation, will uproot the local mining
industry that has traditionally been a mainstay of
- Retirement-fund reform has stalled. The sackings
of Pravin Gordhan and Mcebesi Jonas from the
finance ministry have left it without a champion.
Their replacements, respectively Malusi Gigaba
and Sfiso Buthelezi (also chairman of the
Public Investment Corporation), have other
preoccupations in the Gupta morass;
- It leaves mandatory preservation up in the air.
Retirement funds thus remain a misnomer where
they’re accessible conduits for lifestyle exigencies
- In the offing is a national social security fund
underpinned by the “solidarity” principle, a politely
social way of saying that private-sector retirement
funds are to be squeezed. Not much to stimulate
RAs and the rest there then. The funding of a
national health insurance scheme, which the state
cannot afford, also awaits;
- Regulation 28, which provides prudential
guidelines under the Pension Funds Act for asset
allocations, has become obtuse. Funds cannot
adhere to its requirement for investing with due
regard to governance factors while simultaneously
Zuma casts a long shadow
Today’s Trustee September/November 2017 5
investing in corruption-shrouded parastatals. If
the funds steer clear, to comply with Reg 28, the
Eskoms and Transnets will have a problem. From
where will they get the money to continue their
- Predictably, the ogre of prescribed assets again
rears. Coming out of the ANC policy conference,
it’s a proposal to be investigated with such other
investor inanities as nationalisation of the Reserve
Before the proposed investigation gets ahead of itself,
certain fundamentals must come to the fore:
- Prescribed assets are an admission of failure,
screaming a message to the world that the issuers of
government and government-backed debt cannot
compete fairly for support;
- By definition, being at below-market rates,
prescribeds represent subsidies. For every subsidy
granted, there must be a grantor. Here, it’s
retirement funds where the ultimate grantor is fund
members at their cost;
- Receipt of loans by compulsion is an invitation
to abuse. Market disciplines, for governance and
accountability, are stymied;
- Prescribeds are a selective taxation by stealth.
They can only reduce the returns on retirement
funds’ investments and hence on their members’
benefits. They further contradict government’s
putative aim to enhance the attractiveness of saving
through retirement vehicles.
Low economic growth plays out in low investment returns and low tax revenues. The cocktail mix is explosive.
Many thousands of more fortunate pensioners, which people hope that they’ll be someday, hold living-annuity policies. To the extent that investment returns on their policies can’t keep pace with inflation over the period of post-retirement longevity, or to the extent that their drawdowns have enabled reasonably comfortable retirements in earlier years, the risk is that they'll run out of capital faster than they'd planned.
Without sustenance from benefactors, they’ll have to rely on meagre social security grants. Which is where the second problem arises. Low tax revenues constrain the ability of the state to adjust the grants in line with inflation, let alone to provide for the ever-swelling number of jobless claimants for grants in a low-growth economy.
The arithmetic between more joblessness (fewer taxpayers) and more grant recipients (bigger funding) doesn’t align. As the Institute of Race Relations has pointed out, it's a "recipe for social and political chaos".
Throw into this mix the difference between
defined-benefit funds in the public sector and defined-contribution
funds in the private sector. Subjecting
them equally to a regime of prescribed assets will cause
unequal treatment for respective members, those in
the public sector enjoying a protection from employers
unavailable to employees in the private.
SA’s previous experience with prescribed assets was
during the later years of National Party administration.
In the pullback of foreign investment, it was regulated
that retirement funds invest a proportion of their
assets (touching 50% at one stage), mainly in RSA
bonds and Eskom stock. Fund returns were brutally
If only the implications for the future and the
lessons from the past were to sink in. If only the
representatives of retirement funds rallied their
members in common cause with trade unions. If only.
Nonsenses emanating from the Zuma government
wouldn’t stand a chance.