Edition: Sept / Nov 2017
Editorials

FIRST WORD

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 withdrawals.

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 of them.

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 first place.

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 classes.

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 explain it;
  • 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 fund portfolios;
  • 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 and aspirations;
  • 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 operations?
  • 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 Bank.

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.

Poor Outcomes

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 hammered.

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.

Allan Greenblo,
Editorial Director