Issue: March 2012 / May 2012
Editorials

INFRASTRUCTURE

Zoom from Zuma

Pension funds can play a most useful role in helping to finance the developmental priorities he’s identified. They should be enticed, not forced.

When the Head of State speaks, promises to spend billions of rand roll easily from the tongue. But when the Minister of Finance speaks, as he does in the Budget Speech (due for delivery shortly after this article was completed), specifics become available for scrutiny: how much will derive from tax revenues, how much from borrowings, how much “new money” will be tapped from where, as well as the spending targets and timescales.

In this year’s State of the Nation address, President Jacob Zuma earned plaudits for his focus on infrastructure development. A few hundred billion here, a couple of hundred billion there, all in the essential cause of job creation and backlogs elimination; not to mention the necessary advances in transport, water, electricity and other infrastructural capacity.

The vision is huge. So too is the potential for private-sector participation, without which it cannot succeed. At least two forms of participation are open.

One is through public-private partnerships, already with proven successes to show. Another is through investment by pension funds, politically sitting ducks when challenged on their preference for say luxury shopping malls rather than low-income housing.

A blunt instrument would be reintroduction of prescribed assets, meaning that government would grab a slug from pension funds at rates lower than market. Judging by the New Growth Path and National Development Plan, this appears to be off the table. Fortunately, for in effect prescribeds are a discriminatory tax.

They reduce the returns of pension funds to members, diminishing the attractiveness of saving through them and possibly also such other vehicles as retirement annuities. They also divert a pot of money for the state to use at its discretion, wastefully or otherwise, and can increase government borrowings to the point of adversely affecting SA’s sovereign-credit rating.

Against this, direct investment in infrastructure can be highly attractive for pension funds because it can provide them with inflation-linked and predictable returns over many years. In addition, unlike price volatility of equities and bonds, it can help funds to diversify their risk. There’s a match in the long-term duration of infrastructure investment with the long-term horizon of pension funds. That, at any rate, is the benign theory.

The practice isn’t as easy, mainly because it’s only the big pension funds that can employ the expertise to identify profitable opportunities. Without this, they can bomb.

Take the Government Employees Pension Fund, by far SA’s largest. Sitting on almost R1 trillion, its strategic asset allocation is to set aside 5% of the fund’s portfolio for investing in developmental projects (mostly infrastructure in SA) and a further 5% for elsewhere in Africa. The long-term investments already made, says the GEPF, “are already beginning to have financial and social impacts”.

There is similar precedent elsewhere. For instance, the Ontario Teachers’ Pension Plan in Canada and the Australian superannuation schemes buy direct stakes and invest in both the equity and debt of infrastructure projects and companies. Competition for their money is reflected in rates and returns, often better than the driven-down yields on gilts and equally secure.

But what of pension funds smaller than the mighty GEPF?

Late last year, the UK Treasury entered a memorandum of understanding with the National Association of Pension Funds and the Pension Protection Fund. The NAPF represents public and private scheme members with 800bn in assets, and the PPF has assets of more than 6bn. The purpose of the memorandum is to establish a platform that will promote infrastructure investment by pension funds.

“They need a simpler financial vehicle that helps them to get on board with bricks and mortar,” NAPF chief executive Joanne Segars explained to the Financial Times. “The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked long-term investments. This could be a win-win.”

Funds that had invested in infrastructure have done particularly well (see graphs), especially when compared with equities. The simple point is that, carefully considered, investment in infrastructure can offer pension funds the superior risk-adjusted returns to keep up with inflation and meet rising liabilities.

The UK attempts to embrace all pension funds, not only the larger, is well worth watching for SA relevance. More’s the pity, however, the SA lacks a NAPF-type representative body that speaks for the pension funds themselves.