Issue: June 2012 / August 2012
Prescription rears its ugly head
ANC discussion documents threaten to aggravate policy uncertainties. The sooner they’re killed, the better.
Ploughing through the two economics documents up for discussion at the ANC’s policy conference in June, you can go quietly mad. So crammed with cliche are the papers – respectively headed ‘State-owned entities and development finance institutions’ and ‘The second transition? Building a national democratic society and the balance of forces in 2012’ -- that what they’re trying to say is, to be kind, confusing.
Nowhere is the term “prescribed assets” actually used. Alarm bells have rung because it’s presumed to be there, between the lines, through an oblique reference to “concessional funding”. Then too, linguistic imagination has lumped pension funds into the category of development-finance institutions.
It would certainly be helpful for conference delegates to extract a ‘yes’ or ‘no’ from the anonymous drafters of these documents to a basic question. It’s whether prescribed assets, recommended in neither the New Growth Path (under minister Ebrahim Patel) nor the National Development Plan (under minister Trevor Manuel), are now on the table.
If they are, their meaning isn’t spelled out; at least, not in the sense that “prescribed assets” are understood. They’re a poach on the savings of retirement-fund members and life-assurance policyholders, causing reductions in their benefits and payouts.
It’s similar to imposition of a selective and discriminatory tax, reducing the relative attractions of these vital collective-investment vehicles and thus contradicting their government-sponsored incentives to save. It also conflicts with comments by Finance Minister Pravin Gordan, in his 2012 Budget speech, about SA’s “deep and liquid capital markets through which long-term capital can be raised at competitive rates”.
Arbitrary proportions of fund assets only need prescription when they’re wanted by bureaucrats for investment offerings lower than competitive market rates. Were millions of pension-fund members to realise that the upshot is less money for them on cashing in, resistance might reach e-tolling intensity. Just as well that few understand and none are asked.
Investments at market-competitive rates don’t need prescription. Job creation and infrastructure development require capital. The surest way to waste it is for the state, freed of market disciplines, to appropriate and allocate it. That much is recognised. “Challenges are observed with regard to the capacity of the state to provide effective oversight on the entities which they own,” admits one document.
Delivery, not money, is the problem. In the 2010-11 fiscal, R260bn was planned for infrastructure development. Only R178bn was spent. That’s a mere 68% of the budgeted allocation, worsened by long delays and cost over-runs in implementation. “We are aware of several weaknesses in the state’s infrastructure capacity”, Gordhan noted.
As a rule, long-term savings vehicles are substantially invested in mixes of government and government-backed borrowings. Prudence, not prescription, requires it. Some pension funds hold these bonds more heavily than others, depending on their risk and member profiles; some are more focused on one type than another, depending on thought-through assessments for portfolio diversification and yield objectives.
Go read Regulation 28 of the Pension Funds Act, which sets out the guidelines for asset diversification to reduce risk. Or the revised Financial Sector Charter, which obligates “targeted investment” in infrastructure. Or the Code for Responsible Investing, binding on its institutional signatories, which highlights the importance of social impacts.
Why then promote interventionism when voluntarism works?
Take the Government Employees Pension Fund, the paragon of long-term “sustainable” investment. With a R900bn-plus portfolio, its infrastructure investments are spread across a variety of instruments representing 21% of SA’s R160bn total bond market (over a third of government debt being owned by foreigners, always able to vote with their feet).
Domestic bond holdings are capped at 36% of the GEPF’s portfolio, inclusive of such state-owned enterprises as Eskom, Transnet, Telkom, and the Development Bank. This percentage is on the high side of most private-sector pension funds. Unlike the GEPF, which is not subject to the Pension Funds Act, these are overwhelmingly defined-contribution funds where members bear the investment risk.
They incline to heavier weightings in equities that historically are better inflation hedges than fixed-interest securities. Let it be noted, almost in passing, that equities investment precludes neither job creation nor sustainability considerations. To grow, companies are right up there in the competition for capital.
Although it’s expected of the huge GEPF that it will take the lead in pension funds’ support of government’s R3,2 trillion infrastructure programme – with R845bn approved and budgeted for the medium-term – the GEPF is a defined-benefit fund. In theory, and to be hoped not in practice, government as the employer would need to top up any shortfall in benefits promised to the fund’s 1,2 contributing members and 330 000 pensioners.
That the bill comes back to taxpayers, in the event that the GEPF cannot honour its promise from investment performance, is not a cushion to which defined-contribution funds in the private sector are entitled. They’re on their own. Should there be prescribed assets, by definition and intention they’ll get lower returns.
Even for the GEPF, lower returns aren’t an option. It seeks to earn a real (after-inflation) return of at least 3% annually “in line with our belief that a developmental approach should not compromise returns”. It also recognises that increasing investment in infrastructure “provides both diversification benefits and excellent long-term returns”.
It’s a matter of balance and judgment, for defined-benefit and defined-contribution funds alike. It’s not for state decree to override the fiduciary responsibility of pension-fund trustees.
Infrastructure investment is eminently suitable for pension funds, and not only in such admired “developmental states” as Brazil. Recently in the UK, the Treasury and National Association of Pension Funds agreed to establish a vehicle that will facilitate investment by smaller funds directly into infrastructure. Even before the financial crisis hit in 2008, the UK’s listed infrastructure sector considerably outperformed the FTSE all-share index (TT March-May ’12).
Direct investment in projects is nothing new. In SA, it’s commonly undertaken by larger pension funds in bricks-and-mortar properties which provide them with inflation-linked and predictable returns that are secure over many years. Unlike the price volatility of equities and bonds, it helps them further to diversify risk.
Gordhan has already identified the means to fund SA’s infrastructure projects. These include the fiscus meeting the cost of public-service facilities such as schools and hospitals; public entities such as Eskom and Transnet being financed by internally-generated surpluses and borrowing from the capital market; a mix of tax finance and cost recovery, for instance on commuter transport; and by the private sector, for instance in telecommunications. Of course, there are also numerous public-private partnerships that work.
Contrast sensible convention with ideological thinking, if that’s not an oxymoron, in the ANC discussion documents. To Illustrate:
Broadly, says one of the documents, the question expecting an answer at the policy conference is: “What role should SOEs and DFIs play to underpin the role of the state in directing national economic development through the mobilisation of domestic and foreign capital and other social capital formation initiatives or partnerships to achieve our stated goals?”
Actually, it’s easy to answer. Politically, maybe it isn’t.