The ANC’s economics chief, Enoch Godongwana, says his party is moving away from the idea that prescribed assets be used as a ‘policy tool’, and is instead focusing on changes to Regulation 28 of the Pension Funds Act.
The regulation currently limits the extent to which retirement funds can invest in particular assets or in particular asset classes. The main purpose is to protect the members’ retirement provision from the effects of poorly diversified investment portfolios.
However, financial experts posit that changing Regulation 28 is an unnecessary move.
“While greater clarity and flexibility is always welcome, changing Regulation 28 is probably unnecessary,” said Allan Gray analyst Sandy McGregor.
McGregor said that pension funds are already investing in infrastructure through debt securities issued by parastatals such as Eskom, Transnet, the Trans-Caledon Tunnel Authority (TCTA) and the South African National Roads Agency (Sanral).
“The discussion about changing Regulation 28 is therefore the wrong discussion. The problem is not – nor has it been – the availability of funds, but a lack of suitable projects.”
McGregor said that over the last decade, state institutions tasked with infrastructural development have been crippled by gross mismanagement and endemic corruption.
Most public sector institutions have become uninvestable without a government guarantee, he said.
“By way of contrast, where the private sector was allowed to take the lead, such as in the mobile phone network, renewable energy, commercial property and private housing, there has been significant continuing investment for which finance has been readily available.”
A way forward
McGregor said that the way to get investment going again is to fix the various state institutions involved in infrastructure and give them greater freedom to recruit private sector skills and resources to fulfil their mandates.
“Viable projects can be financed whether it be by banks, pension funds or other savings institutions.
“Usually non-viable projects should not proceed in the first place, but if they are judged to be in the public interest, they should be financed by the state,” he said.
McGregor said that currently Regulation 28 is a prudential and not an economic requirement. He added that the National Treasury and Reserve Bank have long been opposed to subjecting pension funds to prescribed asset regulations.
“Given the shortage of suitable projects, regulations compelling pension funds to hold a proportion of their assets in infrastructure may force them to make inappropriate investments.
“This would be a wasteful application of South Africa’s inadequate savings and have a cost in the form of lower economic growth and reduced pensions.”
Not a free-for-all
McGregor said that the proposed changes to Regulation 28 will not relieve trustees of their fiduciary obligation to ‘act prudently’ in the interests of their fund’s members.
“Following the tabling of the revised 2020/21 Budget, the Minister of Finance said that he favoured changes which facilitate pension fund investment in infrastructure, but there would be no compulsion to do so.
“Subsequently the ANC’s economics chief, Enoch Godongwana, has said the ANC is moving away from the idea that prescribed assets be used as a policy tool; rather it wishes to create an environment in which pension fund trustees can invest in infrastructural projects – provided they are profitable.”
McGregor said that South Africa has annual savings equal to about 15% of GDP and in the present fiscal year a deficit equal to 15% of GDP. Even in the most optimistic projections, state borrowing will crowd the private sector out of capital markets for years to come.
“To get through what are going to be difficult times, we need an efficiently operating capital market, which the Treasury can access as it has in the past. Imposing further complicated regulations on the savings industry would make the difficult task of funding the fiscal deficit even more difficult.”
McGregor said that South Africa has also become notorious for pronouncing grand plans without any subsequent action, “probably because the planners have been too distant from where the real work is done”.
“Certainly the current fiscal situation renders most plans for a greater role of the state in the economy unworkable. However, there are some things which can be done.
“Tapping internationally available concessional finance to reinvigorate parastatals such as Transnet and Sanral would be a good way to start reversing this unhappy narrative. Creating a business-friendly environment which would promote private investment is another.”