Government unlikely to target South Africa’s retirement funds

The Association for Savings and Investment South Africa (ASISA) says that government is unlikely to force retirement funds to invest in specific projects through prescribed assets.

Leon Campher, chief executive of ASISA, said that in recent months the various National Economic Development and Labour Council (Nedlac) partners, namely government, labour, business and community, tabled their economic recovery plans and not a single one mentioned the prescription of assets as a possible solution.

“It needs to be noted that not even the ANC discussion document on economic recovery mentioned prescription of assets as an option that should be considered,” said Campher.

He added that proposals to amend Regulation 28 of the Pension Fund Act to include a separate category for retirement funds to invest in infrastructure assets does not equate to ‘prescription’.

The association, which represents the collective interests of the country’s asset managers, said that it has repeatedly made it clear that its members are opposed to the prescription of assets, it does not believe that there is an imminent threat of this happening. “The fact that we do not believe that there is an imminent threat does not equate to ignorance,” it said.

ASISA addressed some of the main concerns around prescribed assets. It noted that asset managers are not the owners of the assets that could be prescribed. The bulk of the assets that could be prescribed are owned by the retirement fund on behalf of its members.

“It also needs to be noted that roughly half of these assets are held by the Government Employees Pension Fund (GEPF), which is a defined benefit fund. These assets would therefore need to be carefully managed to ensure that there are sufficient funds to cover liabilities, namely the benefits payable to public servants on retirement,” the association said.

All retirement funds have a board of trustees (50% of the trustees are elected by members). Retirement fund trustees are tasked with making asset allocation decisions that are in the best interest of the members, ASISA said.

The trustees in turn consult with asset consultants before appointing asset managers to invest in line with a mandate from the retirement fund. This mandate from the trustees determines the asset classes that a fund can be exposed to, which must comply with Regulation 28 of the Pension Funds Act.

“Retirement funds have an important role to play in the development of any country through their investments. For this reason, pension funds worldwide invest in real assets.

“ASISA has always maintained that the problem in South Africa is not the lack of willingness of capital markets to invest, but rather the absence of viable infrastructure projects. Where there have been viable projects, funding has been made available by the private sector.”

A good example is the Independent Power Producer (IPP) Project, which attracted funding in excess of R200 billion from the private sector, it said.

ASISA said it has engaged extensively on the issue of prescribed assets with the appropriate stakeholders in government to create awareness of the risks associated with prescription of assets.

Regulation 28

Regulation 28 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.

ASISA said that since 2011, Regulation 28 has permitted retirement fund to invest up to 35% of their portfolios in unlisted assets within the following limitations:

  • Up to 10% in unlisted equity;
  • Up to 25% of debt instruments listed on an exchange by a company without listed equity and 15% if the debt instrument is not listed;
  • Up to 10% in private equity; and
  • Up to 2.5% in “other” assets.

Campher said that ASISA is of the view that the above limits do not prevent increased investment in infrastructure.

He said that the following considerations have been raised with National Treasury for further discussion:

  • Since investable retirement fund assets belong to members, infrastructure projects must offer a competitive risk adjusted return;
  • Since provident funds by their contractual design have a need for more liquid investments, listed and liquid project bonds would make it easier for them to invest in infrastructure;
  • Infrastructure projects tend to be unlisted. Direct infrastructure investing is best suited to large defined benefit funds. However, the largest defined benefit retirement funds namely the Government Employees Pension Fund (GEPF), Transnet Pension and Provident Funds, and the Telkom Pension Fund, are not regulated by the Pensions Funds Act and so are not subject to Regulation 28;
  • A pipeline of viable infrastructure projects with contractually reliable sources of income must be available, which is currently not the case.

Campher said that retirement funds are not the only investors in infrastructure projects.

He said that seed funding for infrastructure projects is generally provided by the banks and development finance institutions (DFIs), who take their return and exit once a project is up and running.

If the project is viable and attractive, life insurers and other investors come in by buying equity and providing additional loan capital to replace the money provided by the banks.


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Government unlikely to target South Africa’s retirement funds