ANC plan to use pension money to fund Eskom and Transnet

The ANC’s election manifesto wants to revive an apartheid-era policy compelling pension funds to invest in government-approved investments.

It states it will “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy through prescribed assets”.

Prescribed assets force retirement funds to allocate a percentage of their assets to certain government-approved instruments.

It was first created in 1956 to force retirement funds to invest around half of their assets in South African government and parastatal bonds.

The level of prescriptions rose for two decades and peaked in 1977. After that, it tapered off before being scrapped in 1989.

The government faces severe financial problems with rising debt and increasing expenses. State-owned enterprises are in a particularly dismal financial position.

The ruling party wants to revive prescribed assets to gain access to pension funds to resolve some of the government’s funding challenges.

Zuko Godlimpi, deputy chair of the ANC’s economic transformation committee, said they would start investigating the possibility of reviving prescribed assets immediately after the election.

However, the plan has been widely criticised, with many investment specialists warning it can harm returns.

Mandated investments and limitations on investment choices typically result in suboptimal decisions and returns for pension funds.

Old Mutual highlighted that the main objection to prescribed assets is that they usually apply to investments without sufficient demand or merit.

“If the assets had sufficient investment merits, there would be no need to prescribe them,” Old Mutual said.

Nominating an instrument as a prescribed asset invariably creates artificial demand for it which would not have existed in an open market.

If the instrument is narrowly defined and supply is limited or controlled, the price of the instrument is likely to rise.

“From an investment point of view, and all things being equal, a higher price implies lower expected future returns,” Old Mutual said.

At the same time, the prescribed asset will be assured of investment flows, which limits the incentive to deliver competitive returns to investors.

“If it is an entity like a state-owned enterprise (SOE), the incentive to ensure that it is well-run and delivers a decent investment return will also be curtailed,” it said.

The Helen Suzman Foundation warned that prescribed assets could have a very real negative impact on financial institutions and the economy as a whole.

“Imposing investment allocations and ignoring market signals that call for proper governance of SOEs will not help to incentivise public officials to improve their performance,” it said.

Instead of prescribed assets, experts advised the government to create a stable business environment to attract investment.

No need to panic

Experts highlighted that the ANC’s proposal does not yet reflect the government’s position and has not gone through the necessary legislative processes.

That means prescribed assets are not on the table and must go through many legal processes and consultations before becoming law.

Old Mutual Wealth investment strategist Izak Odendaal said this plan is unlikely to be implemented and will not achieve its ambitious targets.

He said the ANC’s prescribed assets proposal will take years to implement and will not help the government boost the economy.

Odendaal added that the ANC worded the proposal vaguely, making it hard to know its exact intentions.

Furthermore, it does not seem to be a priority. “There will be lengthy consultations with the asset management sector prior to implementation,” he said

This is not the first time the government has been down this road of investigating the use of prescriptions.

Instead, South Africa ended up with changes to Regulation 28 that facilitated greater investment by pension funds into infrastructure.

He said it might be changed from an allowance to a compulsory investment, but it seems unlikely.

“The problem isn’t that there isn’t enough money to fund infrastructure. The problem is that there aren’t enough bankable projects for the private sector to invest in,” he said.

“Even if it becomes compulsory, it is likely to be small, perhaps 5% or so.”