Government doubles down on tapping into pension funds

 ·18 Jul 2024

The South African government is weighing its options regarding revising legislation to allow it to tap into pension funds and other asset managers to fund industrial policy projects.

However, some have expressed concern that if not done correctly, investor assets could suffer the same fate as some of the country’s mismanaged state-owned enterprises (SOEs).

In an interview with Business Day on 17 July, Parks Tau, Minister of the Department of Trade, Industry and Competition (DTIC), said that the government recently tabled a proposal to amend regulation 28 of the Pension Funds Act.

Regulation 28 of the Pension Funds Act sets limits on pension funds and life insurers’ investments in assets like property, government bonds, and stocks but does not currently mandate minimum investments in these areas.

Adjusting these caps and diversifying investments could significantly boost capital in key sectors of South Africa’s industrial policy.

The pension fund industry holds over R4 trillion, with a significant portion of this managed by the state’s Public Investment Corporation, which oversees more than half of these assets.

Tau said that this proposal is part of a “comprehensive suite of regulatory tools and mechanisms” to facilitate industrialisation.

This move could open the door to trillions of rand in retirement savings for earmarked sectors as part of the Industrial Policy, he said.

The proposed change comes amid various fiscal constraints, which are set to be exacerbated by spending pressure from National Health Insurance and possible basic income grants and other social development initiatives.

“Currently, we are putting on the table possible considerations, but these would have to be processed on the basis of a comprehensive review and implementation mechanisms,” Tau said.

In June 2019, the previous administration, also under President Cyril Ramaphosa, launched an Industrial Strategy. This strategy established a foundation for policies on localisation, trade, and competition and focused on industrialisation in hopes of turning around a battered economy.

One of the DTIC’s identified policies is “promoting industrialisation opportunities to ensure that South Africa can develop security of supply of components and create jobs in the process,” as per the department’s May 2024 Industrial Policy.

“An apex priority for this administration is taking into account the levels of growth or limited growth that we’ve had as a country and the need to accelerate economic growth transformation and job creation,” said Tau.

DTIC minister Parks Tau. Photo: GCIS

“Our agenda would be informed by placing industrial policy as the centrepiece of economic policy in the country; it is about ensuring that we drive programmes of industrialisation and reindustrialisation,” added the minister.

The DTIC has allocated 70% of its R30.1 billion budget for 2024/25 to investment incentives, sector support programmes, and localisation and transformation efforts.

The review published by Tau’s predecessor highlighted the importance of prioritising rapid expansion of infrastructure spending for the new administration.

It recommends increasing investment levels to at least R400 billion to R500 billion annually, up from the previous total of R100 billion and involves both private and public sector resources.

This sparked the DTIC’s need to look for new sources of capital.

Not everyone thinks it is a great idea

Prescribing assets is one of the headline economic policies in the ANC’s 2024 election manifesto. It is an apartheid-era rule that requires pension funds and assets to be invested in government.

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.

Some in the pension industry have expressed strong concerns over the reintroduction of prescribed assets, fearing that the funds may be threatened. This highlights the risks posed by investment in poorly performing state-owned enterprises like Eskom and Transnet.

These enterprises have been plagued by mismanagement and corruption, which experts believe could cost South Africa significant GDP growth.

Key figures like Dawie de Villiers, CEO of Alexander Forbes, and Dawie Roodt, chief economist at Efficient Group, argue against this move due to the autonomy it takes away from pension fund trustees and the generally poor performance of these enterprises.

“It’s a horrible idea,” Roodt said. “The trustees of a pension fund are supposed to decide for themselves what’s the best investment for their members.”

While infrastructure is a favoured asset class globally due to its stable returns, the lack of viable projects in South Africa makes this directive challenging.

Experts argue that forcing pension funds into these investments could saturate the few available projects, diminishing returns.

Instead, de Villiers suggested improving project accessibility through better governance and risk-adjusted returns.

Additionally, investment strategist Izak Odendaal pointed out that the lack of bankable projects, rather than funding, is the real hurdle for South Africa’s economic revival.

Sandy McGregor, a strategist at Allan Gray, warned that prescribed assets could lead to inefficient capital allocation and deter international investment due to the expected suboptimal returns.

The decision relating to this proposal is expected to be addressed at President Cyril Ramaphosa’s opening of Parliament address on 18 July.


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