It seems the state has realised that if it isn’t to force the markets, it must be friendly to them
Forget prescribed assets. That’s a diversion from the potentially solid proposal now on the table that seeks a social compact through retirement funds, representing millions of South Africans’ long-term interests, for investment in growth and employment-generating infrastructure projects.
Prescribed assets would have been government’s blunt instrument to force a proportion of retirement-fund assets into the dark holes of virtually unaccountable state expenditures. The state would have been raiding pension assets, contradicting its pleas for people to set aside larger amounts for retirement.
Instead, what seems now to be emerging is the opposite. At least the latest proposal around harnessing pension funds to rebuild SA’s infrastructure has sparked formal discussions, previously conducted inelegantly. It seems the state has realised that if it isn’t to force the markets, it must be friendly to them.
On the one hand, there’s a state desperate for investment. On the other, there are retirement funds crying out for a broader range of investable opportunities.
The crisis over Covid-19 has brought these two issues to a head:
- First, how to fund SA’s huge infrastructure requirements when the fiscus has no money:
- Second, how the billions of rand in retirement funds can be put to more productive use in SA’s real economy. It would be an alternative to hedging against the rand (by investing offshore or piling into the JSE’s large-cap giants whose revenues are earned primarily outside SA), or being trapped into the ever-shrinking pool of domestic mid-cap JSE-listed equities (especially when the post-Covid scenarios for many old favourites range from speculative to sombre).
It is clear the ground is being prepared for retirement funds to invest much more heavily in the unlisted space than the sparse limits presently allowed under the Regulation 28 prudential guidelines. The principle is well and good, so long as established rights, enshrined by the Pension Funds Act for the protection of fund members, remain inviolate.
However, the origin of this new proposal is unclear and has quickly generated heat and much suspicion over its intentions. As it happens, ANC transformation head Enoch Godongwana, in the role of spokesperson, also chair the board of the Development Bank that would be centrally involved in the infrastructure plan.
Details have yet to be hammered out, but nothing that has emerged so far appears to contradict finance minister Tito Mboweni’s lament in his February Budget Review.
It isn’t even clear yet whether sweeping amendments to Reg 28 are even required.
However, there would need to be a shift in emphasis, which would allow pension funds to shift from investing predominantly in listed securities to investing in designated “development finance institutions,” such as the Development Bank. This could then create opportunities for retirement funds to invest directly in specific projects, rather than generic instruments.
Whether this idea is accepted or rejected could depend partly on whether government will guarantee the forecasted returns forecast. Another variable will be the interest rate used in feasibility projections.
But if it happens, retirement funds would divert from their traditional role as lenders or holders of liquid assets to become co-owners of bridges, dams or whatever. These assets would often by illiquid, which would need to be reflected in the risk/reward ratio.
Asset managers have a role to play
So who then will negotiate and evaluate the projected yields? Few funds have the in-house capability even to decide their asset allocations. Instead, they usually engage asset consultants and managers under mandate.
But these are precisely the adviser categories that the draft proposal wants excluded from involvement, ostensibly so that the costs of intermediation are reduced. This implies that retirement funds will either have to absorb the cost, or fly blind in breach of their fiduciary duties.
Yet, a number of asset managers have significantly cut their teeth in infrastructure projects, independent of government. They have experience to share, so cutting them out of the equation wouldn’t necessarily be the best thing.
These asset managers are also fiduciary stewards for retirement funds. As such, they are positioned to play a representative role in negotiations with government and assessment of feasibilities. They guard the henhouse from the fox.
Unlike prescribed assets, this latest proposal looks encouragingly market-attuned, on a benign interpretation. But part of the conversation must be about sharing in the costs of social infrastructure, as much in the interests of the state as of retirement funds. Both have putative commitments to the UN Sustainable Development Goals.
At this stage, the numbers involved are hard to define. Paul Mashatile has mentioned a $20.5bn infrastructure programme “after talks with the private sector and multilateral lenders as part of an attempt to recover from the coronavirus epidemic”. You can assume that when he says “the private sector,” that is partially a euphemism for retirement funds.
Before Covid-19, Mboweni’s Budget Review noted that government had committed R100bn to the Infrastructure Fund mainly from the “private sector”. The fund’s implementation unit, housed within the Development Bank, “aims to build a pipeline of potential projects worth over R700bn over the next 10 years”.
That Review then lists 30 major projects — but only one is ready for implementation.
National Treasury admitted that the value of government’s infrastructure budget “is eroded by insufficient capacity and skills” so it is introducing reforms “expected to improve the effectiveness of infrastructure spending and develop a project pipeline for funding by government and the private sector”.
Maybe this time it’s serious. It must be serious, because time isn’t on its side.