BUSINESS NEWS - At the launch of its election manifesto in January, the ANC said that it intends to look at the introduction of prescribed assets to fund social and economic development. This would mean that retirement funds, and potentially other forms of investment, would have to invest in specific asset classes or securities set by the government.
This is hardly a new idea. For a long period up until 1989, when international investment into apartheid South Africa dried up, the government prescribed that pension funds had to invest 53% of all their assets into parastatals and government bonds.
It was not widely percevied to be a positive thing for individual investors then, and the return of the idea has not been welcomed by the industry now.
“I don’t have numbers of what the returns were, but there was definitely an opportunity cost to investors at the time,” says Malusi Ndlovu, general manager at Old Mutual Corporate Consultants. “Overall, limiting investment freedom is not a good thing. It creates artificial demand for certain asset classes and limits the amounts of money available for other asset classes, which has an impact on returns.”
Nuanced approach
That doesn’t, however, mean that the motivation behind the ANC’s proposal is necessarily misplaced. There is no question that South Africa’s enormous retirement savings pool has the potential to play a bigger role in developing the country. It must however do so in a way that does not pose a risk to the investors whose money it is.
This is because South Africa already has a retirement savings problem. Prescribing assets will undoubtedly impact on the long-term returns investors can expect and reduce their ability to retire comfortably. It will also make saving for retirement less appealing on the whole.
In other words, it would be exacerbating what is already a social problem in the hope of solving others. That would make no sense.
The government therefore needs to bring a more nuanced approach to the problem.
“There is space to look at social outcomes,” says Ndlovu. “The question is whether one does that through prescription or other policies. We think you can do it by making asset classes that are difficult to invest in, like infrastructure, easier to invest in.”
Paul Boynton, head of alternative investments at Old Mutual Investment Group, points out that the country already has an excellent example of where this has happened – the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme that has been through a number of bid windows and has sourced investment for over 100 projects.
“The renewable energy programme, despite its speed wobble with round four being held up, is a global success story,” says Boynton. “If you are involved in renewable energy globally, you know about what’s happening in South Africa because it’s been such a well-run programme.”
Creating incentives
This has shown conclusively that large amounts of capital, much of it from pension funds, can be freed up for economic development when the right incentives are created.
“Government can mobilise private sector capital without compelling it to invest in certain areas,” says Boynton. “It just needs to develop a competitive framework, where capital can see a reliable opportunity for investment. When that happens, you will see developers from around the world coming to South Africa to look at how they can get involved.”
Creating these kinds of opportunities produces a win-win situation for everybody. Pension funds can deliver returns for their members, development proejcts can source the funding they require, and the government can stimulate economic growth.
For large institutional investors, Boynton also believes that it is important to be cognisant of the wider reality in which they operating.
Ecosystem
“As big pension funds or participants in the South African economy, you have to see yourself as part of the ecosystem,” Boynton argues. “As a country we need to be more thoughtful about this.”
This is because investing in infrastructure is not just an investment in itself. It can make a difference to the economic outcomes in the country as a whole. That, in turn, has knock-on effects that boost growth, lift company profits, and support returns across other parts of an investment portfolio as well.
“The World Bank has estimated that if we remedy the infrastructure deficit across Africa, we will add 4% to economic growth,” Boynton points out. “If you are a material participant – through your pension fund – in what is happening in the South African economy, then putting capital to work in some of these spaces can come back in many ways.”
He believes this is something that more enlightened investors around the world are coming to recognise.
“Investing in the ecosystem where you are not demanding a return only out of the investment you are making, but considering the systemic impact of what you are doing, is very important.”
