Large pension funds have a duty to consider investments that will help rebuild the country, says Elias Masilela, the new chair of Sanlam’s board and the national task force on impact investing. 

Speaking at the company’s symposium on its annual Benchmark retirement fund survey, Masilela said as pension funds exist in an economic system, they have a long-term interest in preserving that system and must therefore consider investments that contribute to rebuilding SA’s economy, but not at the expense of their own growth.

The retirement fund industry is therefore hopeful that the government and the private sector’s focus on infrastructure projects to lead an economic revival could have the potential to provide a good alternative source of returns. This is particularly relevant in the current environment of low returns across asset classes, says Jason Lightfoot, manager of the R16bn Futuregrowth Infrastructure & Development Bond Fund.   

It is “heartening” to see an alignment in views on an infrastructure-led recovery from the private sector, led by Business for SA (B4SA) in its paper on accelerating economic recovery, and the ANC’s discussion paper on building a new inclusive economy, says Janina Slawski, head of investments consulting at Alexander Forbes. 

The savings industry, represented by the Association for Savings and Investment SA, is supporting the B4SA plan.

Futuregrowth and Alexander Forbes were among the managers invited to participate in the government’s sustainable infrastructure development symposium in June.

At the symposium, the government’s infrastructure and investment office (IIO) informed local and global investors that 276 projects had been identified, including 88 that have passed feasibility studies. 

Lightfoot says the aim of the symposium was to have a co-ordinated approach, with the presidential infrastructure office sharing its vision and the country’s needs with asset managers and other capital market asset allocators, but ultimately the success of such projects will depend on a number of factors that will give these investors comfort before they invest.

Developing infrastructure is widely regarded as key to stimulating economic growth and reducing poverty as the lack of efficient services such as electricity and water, housing, effective transport and the internet are affecting the cost of producing goods and services, getting them to market and job creation.

This in turn affects the returns you can earn on your savings, which are invested in shares and bonds issued by businesses and the government. 

As part of the focus on getting retirement funds to invest in infrastructure, the ANC has proposed reviewing regulation 28 of the Pension Funds Act — the regulation that governs how much your fund can invest in each investment asset class — to see if the limits on unlisted investments need to be raised.

Slawski says it is encouraging that there is no reference to prescription in the ANC document — it calls for a review of the maximum investment limits rather than setting any minimum that must be invested in infrastructure or any other government project.

Existing asset class limits

The Southern African Venture Capital and Private Equity Industry Association (Savca) has also proposed increasing the private equity allocation in regulation 28 from 10% to 15% of a retirement fund’s investments.

But Lightfoot and Conway Williams, the joint-head of unlisted credit at Futuregrowth, don’t believe changes to regulation 28 will be necessary. 

They say funds can already make use of the existing different asset class limits for such investments, which will generally be unlisted in nature, to be able to invest up to 35% of their assets in infrastructure. 

Lightfoot says these types of investments are generally very illiquid and a pension fund should probably not have a large portion of a specific asset class invested in highly illiquid instruments, but the allocation will also depend on the life stage of a particular pension fund member. 

Slawski says a review of regulation 28 could be good for those funds that have reached the maximum exposure, but it is unlikely to generate significant new flows from funds.

Only large defined benefit funds such as the Government Employees Pension Fund will ever have more than about 5% exposed to unlisted infrastructure projects because the unlisted debt and private equity investments are typically not very liquid, she says.

Defined benefit funds guarantee a pension based on a percentage of your final salary, but most SA retirement funds are defined contribution ones, which entitle members to a fund credit equal to what they and their employers contribute and the growth on that.

Members can withdraw this fund credit on resignation or retrenchment, the fund value is priced daily and the underlying investments can often be switched, Slawski says. 

This makes substantial allocations to unlisted assets problematic as the investment values are updated infrequently and holding periods can be in excess of 12 years, she says. 

Slawski says the envisaged infrastructure needs funding beyond what local retirement funds can provide, which is why the infrastructure symposium was aimed at international sovereign wealth funds, large international infrastructure funds, big defined benefit funds like those in Europe, foundation trusts and US endowment funds. 

The government has also been talking to the savings industry about issuing more liquid listed bonds to fund infrastructure projects, and Nersan Naidoo, CEO of Sanlam Investments, told the Benchmark symposium, that “blended” listed and unlisted financing is a good way to increase pension fund allocations.

The discussions so far may be positive, but Lightfoot says the proof of the pudding will be if the IIO comes up with “bankable” investments — those that managers can invest in with certainty about government policy, good governance, sound returns and which make sense for retirement fund members and other investors.

“Our role is to act in investors’ best interests — we assess each project on its individual merits and consider the required return based on the risk inherent in that project,” Williams says. 

Slawski agrees that linking returns to the risks is key and is concerned that the ANC has said changes to regulation 28 are required to “enable cheaper access to finance for development” — pension funds’ financing should not be cheaper than that provided by any other investors, she says.

The Futuregrowth Infrastructure & Development Bond Fund has a 20-year track record showing what returns can be achieved when unlisted equity and debt infrastructure projects are combined with listed bonds. Over 20 years to the end of April 2020, the fund has returned 11.86% a year, which is consistently 1.75%-2% above the All Bond index and 5%-6% above inflation, Lightfoot says.

Alexander Forbes offers a multi-managed Private Markets Fund that is diversified across 15 underlying funds invested in infrastructure, direct property, unlisted property and unlisted credit and has returned 18.24% since its launch in November 2017, while its benchmark, the Capped Swix index, is down almost 18% over the same period.

Alan Wood, head of investment consulting at Simeka Consultants and Actuaries, told the Benchmark symposium that managers are offering Covid-19 restructure funds with yields in excess of 15% a year.

David Gluckman, chair of the Sanlam Umbrella Fund, told the symposium that impact investing will be the most important focus for big retirement funds for the next decade. The returns can be very good if you identify the right projects and avoid ones linked to corruption and fraud, he says. 

But fund trustees lack expertise and need managers to assist them and will have to make some trade-offs on costs, short-term returns and liquidity, he said. 

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