Policy making must be dynamic to respond efficiently to changing markets
One of the reasons pension assets are important for economic growth is that they are long-term in nature, and so can be deployed with a lower assessed risk outcome
A recent interview with ANC economic transformation head Enoch Godongwana, broadcast by Carte Blanche, has left many in a spin regarding the proposed prescription of pension fund investments into development projects.
In the interview, Godongwana suggested that a decision by Standard Bank and Nedbank to halt funding for coal projects needed to be looked at in context, this being that banks do not determine economic policy. So, if the “real” policy makers find that coal projects offer material benefits for the economy as “developmental projects”, a legislated position in favour of prescription would require a change in the stance the banks have taken.
A policy of prescribed asset investments would see a regulatory obligation on asset managers to invest a portion of the retirement funds they manage into the said development projects. The focus, therefore, on coal is a red herring in context of the asset prescription debate. Regulation 28 of the Pension Funds Act is a regulatory framework that provides guidelines and limits on the asset classes retirement assets can be invested in.
The gazetted policy objectives of regulation 28 are protection of pension fund members; leveraging the link between retirement savings and economic growth and the subsequent efficient allocation of resources; and reducing pressure on the fiscus resulting from members needing social security to support themselves in retirement.
What this suggests is that regulation of the way pension assets are invested is not bad in and of itself, and that legislation can have material benefits for economic growth.
These two points should be the basis from which the conversation on prescribed assets should start. From the regulatory point of view, Godongwana lamented that despite the market participants not being legislators, their importance as stakeholders in the economic outcomes of the country could not be overemphasised.
This suggests that there needs to be extensive consultation by the Treasury with all the stakeholders on how such a legislative framework could be designed and implemented for the best interest of the fund members and the economy. The issue is not regulation itself, but whether the regulation would have positive or negative spillover effects.
On deciding on which projects are viable “developmental projects”, the same research methodology that determines the kind assets regulation 28 determines as well as the investment thresholds into those assets can be applied when it comes to these developmental projects. One of the reasons pension assets are important for economic growth is that they are long-term in nature, and therefore can be deployed with a lower assessed risk outcome.
There was an amendment to regulation 28 in 2018 that increased the allocation limits of offshore and African investments by pension funds to 25% to 30% and 5% to 10%, respectively.
These changes come as the policy makers continue to actively assess the investment landscape and respond accordingly to achieve the aims of the act as argued above. Some have argued that apartheid-era asset prescription was a failure and would therefore not be advisable in the current dispensation. That comparison is both flawed and baseless as the proposed asset prescriptions would not be channelling funds into state-owned entities and government bonds.
Other arguments against prescribed assets suggest that the such a policy move would scare off international investors concerned by “political” meddling in the functioning of a global standard capital market like ours. But policy making should be both dynamic and iterative, if policy makers are to respond efficiently to changing market dynamics in the best interests of the economy.
It will therefore be a tragic failure if the policy amendments policy makers can or cannot explore are dictated by market participants, although it remains of utmost importance that affected stakeholders make their voices heard.
• Skenjana is founder and financial economist at Afra Consultants.