State pension funds once revolutionised the investment industry, and can do so again
Their history shows how a new dialogue with pensions and workers at the centre may spark a turnaround
SA is in a deep, structural economic crisis, and it is highly likely that it will fall further into the abyss, with untold sociopolitical consequences, if drastic measures are not taken. This calls for a business unusual approach and a sense of urgency similar to the way global economies responded to the 2008 financial crisis.
The measures to boost economic growth announced by president Cyril Ramaphosa in his state of the nation address (Sona) were encouraging, but there was one glaring omission — the role of pension funds and, more broadly, the savings industry — in a new deal to jolt our slumbering economy into the dynamism necessary for sustainable growth and development.
“At the second SA Investment Conference last year, more than 70 companies made investment commitments of R364bn in industries as diverse as advanced manufacturing, agroprocessing, infrastructure, mining, services, tourism and hospitality. In the first two years of our ambitious investment drive we have raised a total of R664bn in investment commitments, which is more than half of our five-year target of R1.2-trillion,” Ramaphosa announced to the nation.
While Ramaphosa must be commended for his global investment drive, the reality is we have more than R6-trillion in retirement fund savings here at home. The focus should be on encouraging retirement funds to pursue developmental investment opportunities.
Large pension funds such as the Government Employees Pension Fund (GEPF), with R1.8-trillion, and the Eskom Pension and Provident Fund (EPPF), with R147bn, have both launched developmental investment frameworks with a focus on infrastructure investments, private equity and real assets broadly. In addition to the policies launched by GEPF and EPPF, a number of progressive pension funds such as Sentinel, Telkom, Transnet, Transport Sector and Sala, have been increasing their exposure to alternatives. These funds recognise that their fortunes are interlinked with that of the overall SA economy.
Despite their progressive developmental investment policies both funds remain underinvested in real assets due to a lack of bankable projects. This is the same for most pension funds under Regulation 28, a framework set by the regulator in terms of broad asset allocation. Thus the president’s focus should be on unlocking pension funds and making it easy for them to invest directly in developmental investment opportunities such as infrastructure.
The three areas of focus should be, first, agreeing on a framework for public-private partnerships — for example, the renewable energy independent power producer procurement (REIPPP) programme is a great framework that could be replicated across other sectors. Second, developing a bankable deal pipeline — a menu of investable projects — and third, amending Regulation 28, to widen and raise the current regulation bands of 0%- 15% for alternative investments, to a minimum of 5% and an upper limit of 25%. Increased allocation to alternatives would lead to better risk-adjusted returns for pension funds.
The Eskom R450bn debt conundrum in particular calls for a concerted effort from all parties to work towards finding a lasting solution. While Cosatu has put the cat among the pigeons with its proposal to throw Eskom a R250bn lifeline using GEPF coffers as a source of funding, it must be commended for triggering an important national dialogue.
The president should take the opportunity to broaden the discussion towards a much more sustainable investment framework: beyond Eskom SA has a huge need for investments in different forms of infrastructure, such as water and health care infrastructure. The GEPF provides instructive lessons in this regard. In 2008-2009, in the midst of the financial crisis, it resisted calls to be reactive and adopted a measured and yet proactive approach to restructuring its investment strategy by increasing allocations to development assets in the real economy.
The fund then resolved to hold a multistakeholder dialogue with labour, the Treasury and colleagues in the investment industry, in order to review the fund’s investment strategy in search of new opportunities to improve portfolio diversification and long-term returns. This important dialogue in the history of the fund resulted in the crafting of a “developmental investment policy” that committed the fund to set aside 5% of its portfolio (R45bn at the time) to be invested in economic infrastructure, social infrastructure, renewable energy, BEE and small, medium-sized and microenterprises. In today’s GEPF asset values, 5% of R1.8-trillion is R90bn.
The 2008 financial crisis led to declining pension asset values and a rise in actuarial liabilities, resulting in substantial funding and solvency problems for many pension plans, especially those in developed markets. These issues, coupled with lower expected real returns from equities and other traditional growth assets, necessitated a review of investment strategies.
Fast forward to 2020 and a new dialogue must be had that will set SA on a sustainable growth path, away from looming socioeconomic ruin — with pension funds and, by extension, workers at the centre of these discussions.
The pioneering role the GEPF and EPPF have played in transforming the economy by promoting the inclusion of environmental, social and governance issues in their investment decision-making processes has revolutionised the investment industry, leading to more asset owners and managers adopting similar practices.
Similarly, through the REIPPP programme, SA has ably demonstrated that when the policy environment provides certainty, the private sector and pension funds are able to invest their capital — a total of R192bn has been invested in renewable energy projects so far.
A broader private-public partnership in pensions, supported by a favourable government policy environment and a pipeline of bankable investment projects, has the potential to turn the SA economy around.
• Oliphant, a former head of the GEPF, is chair of Third Way Investment Partners, All Weather and RH Bophelo.