The case for responsible investment of pension savings in infrastructure
Projects can be a source of competitive returns if fund managers carry out thorough due diligence
The idea of tapping into pension funds to finance infrastructure development with a view to increasing the productive capacity of the economy and create jobs is neither new nor unique to SA.
However, amid a recent resurgence in the debate locally over whether large retirement funds should invest more in infrastructure, it’s worth remembering that the first duty of funds and their trustees has always been to their members, whose money they are tasked to protect and grow.
On this point there are sound investment reasons for retirement funds to allocate money to infrastructure. The long-term and inflation-hedging nature of the investments can be an appropriate match for the liability structures of pension funds while, most importantly, development projects are capable of generating competitive risk-adjusted returns for members.
At the same time, the theory goes, retirement funds are able to contribute to national development through growth and employment, and everybody wins. However, one problem is that SA’s track record in terms of managing large projects and state-driven enterprises is notoriously bad, due mainly to questionable viability, poor management and corruption.
As a result, there’s a disconnect between what many investments have delivered in the past and what retirement funds need from the assets they invest in for the future. This is accompanied by what some refer to as a “trust deficit” between those looking for money and the providers of funding.
It is important in overcoming this problem not to view workers’ savings as an opportunity to access cheap finance for investment in projects that don’t meet required feasibility, investment and governance criteria.
Fund managers have a responsibility to undertake comprehensive due diligence, including an appraisal of all prospective investments to establish their commercial potential, and to examine their financial records, assets and liabilities, and oversight structures. This process facilitates informed decisions by helping us understand the risks involved and whether the investment is appropriate in the context of the client’s portfolio and strategy.
With the government’s debt burden having spiralled over recent years, there has been a tendency to look more broadly at capital markets for alternative sources of finance.
That is not surprising given finance minister Tito Mboweni’s warning that SA could face a sovereign debt crisis within three years if government debt is not reined in. Our inability to pay the interest or the capital on amounts borrowed would have serious economic consequences.
At the same time, ratings agencies have expressed scepticism about the government’s plans to rein in spending and debt, citing a poor track record and low economic growth.
This reality has prompted much debate over where the money will come from and whether pensions have a role to play in making infrastructure development the catalyst for recovery from the economic slump that has been exacerbated by Covid-19.
The ANC has called for the amendment of regulation 28 of the Pension Funds Act, which governs the way retirement funds invest in various asset classes. This is to ensure that retirement fund savings are sensibly invested to protect members against the risk of poorly diversified portfolios.
Mboweni has also indicated support for the idea of pension funds being allowed to invest in infrastructure directly. One way of doing this would be to use infrastructure bonds.
It is probably fair to say that fund managers generally would prefer any move in this direction to involve a voluntary programme rather than being coerced to invest in a certain way. Put differently, a voluntary programme would be vastly preferable to the traditional prescribed assets regime as practised in the past.
If regulation 28 was amended to impose prescribed assets, this would probably involve setting a minimum floor for the proportion of investments to be held in government stock, including infrastructure bonds.
In this regard, it is encouraging that in its suggested review of regulation 28 the ANC proposed raising the limits on unlisted investments rather than setting a minimum that must be invested in infrastructure or other government projects.
That coercion should not be necessary is clear from the figures, which show that the pension fund industry is already a big investor in government stocks listed on the JSE, as well as state-owned enterprises and municipalities.
Retirement funds and their asset managers are likely to be more inclined to commit additional funds to infrastructure if long-promised policy reforms were implemented by the government. Confidence in infrastructure projects would be much enhanced if funds were overseen by independent boards of trustees.
The importance of accessing finance to invest in infrastructure projects capable of facilitating an economic revival was driven home by the recent announcement of a host of potential future opportunities in the 50 strategic infrastructure projects and 12 special projects recently gazetted by the minister for public works & infrastructure.
These projects are worth R340bn and have the potential to create 290,000 jobs. Some are only months away from being implemented and are said to represent viable and bankable projects that the private sector, including pension funds, could consider funding.
In doing so, it is vital that workers’ interests are not compromised. Given the already precarious financial position of retirees in SA there is an urgent need to enhance returns for retirement fund members. Alexander Forbes’s research shows that the average member retires with savings capable of providing a pension equal to just over a quarter of their final salary.
Important in today’s environment of low returns across asset classes is that infrastructure projects, while very illiquid, have the potential to provide a good alternative source of returns.
• Leepile is CEO of financial services group Novare Holdings.
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