Prescription for retirement savings — what's to worry about?
South Africans are in a froth about the ANC’s idea to force financial institutions such as retirement funds to invest a portion of their assets into socially productive investments for the social good of the country.
Industry experts agree that introducing regulations on so-called "prescribed assets" will have many negative consequences not only for the country, but especially for retirement fund members who could be left poorer from possible lower-than-market returns.
Leon Campher, CEO of the Association of Savings and Investment SA (Asisa), says the introduction of prescribed assets could force the savings and investment industry to deploy the savings of ordinary South Africans into entities that have over the recent past been mired in state capture and lack of service delivery.
He says the concept of prescribed assets did not work when it was introduced by the apartheid government in the 1950s and Asisa and its members believe that it would have negative effects on the country should it be introduced now.
Janina Slawski, principal investment consultant at Alexander Forbes Investments, says the ANC's 2019 manifesto mentions prescribed assets in two sections, but both mentions refer to investigation - and no detail has been provided about the form the prescription could take.
"The references to investments in 'social and economic development', 'socially productive investments' and 'job creation' by the ANC are encouraging," says Slawski, "but there is concern that this could mean investment in state-owned enterprises and municipalities that have social and economic development as part of their mandates, for example Eskom, Transnet and Sanral."
A solution looking for a problem
Campher points out that asset managers are not asset owners. The bulk of the assets that would be prescribed are owned by retirement fund members.
As the owners of these assets, ordinary South Africans elect and appoint trustees to make asset allocation decisions that are in their best interest. Prescription would jeopardise this fiduciary duty, he says.
Slawski says that "Alexander Forbes is opposed to any regulation, including prescription, that could lead to sub-optimal investment outcomes for investors, in particular for members of retirement funds where fiduciary duty requires that members' benefits be safeguarded and grown".
Prescription and the potential reduction in investment returns would leave members poorer, and if introduced in a period of expected low returns, when it is critical that all focus should be on maximising returns, the impact would be even greater, she says.
The enforced nature of the investment would be problematic, Slawski says, as investors would not have the opportunity to negotiate better terms for the investment or to walk away from unfavourable terms.
Sandy McGregor, portfolio manager at Allan Gray, describes the possible introduction of prescribed assets as "a solution looking for a problem". "In our view there is no compelling need for prescribed assets," he says.
Introducing prescribed assets would ultimately worsen SA's economic woes. Well-managed enterprises with a sound business plan can always access credit markets, and market disciplines that deny unsound ventures access to capital are an important feature of any successful economy.
By forcing investment into specific sectors, we would inevitably promote a misallocation of resources and erode the efficiency of the economy, which would result in slower economic growth, he says.
In addition, regulations that force savers to invest sub-optimally would also have an adverse impact on their propensity to save, says McGregor.
However, according to Slawski, investment in appropriate developmental assets is critical to ignite social and economic development and job creation. It is not the availability of capital that is the issue, it is the availability of opportunities, she says.
David Moore, head of alternative investments at Alexander Forbes Investments, says they have already invested, on behalf of some of their retirement funds, in a number of projects with socially productive spin-offs and which offer sound returns via several private market fund managers.
These investments include a wind farm in the Eastern Cape, a green housing estate in the Western Cape that addresses the shortage of housing and the growth of informal settlements in that area, and an investment in the SA Taxi Finance Solutions, which addresses the difficulty the taxi industry has in getting access to formal finance.
Isaah Mhlanga, executive chief economist at Alexander Forbes Investments, says details of the types of investments that could be prescribed are not known at this stage. If the prescription is for funds to invest in socially productive investments that deliver positive returns and if it fits in with the funds' investment strategy, it is unlikely that the industry would oppose such proposals.
Also acceptable would be infrastructure projects that are guaranteed by the government if expected cash flows do not materialise and where such investments deliver an acceptable yield for a fund, he says.
Campher says Asisa is empowered by the mandate from members that manage about R7.8-trillion of the nation's savings and investments, and is recognised as a significant and relevant partner around the government's negotiating table.
The government under President Cyril Ramaphosa has been very collaborative on various issues and Camphor says he believes that engagements with the savings and investments industry will be equally constructive on this topic.
Mhlanga says before an idea such as prescribed assets can be implemented, he expects widespread consultation with the industry. From there its path into regulation could take up to two years.