EDITORIAL: Prescribed assets — a recipe for disaster
Pension funds would be forced to put a certain amount of your savings into government-approved instruments — like a bond to finance Eskom, or SAA
Just when there’s much-needed clarity on land expropriation, the ANC hurls another ill-advised spanner into the works. This time it stemmed from the ANC’s policy manifesto last weekend, which raised the spectre of "prescribed assets" in unsettlingly specific language. In a nutshell, pension funds would be forced to put a certain amount of your savings into government-approved instruments — like a bond to finance Eskom, or SAA.
The spectre of prescribed assets has loomed for years. In 2017, the ANC said such an intervention should be considered to force funds to invest in infrastructure, skills development and job creation.
But this week, President Cyril Ramaphosa spoke crisply of how the ANC will investigate the introduction of prescribed assets to unlock resources for investment in social development.
The goal, he said, is to "mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities".
The tone suggests plenty of work has already gone into investigating this.
This is deeply worrying for a number of reasons. First, from a political perspective, it suggests how influential the hidden hand of the Jacob Zuma nationalist-orientated wing of the ANC still is.
That was clear, of course, from the land debate, but the new Expropriation Bill stops short of what the Zuma faction wants. The bill is explicit that expropriation applies only if land is held by a state-owned company, if it is used by a labour tenant, if it’s held for speculative purposes, or if it has been abandoned. But within the idealogically riven ANC, there is a strong element of nationalism and hostility to market economics — under the wrapper of "radical economic transformation".
"Prescribed assets" isn’t an invention of a faction of the ANC. Many nationalist governments have implemented such a regime before — including the apartheid government.
As Ashburton Investments’ Albert Botha points out, the National Party prescription peaked in 1977 "when a fund had to include at least 77.5% of its assets in a combination of state-owned companies and government bonds". By 1989, shortly before it was phased out, the target was 53%.
Of course, the government wouldn’t need to consider forcing pension funds to finance state-owned companies if they were better run, and investors could see this. And it is true that pension funds already have large weightings towards government bonds. Foreign investors also have a large exposure to the best state companies.
The problem comes when you force pension funds to finance basket-case state companies like Eskom or SAA, which are unsustainable and the prospect of seeing a return on this investment is vanishingly slim.
The apartheid government forced pension funds to finance atrocious projects that weren’t sustainable. The result: a drop in pension savings.
The government correctly diagnoses the problem (a lack of funding), but it misprescribes the remedy. Rather than force funds to invest in shaky companies that no-one dare touch, the government should rather fix the state companies like Eskom. It would have the dual benefit of boosting the country’s credit rating, and making the prospect of investing in those entities far more appealing.
To echo the words of Jurie Wessels, who headed the blanket organisation for life insurers, the LOA, back in 1994 when discussing prescribed assets: "There is no shortage of money; there is a shortage of feasible projects."