According to experts South Africa has more pension assets than any other emerging economy. With more than R4 000 billion in South Africa’s pension funds, the government’s proposed new policy on prescribed assets could unlock a pot of gold for the government.
The suggestion in the ANC’s election manifesto this year, that a policy of prescribed assets should be investigated could mean that it would become government policy to invest pension fund money where the government wants you to and not where you can get the highest return.
When the term “prescribed assets” is used, it is understood that the government is forcing the savings industry to buy government stock, as well as bonds issued by state owned enterprises (SOEs) on behalf of investors such as retirement funds.
The savings and investment industry, as represented by the Association for Savings and Investment South Africa (ASISA), has worked extensively with various relevant parties on the potential impact of prescribed assets, including government ministers that works with the development of infrastructure via Business Unity South Africa (BUSA), to the National Economic Development and Labour (Nedlac), and via the CEO initiative.
According to Leon Campher, chief executive of ASISA the association and its members are opposed to the prescribed assets and believes that there is no imminent danger of this happening.
ASISA is the industry body representing asset managers and insurers, including major pension fund managers such as Alexander Forbes, Liberty, Old Mutual and Momentum.
ASISA members already spent more than R1,3 trillion in support of government, local authorities and state-owned companies.
What are prescribed assets about?
South African pension funds are already subject to some provision in the form of regulation 28 or the Pension Funds Act, which restricts retirement funds to the extent to which they may invest in specific categories of assets.
The most important limits thus far are as follows:
- No more than 75% of total funds may be invested in assets.
- No more than 25% may be in listed property.
- No more than 30% may be in foreign assets.
- No more than 10% may be invested in hedge funds.
Why is Solidarity Financial Services and their asset manager, ASISA, opposed to prescribed assets?
- The concept of “prescribed assets” will force the savings and investment industry to use the savings of ordinary South Africans in businesses that have been targeted recently by state capture and lack of delivery. As custodians of these savings, it must be resisted.
- Asset managers are not asset owners. Most of the assets that can be prescribed are owned by pension fund members. It should also be taken into account that about half of these assets are held by the GEPF and are therefore owned by civil servants. As owners of these assets, ordinary South Africans, we choose and appoint trustees to make asset allocation decisions that are in their best interest. Prescription would jeopardise this fiduciary duty.
- Prescribing of assets hampers the capital distribution function of the capital markets, which must always be objective and driven by performance. This forces the market to invest in low return and/or high-risk projects, which can have two direct consequences:
- The incentive for these projects to compete would be removed as financing and will no longer be encouraged by performance.
- Since capital is a limited resource, worthy projects can be deprived of funding. These projects, which are otherwise growing, lead to sustainable employment no longer happening.
- Prescription will have a negative impact on the country’s credit rating. If South Africa loses its investment rate, foreign investors, many of whom are pension funds, will be forced to withdraw their money from South Africa. This is something the country simply cannot afford.
What are your options in the future?
The plan for prescribed assets is only proposed and not yet formalised. However, it will merely be a regulation and not an Act by parliament. Therefore, it can become a reality sooner than expected.
Investors should gain a proper understanding of the implications that prescribed assets could have on their pension funds.
Contact your financial advisor about your best options to protect your pension from low returns. This can be done by diversifying your portfolio, investing abroad and other options.