Pros and Cons of Prescribed Assets: A 2024 Perspective

Deresh Lawangee, CEO of EasyRetire RISE, discusses the growing debate over prescribed assets for pension funds. Explore the history, recent changes, and key pros and cons shaping the future of South African investments.

As we approach the outcome of the 2024 South African election and the coalition government that will determine our policies for the next five years, the question of prescribed assets resurfaces. This discussion gained prominence following the 2023 changes to the Pension Funds Act, which can be explored further in my article here.

Historical Context and Current Changes
During the apartheid era, when South Africa was under global sanctions, the government used prescribed assets to access capital, successfully building robust infrastructure despite severe political and social flaws. This historical example highlights that prescribed assets can be effective if managed responsibly.

In 2023, changes to the Pension Funds Act allowed up to 45% of retirement fund assets to be invested in infrastructure. While not mandatory, this requirement to measure and report on local infrastructure investments could be seen as a precursor to prescribed assets, especially if the pension fund industry—managing over R2 trillion—does not invest adequately in South Africa’s development.

The Scale of Pension Fund Investments
The pension fund industry can now allocate up to 45% of its assets offshore. Additionally, about 40% of the revenue from the Top 40 companies on the JSE is generated outside South Africa, effectively externalizing capital. This raises an important question: should South African pension fund assets be invested primarily for national development, or should they focus solely on achieving the best investment returns for retirees?

The Patriotism Debate
Should the pension fund industry prioritize investments in South Africa for the nation’s benefit? Mark Twain’s quote, “Patriotism is the last refuge of a scoundrel,” resonates in the current low-trust environment marked by corruption scandals and state capture. Can the industry trust the state with its funds?

Consideration of Government Failure
The consideration of prescribed assets can be seen as an acknowledgment of the government's shortcomings in infrastructure development and economic management. In a low-trust environment where corruption and inefficiency are rampant, the pension fund industry faces the challenge of whether it can confidently allocate funds to government projects. The idea of prescribed assets suggests that the government is now looking to the pension fund industry to compensate for its failures. This perspective highlights the need for a robust debate on whether the industry should be forced to support state-led projects, given the potential risks involved. This low-trust environment makes the introduction of prescribed assets difficult.

Moreover, the notion of patriotism in this context becomes complicated. While investing in national projects can be seen as a patriotic duty, the industry's primary responsibility is to ensure the best possible returns for retirees. Balancing these conflicting priorities requires careful consideration and transparent decision-making.

It is also important to note that the private sector is not immune to poor allocation of capital. Corporate failures, such as the Steinhoff scandal, have shown that private companies can also misallocate resources and destroy capital. Therefore, both the public and private sectors need stringent oversight and accountability to ensure the responsible use of funds.

Pros and Cons of Prescribed Assets

The debate on prescribed assets is complex, balancing national development goals with the need for high investment returns and prudent capital use. As South Africa navigates its political and economic future, the decisions made regarding prescribed assets will have far-reaching implications for the country’s development and the pension fund industry.

Engaging in a robust and transparent debate on the topic, ensuring stringent oversight, and learning from past experiences can help mitigate some of the cons while maximizing the pros for the benefit of South Africa's economy and its people. By considering both the potential benefits and drawbacks, stakeholders can make informed decisions that align with the best interests of both retirees and the nation as a whole.

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