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
|
Pro |
Explanation |
|
Improved Infrastructure |
Responsible use of capital can significantly enhance South Africa’s infrastructure. |
|
Quality of Life |
Better infrastructure will improve the quality of life for ordinary South Africans. |
|
Financial Independence |
Reduces dependence on international financiers like the World Bank, IMF, or China, which often impose stringent conditions. |
|
Sovereignty |
Strengthens South Africa’s financial independence and sovereignty. |
|
Fiscal Strength |
A stronger fiscal position could lower borrowing rates and support the Rand. |
|
Job Creation |
Investment in infrastructure and local projects can create jobs, reducing unemployment and stimulating economic growth. |
|
Economic Stability |
Increased investment in local projects can stabilize the economy by promoting domestic production and consumption. |
|
Enhanced Public Services |
Investments in infrastructure can improve public services such as transportation, healthcare, and education, benefiting society as a whole. |
|
Long-Term Economic Benefits |
Infrastructure investments tend to have long-term benefits, providing sustainable economic growth and development over time. |
|
Capital for Innovation |
Directed investments can provide capital for innovative projects and startups, fostering a culture of entrepreneurship and innovation within the country. |
|
Con |
Explanation |
|
Reduced Competition |
A ready pool of capital without competition may not be optimally used, potentially leading to lower investment returns. |
|
Risk of Corruption |
Without proper oversight, there is a significant risk of corruption and capital loss. |
|
Impact on Private Sector |
Lack of competition could hinder aspiring private competitors and harm certain industries. |
|
Misallocation of Resources |
Funds could be directed towards politically motivated projects rather than economically viable ones, leading to inefficient use of resources. |
|
Market Distortion |
Prescribed assets can distort the market by artificially inflating the value of certain assets and sectors, leading to mispricing and bubbles. |
|
Reduced Investor Confidence |
The imposition of prescribed assets might reduce investor confidence, both domestically and internationally, potentially leading to capital flight. |
|
Limited Flexibility |
Mandating investments in certain assets can reduce the flexibility of fund managers to adjust portfolios in response to market conditions, potentially impacting overall fund performance. |
|
Increased Administrative Burden |
The requirement to invest in specific assets may increase the administrative burden on pension funds, leading to higher operational costs. |
|
Potential for Conflict of Interest |
There could be potential conflicts of interest if those managing prescribed assets have close ties to the projects being funded, leading to biased decision-making. |
|
Economic Overreliance |
Overreliance on pension fund investments for national development may overlook other critical sources of funding and economic strategies, limiting diversified economic growth approaches. |
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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