The ANC’s great pension heist
During his supplementary budget speech in June 2020, finance minister Tito Mboweni stated that amendments to Regulation 28 of the Pension Funds Act will make it possible for these pension funds to invest in infrastructure and immovable property.
The aim of this amendment would be to boost economic growth given the enormous impact of Covid-19 on the country’s economy.
But Mboweni may have been overly eloquent in stating that he supports the amendment which will allow investment from pension funds. For this is not the first time that the ruling party has voiced its intentions to use pension funds for investing in state-owned businesses and projects, and when it comes to ‘prescribed assets’, there isn’t much choice in the matter.
What does this mean for South Africans?
The broken record that keeps on playing
As other leaders before him, President Ramaphosa has mentioned prescribed assets several times in the past. In a press meeting in September 2018, Ramaphosa noted that pension funds could serve as potential long-term investors in infrastructure. The president repeated his campaign for pension-funded projects in August 2019, though he was a bit vague about the beneficiaries of such funding – it seemed the focus had shifted towards state owned enterprises. During the same period, Minister of Trade and Industry, Ebrahim Patel, noted his intention to encourage retirement funds to invest in trade development.
Ramaphosa’s pension intentions were made clear in January 2020 when he indicated that the government had every intention to use pension funds to invest in ‘revamping Eskom’.
This was met with some furore given the exaggerated fuss heaped before the feet of Eskom’s new CEO, Andre de Ruyter a mere month before. With his prowess, Eskom was envisioned to make a swift turnaround. But then it didn’t.
Ramaphosa’s comments were echoed by the ANC’s Economic Transformation Committee who stated their intention to push for prescribed assets.
Ramaphosa renewed his vision for utilising pensions for Eskom in March 2020 – although this time the funding would be dedicated to settling Eskom’s debt obligations. The government had already initiated talks with labour union Cosatu who was quite adamant that its own workers’ pension savings and funds held on behalf of state workers by the Public Investment Corporation be used to halve Eskom’s debt bill. Somewhere during the past few months smart semantic tomfoolery has also allowed many South Africans to overlook the government’s use or ‘government pension funds’ as a source for this prescription to ‘private pension funds’.
In April 2020 president Ramaphosa would unpack his R500-billion Covid-19 stimulus package before South Africans. Though not mentioned outright, the mention of pension funds as a possible source of funding for Covid-19 relief is clearly stated in the Institute for Economic Justice’s executive summary on pandemic relief.
In June 2020, Tito Mboweni would note the state’s intention to amend Regulation 28 of the Pension Funds Act to allow funding for infrastructure development. This announcement followed on a leaked document by the ANC’s Economic Transformation Committee which calls for the use of pension funds for Covid-19 relief.
Though Mboweni seemed to note all along that they did not intend to institute prescribed assets and merely amend the regulation to lift the restrictions on investment from pension funds, he also stated that this amendment calls for a “necessary regulatory mechanism to ensure increased pension fund investments directly into projects such as real assets, which can unlock capital that is currently not finding its way into [these] projects”. These are worrying words considering it clearly indicates that the intended regulatory measure will guarantee direct investment from pension funds.
Then came mid-July, when minister Mboweni indicated that they would also seek to utilise pension funds for an SAA bail-out (even though no such decision had been finalised).
A slurry of contradictions – but clear intent
If we glance back once more to March 2020, the dichotomy is emphasised in President’s Ramaphosa’s press briefing to the South African National Editors’ Forum (Sanef) where he stated that South Africans weren’t good at saving money, and that pension funds were the main sources of money which should be used to save Eskom.
For a country which struggles with saving, it seems rather illogical to utilise these savings to invest in an entity known for financial mismanagement.
The concern around prescribed assets is nothing new. In 1988 the Jacobs Committee had investigated the prescribed assets introduced by the South African government in 1956 and the government’s prescribed asset policy was subsequently abolished. Remnants of the practice remained entrenched in Regulation 28, however, with prescription for ‘maximums per asset classes and exposures’. Perhaps the euphemism of ‘amending Regulation 28’ is therefore deliberately used by the ruling party to prevent their followers from comparing their ‘regulatory mechanism’ from comparison with Apartheid prescription.
Prescribing assets is not always a bad idea (though a positive outcome is rare). Where state owned enterprises are trustworthy entities, managed without corruption, known for progressive economic policies and efficient service delivery it would make sense to invest individuals’ life savings in these bodies. If the individuals who contribute towards pension funds are financially stable, make sound financial decisions, have fallback savings and investments and not at risk of losing their jobs – then prescribing that their pension funds invest in these SOEs or other stimulus initiatives is also viable.
The prescription is supported by various entities in South Africa, including the ANC’s Economic Transformation Committee, Business for South Africa and The Southern African Venture Capital and Private Equity Association. But Adamela Trust business reporter Thando Maeko whose Mail & Guardian article dated 16 July 2020 titled ‘All agree: Use pension funds’ may have been a bit enthusiastic in her assertion that all agree. In fact, the assumption is blatantly fallacious.
The suggestion of prescribed assets has been shot down by Ascor® Independent Wealth Managers, Alexander Forbes, Sygnia, the Association for Savings and Investment South Africa, Futuregrowth Asset Management, Business Leadership South Africa, the Public Servants Association of South Africa, Prudential, GetBiz, Intellidex, CFA, opposing political parties and more.
Even the World Bank – one of South Africa’s benefactors – believes prescribed assets to be an illogical move. In their own study Developing a Domestic Funding Strategy for South Africa’s Public Sector, they noted that data collected from several countries over a decade indicates that prescribed investment policies generate predominantly negative results and are even ‘financially catastrophic’.
Janina Slawski, head of Investments Consulting at Alexander Forbes notes that prescription which forces retirement funds to invest in developmental initiatives merely lowers the return on investment – and there is extensive evidence to support this. The knock-on effect is that individuals will subsequently retire with less money. The secondary problem which will present is that foreign or private sector investors will shy away from further investment in South Africa as the overall risk of investment becomes too great. A prescription strategy aimed at boosting economic growth and investment are fundamentally flawed as this generally achieves the exact opposite of what it claims strive for.
Ratings agencies don’t take kindly to forced investment in failing governmental projects and entities either – which means the move will negatively impact the country’s investment ratings as a whole.
More fuel to the fire…
Investing a portion of South Africans’ pension savings in sub-optimal investment classes is a frightening concept on its own, but this is not the only problem. With more than three million South Africans left unemployed by Covid-19, the pension funds themselves are being raided.
Not only are South Africans unable to continue contributions, but many individuals have been compelled to make early withdrawals (with high tax implications) to keep food on the table. To address the issue, the Financial Sector Conduct Authority advised board members of retirement funds to:
- minimise identified risks to their investments
- provide uninterrupted service delivery
- increase their reporting and analysis of trends
- manage liquidity risk while enabling beneficial investments
- maintain complaint management processes and turn-around times without compromise
- take steps to counter cyber risk and data breach exposure due to remote working
- consider all requests for suspension or reduction of retirement contributions
- continue paying risk benefit premiums for affected members
- amend their fund rules to cater for employers and individuals in distress
Indeed, these measures may be necessary to safeguard individual pensions, but it is a rather tall task for retirement fund managers to manage – more service and more concessions with less funding and significantly lower return on their investments.
If we take all the data, analyses and case studies into account, it’s clear that South Africans should not be expected to invest their savings in government bailouts. But the matter will undoubtedly continue to be tabled at every opportunity and renewed vigour as the ruling party’s determination snowballs in parallel with the country’s snowballing economic depreciation.
Time to move your money
It’s only logical that one considers your options and make sound decisions to mitigate the impact on your own savings portfolio.
Those South Africans considering moving abroad or who are already settled elsewhere should not dally in reinvesting their savings elsewhere. Though the global economy has certainly taken a knock in 2020, most other countries have a far higher chance of recovery and more promising investment outlooks than South Africa. Moreover, many governments offer reinvestment incentives to reward expats for reinvesting their savings in local pension schemes. This means that withdrawal or taxation penalties levied on pension and retirement annuity contributions can easily be recovered while the new investment is likely to see higher returns.
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