A pronouncement this week by the Deputy Minister of Finance seems to indicate that the government is backing away from plans to introduce prescribed assets for retirement funds.
“As a responsible government, we will always set and promote a policy environment that enhances pension portfolio returns, promotes market stability, and avoids compromising both the pre- and post-retirement lives of citizens,” David Masondo told the Old Mutual Thought Leader Forum in Johannesburg on Tuesday.
“It is the government’s commitment to respect the investment mandates of pension plans, the fiduciary duties of trustees, and their desire to maximise portfolio returns within acceptable risk tolerance levels.
“Regulatory instruments such as Regulation 28 provide prudential guidelines and an enabling framework to facilitate the long-term investment nature of retirement funds. It is our view that investments in infrastructure complement the long-term investment horizons of retirement funds.
“Together we must drive this sector forward through responsible governance and a continued focus on inclusive economic growth, employment creation, and poverty alleviation.”
Regulation 28 of the Pension Funds Act sets out the investment limits and guidelines for retirement funds. It enables retirement funds to allocate up to 45% of their assets to infrastructure. The limits further separate private equity and other assets from hedge funds to promote investment into infrastructure because these investments are often housed in alternative asset classes, such as private equity and private debt.
The limit for exposure to investment in infrastructure was raised to 45% in 2022 following consultation with the savings and investment industry.
In July, Minister of Trade, Industry and Competition Parks Tau said his department had tabled a proposal to amend Regulation 28 to finance industrialisation.
The proposal was tabled at the Cabinet lekgotla as part of a “comprehensive suite of regulatory tools and mechanisms” to spur industrialisation.
The proposals included introducing new asset classes into Regulation 28 to explore the potential of leveraging retirement savings for industrial financing. However, Tau said any potential changes would have to undergo a thorough review and be accompanied by effective implementation mechanisms.
In its 2024 election manifesto, the ANC proposed investigating the introduction of prescribed assets, which would mandate institutional investors such as retirement funds to invest a portion of their funds in infrastructure development to boost economic growth. The same proposal was contained in the party’s 2019.
But some of the 10 parties in the government of national unity, including the Democratic Alliance, are opposed to prescribed assets.
And the asset management industry has come against the proposal.
Sanlam Corporate Investments, in Sanlam’s latest Benchmark Survey, said prescribed assets have significant risks, including the potential misallocation of resources and the negative impact on investment returns for retirement funds.
“Historically, prescribed assets were used between 1958 and 1989 in South Africa but were eventually abolished due to their inefficiency and the burden they placed on investment performance,” said Aleeshia Naicker, senior investment consultant at Simeka Consultants & Actuaries, and Solly Tsie, the head of investment strategy Sanlam Corporate Investments.
“During this period, prescribed assets underperformed equities by 6.4% per annum, 17.2% per annum, and 6.7% per annum during the 1960s, 1970s, and 1980s, respectively, representing the opportunity cost experienced by institutional investors during those periods.”
FSCA against prescribed assets
Olano Makhubela, the FSCA’s executive for Market Integrity and Decision Sciences, said the Authority is opposed to prescribed assets.
“As a regulator, we have always been clear that we are not in favour of prescribed assets for various reasons. We have been down that route before, and we know what happened. Other countries have been down that route before, and we know what happened in those jurisdictions,” Makhubela told the Thought Leader Forum on Tuesday.
“Most of all, there is a clear fiduciary duty in the Pension Funds Act in relation to trustees. We see that duty as sacrosanct. The moment you introduce prescribed assets, you start tampering with that fiduciary duty, and we will have a problem with that.”
South Africa introduced prescribed assets when the Pension Funds Act was promulgated in 1956. The level of prescription peaked in 1977 and then began to fall until it was scrapped in 1989. During most of these 30 years, funds were required to invest more than half their assets in government and state-owned entities’ bonds.
He said prescribed assets would compromise the overall return of a fund, which the FSCA did not think is right. “The moment you weaken that due diligence because you have prescribed assets, you are going down a very slippery road.”
Makhubela said prescribed assets are unnecessary because Regulation 28 already allows retirement funds to allocate as much as 45% of their assets to infrastructure as an investment class.
As such, the government needs only to provide bankable and investable projects that can pass due diligence checks, and provide attractive returns to lure investments, he said.
“Prescribed assets are the prerogative of government and particularly Treasury,” he said, “But we are quite unequivocal on this one; we don’t think prescribed assets are the way to go.”
