/ 7 July 2017

Pension funds in ANC crosshairs

Prescriptive: Finance Minister Malusi Gigaba
Prescriptive: Finance Minister Malusi Gigaba

The ANC has again set its sights on pensioners’ retirement money as a potential source of funding for state development.

At the close of its policy conference this week the party said it would investigate the use of prescribed assets, one of the proposals to come out of its economic transformation deliberations.

The proposal was not part of initial discussion documents going into the policy conference, and was introduced amid other unexpected additions such as the proposal to nationalise the South African Reserve Bank.

The concept of prescribed assets requires pension funds to invest set amount of their funds in instruments such as government or parastatal bonds.

During the height of apartheid, when South Africa was shunned by global capital markets, the state required pension funds to invest more than half their funds this way.

The proposal announced by the ANC economic transformation committee chairperson, Enoch Godongwana, follows comments by Finance Minister Malusi Gigaba that the role of the Public Investment Corporation (PIC) must be reviewed.

Speaking at a briefing on the sidelines of the conference on Friday, Gigaba said as part of the drive towards “radical economic transformation” it was necessary to “review PIC’s role in driving transformation instead of it being seen narrowly as an instrument for empowerment of a few elites”.

The PIC is the state-owned fund manager of the Government Employees Pension Fund, which houses about R1.6-trillion in civil servants’ pensions.

In 2015 private sector pension savings amounted to R3.88-trillion, according to an Organisation for Economic Co-operation and Development report.

The idea of prescription is not a new one and has been floated before, for example as a means to fund the national growth path.

It has, however, resurfaced at a time when South Africa is in the grip of a technical recession and has been dealt several credit ratings downgrades because of growing policy uncertainty and what has been seen as an attack on the independence of key institutions such as the Reserve Bank.

It also coincides with the increased difficulty of state-owned companies to raise funds, particularly from private investors. State-owned companies such as Transnet have struggled to issue bonds at public auctions and power utility Eskom stopped selling bonds in the open market as far back as 2014, opting for private placements instead.

As of May bond issuance by state-owned enterprises had reached only R7.2-billion, roughly half what it was at the same time last year, according to RMB Global Markets Research.

The precarious financial state of a number of state-owned enterprises has not been helped by continued corruptions allegations, with the most recent emerging out of the #GuptaLeaks email dossier.

There is also concern that the PIC may be leaned on to pick up the slack left by private investors.

Godongwana could not give clarity on the implications of this proposal for the PIC or other asset managers. Questions requesting clarity from Gigaba went unanswered.

But the concept has been met with scepticism.

The lack of proper risk controls and governance has led to state-owned enterprises’ balance sheets “being obliterated by poor management decisions” in recent years, said George Herman, chief investment officer of Citadel Wealth Management.

Instituting prescription would force all pension funds to invest in such issuers despite the obvious shortcomings or risks, he said.

In a research note, Nomura strategist Peter Attard Montalto flagged that prescribed assets “are now more firmly on the agenda”. Although the policy was not necessarily a bad thing in a developing economy, he said, corruption was an issue in the South African context.

Prescription was a threat to the integrity of people’s pension funds, said Andrew Canter, chief investment officer of Futuregrowth Asset Management. Although the idea had been put forward before, he noted that, in the past, rational discussions on the merits of prescription had seen the idea put aside: “Wise minds have repeatedly turned down prescription.”

Its introduction in the context of the current environment was even more worrying, he said.

A risk of prescription is that the definition of “developmental” investments could be factional or politically motivated, rather than based on sound investment principles. Prescription would introduce distortions into the market as a sudden flood of money chased too few deals, and that would drive down investment returns, Canter argued.

Opposition to prescription was not about the investor market being hostile to development, he said, but was instead about “the industry protecting the integrity of people’s savings”, noting there were millions of retirement fund members across the social spectrum.

South Africa’s financial sector provides enormous capital to national development, a fact which is often overlooked.

The idea of prescription was to tell people where to invest their money, and that raised the question of whether introducing prescription would be legal, Canter added. “If government instructs investors, and returns suffer, will the fiscus underwrite the losses?” he asked.

Answering the charge that markets are failing, Canter highlighted that well-considered developmental programmes have never failed to attract capital investment: “Just look at the over R200-billion mobilised for the start-up alternative energy sector in the past few years,” he said.

The Government Employees Pension Fund (GEPF) is a defined-benefit fund, meaning that, at retirement, employees’ benefits are paid out at a set rate rather than at a rate governed by the investment performance of a fund. The fund is underwritten by the state, which is liable for any gaps between the benefits due to beneficiaries and the money available in the fund.

The PIC is an extension of the fiscus, argued Canter, and taxpayers are “on the hook” for any shortfalls in the fund that may be brought on by poor performance.

Given these risks, it was crucial that the PIC remained an independent entity, operating on fiduciary principles, he said.

In May, treasury said in Parliament that the PIC was being considered as a possible option to recapitalise an ailing SAA. This prompted the GEPF to release a statement reassuring members that their savings were safe and that no discussions had been held with the fund on the matter.

The fund refused to comment on Gigaba’s statement, saying it “cannot comment on political parties’ sideline statements”.

But the fund’s mandate to the PIC “is very clear, therefore there is no immediate need to change the mandate”, it said. In addition, the fund was already supporting economic transformation through its developmental investment policy, it said.

The aim of the policy is to earn good returns for fund members while supporting positive, long-term economic, social and environmental outcomes for South Africa. It allows for investments, including in economic and social infrastructure, and broad-based black economic empowerment.

The PIC did not answer questions put to it by the Mail & Guardian this week. In previous statements it has stressed that, although it does hold a substantial number of state-owned enterprises’ bonds, a significant portion of these are government guaranteed.

It also said it was concerned with the governance practices of certain parastatals and had discussed this matter with the treasury. Additionally, it has said it was in discussions with “external company law experts to determine what changes can be made to the PIC’s governance policies to enable the PIC to exercise a greater degree of oversight on the governance structures of investee state-owned enterprises”.

It has stressed that it is “not conflicted as an organ of state, as all investment decisions are taken in the best interest of our clients and in line with client mandate requirements and the investment risk parameters stipulated by client mandates”.