Guiding consumers since 2009

Investing in state-owned companies could impact pension funds negatively

By Staff Writer
The possibility of state-owned companies using pension funds to support economic investments could present a number of challenges for retirees in South Africa and have a negative consequence on foreign investors.

This is according to Windall Becker, partner at Rezco Investment Group.
Last month Public Enterprises Minister Malusi Gigaba said his department had been asked to initiate a joint process, with the parastatals in its portfolio, to look into the ramifications of directing the company pension funds to invest in assets prescribed by the State.
 
Becker said any move forcing private retirement funds to invest in assets prescribed by the State could be risky. 
“Members of such funds would likely see a potential increase in the risk of their retirement fund assets, by being moved into more risky assets, with potentially higher returns, to compensate for the drag on returns,” said Becker.
 
Government control of investments
 
He added that the reintroduction of prescribed assets would require retirement fund managers to invest a certain percentage of money in investments pre-determined by the State and not by market forces. Investors’ risk and return requirements would therefore be superseded by the state dictating where retirement fund assets should be invested. 
 
“For example, the government could instruct retirement funds to invest a certain percentage of their investments in prescribed government bonds or parastatals such as Eskom.

Prescribed asset allocations were used by the old regime and, as a consequence, many pension funds were chronically under-funded, with retirees paying the price for the legislation through lower retirement funding. 
 
We do not see how the situation would not repeat itself if such a proposal were to be reintroduced into the market now. In effect, the government would be asking the retirement industry to subside state expenditure at rates below market.

Consequently, there would be a transfer of wealth from the retirement fund industry to the government and the parastatals,” said Becker.
 
Cheap funding
 
For Becker another major concern was the level of prescription by the State. 
“If, for example, the State could initially prescribe that 5% of funds are invested in prescribed assets. But that number could be increased over time as the State sees the retirement fund industry as a source of cheap funding,” he said.  
 
He added that one of the reasons that prescribed assets are being discussed again is the fact that the South African economy has suffered from a lack of investment in fixed assets, as well as the significant rand depreciation, which makes borrowing more expensive.
 
Property rights under threat
 
According to Becker such a move by the government would directly target individual property rights and create a negative perception of South Africa as an investment destination. It would also increase the perceived risk of investing in South Africa by foreigners.
 
“This would result in an increase in the risk premium required, and, therefore, the cost of borrowing by the South African government abroad would increase. The retirement fund members, in general, would retire with less security as a consequence of these policies, placing a further burden on the State as they get older,” he said.

Recent Articles

Featured New homeowner? Be aware of these extra expenses

You’ve overcome all the hurdles of buying a home. You’ve managed to pay your deposit and your closing payments, and now you’re a proud title deed holder. However, there are other expenses waiting around the corner. Are you prepared?

Your biggest credit conundrums – answered

Understanding your credit health is one of the most important factors in managing your finances. This is because it gives you insight into your debt, your borrowing ability, and your financial history. While many understand this, there are still many questions on how to do just that.

Avoid debt collectors, choose debt counselling

There are two things you can do when you are struggling to pay your debt. You can either let your creditors hand your debt over to debt collectors – or you can let debt counsellors help you deal with your debt.

Retail notes: easy investment option for new investors

Being a newbie in the world of investing can be challenging because you don’t know where and how to invest. With so many investment options, you could easily be befuddled. Justmoney looks at how retail notes can help you cut your teeth in the world of investing.   

Deals

Spur's South African Combo Special

Price: R80
When: Mondays
Where: Nationwide

De'Vara Beauty Spa Monday Madness Special

Price: From R580
When: Mondays
Where: Cape Town

Translux Student Discount

Price: Depends on destination
When: Daily
Where: Nationwide