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 Investors’ risk and return requirements would therefore be superseded by the state dictating where retirement fund assets should be invested.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.
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.