Deputy finance minister and chair of the Public Investment Corporation (PIC) David Masondo has shot down talk of prescribed assets, saying foreign investor confidence in the efficiency of SA capital markets would be undermined, further reducing the savings pool.
Masondo said overall capital market operations, effectiveness and efficiency would decline should asset prescription be reintroduced in SA, both the intermediation of the listed equities and the bond market, with share prices falling, the yield curve distorting, and transaction costs of all debt increasing.
“There is no government intention to interfere with the investment mandates and discretionary powers of the investment managers. Money owners must provide mandates to money managers, who must in turn generate good returns for clients and impact the socioeconomic transformation,” said Masondo.
“The government respects the investment mandates of pension plans, the fiduciary duties of trustees and their desire to maximise portfolio returns within acceptable risk tolerance levels.
“The problem with prescription is that recipients of the prescribed funds may be incentivised not to manage the entities, for example, SOEs [state-owned entities], municipalities, etc effectively and efficiently as they would be guaranteed to get funds regardless of how they are managed.
“If these entities were to continue to be ineffective and inefficient, they would be boosted by prescription in the short term but would fail in the medium to the long term and fail to give any return and to repay the retirement funds, which will in turn lead to the failure of the retirement funds.”
His comments come a week after health minister Aaron Motsoaledi said money from the PIC would be used to fund the upgrading of health infrastructure, as part of the contentious National Health Insurance (NHI).
Prescribed assets is not a new concept in SA. In 1956 the Pension Funds Act was promulgated and it introduced prescribed assets. The prescribed assets in question at that time were government bonds.
In the following two decades, the level of prescription rose to a peak in 1977 — before it began to fall until it was scrapped in 1989. During most of this 30-year period, funds were required to invest more than half their assets in SA government and SOEs’ bonds.
The ANC in its manifesto ahead of the May general election revived the concept of prescribed assets after making a similar commitment in its 2019 election manifesto.
For the idea to see the light of day, regulation 28 would have to be altered, forcing asset managers with regulation 28-compliant mandates across retirement assets to buy a certain amount of government institutional bonds.
The Financial Sector Conduct Authority (FSCA) said in August that reintroducing a prescribed assets regime in SA would offend market principles and was something it would be firmly against.
Masondo said that if the prescribed investments offered below-market returns it would reduce the ability of retirement funds to meet their liabilities and the ability to pay benefits in the medium to long term.
“The sponsors of defined benefit funds, [that is] companies in the case of private funds and the government in the case of the GEPF [Government Employees Pension Fund] will have to increase their contributions.
“For defined contribution funds, the accumulation of member accounts will be reduced leading to smaller lump sums at the time of benefit claims,” said Masondo. “As retirement funds are voluntary, new retirement funds may not be established exposing workers to not having retirement benefits.
“Existing retirement funds may scale down their benefits, offering or closing down over time, exposing workers to reduced retirement benefits.”
Business Day reported in July that the government was considering amending legislation to permit pension funds and other asset managers to finance SA’s industrial policy initiatives
The proposal to amend regulation 28 of the Pension Funds Act to finance industrialisation was tabled by the department of trade, industry & competition at a cabinet lekgotla in July.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.