The government is considering amending legislation to permit pension funds and other asset managers to finance SA’s industrial policy initiatives in a move that could open the door to trillions of rand in retirement savings for strategic sectors amid fiscal constraints.
The proposal to amend regulation 28 of the Pension Funds Act to finance industrialisation was tabled by the department of trade, industry & competition at the past weekend’s cabinet lekgotla as part of a “comprehensive suite of regulatory tools and mechanisms” to spur industrialisation, minister Parks Tau said.
“Currently we are putting on the table possible considerations but these would have to be processed on the basis of a comprehensive review and implementation mechanisms,” Tau told Business Day.
The outcomes of the lekgotla will be presented by President Cyril Ramaphosa, who in the opening of the seventh parliament on Thursday staked his reputation on reviving the economy, which has hardly grown for more than a decade.
After the economy was battered by the disastrous stewardship of former president Jacob Zuma, Ramaphosa’s administration accelerated industrial policy with sector-specific master plans aimed at aligning industries for growth, promoting exports and supporting black industrialists.
The policy, under the Reimagined Industrial Strategy, is also designed to scale up infrastructure spending and green industrialisation and to capitalise on the African Continental Free Trade Area, which provides a gateway to more than 1.3-billion consumers in a trade block worth R23-trillion.
Regulation 28 sets the maximum level that pension funds and life insurers can hold in asset classes such as property, government bonds and listed shares, but does not prescribe minimum investments in asset classes.
By possibly adjusting investment limits and diversifying asset allocation, the government could open capital floodgates to sectors deemed strategic to SA’s industrial policy goals.
The pensions fund industry comprises more than R4-trillion in retirement savings, more than half of which is in the custody of the state-owned Public Investment Corporation.
Backlash
Tau’s proposal stops short of directly influencing investment allocation. During the apartheid era, the government compelled retirement funds to invest a portion of their assets in local government and state-owned enterprises. But discussions about reintroducing the policy of prescribed assets occasionally resurface, triggering a public backlash and raising concerns about investor returns.
The ANC made the proposal to mandate a specific portion of pension funds to be invested in government-approved assets such as infrastructure projects part of its 2024 election manifesto.
The asset management industry has previously warned that should the proposal be implemented, it could increase the risk for savers and result in lower returns.
“While Regulation 28 established a 45% allocation for infrastructure investment almost two years ago (this remains optional, not mandatory), it now doesn’t make any sense to have a further “soft” sector-specific allocation such as an industrial/manufacturing cap,” said Jason Lightfoot, portfolio manager at Futuregrowth Asset Management, one of SA’s biggest institutional bond investors.
“The industry will vehemently oppose any form of prescription, although this was not directly implied. The government needs to focus on fostering an investment-friendly environment that allows for the development of attractive projects pension funds can confidently invest in.”
Tau’s predecessor, Ebrahim Patel, noted in a review of his five-year tenure from 2019 that industrial funding by the department of trade, industry & competition, Industrial Development Corporation and the National Empowerment Fund totalled R100bn.
The review, released in May, emphasises that the rapid scaling up of infrastructure spending should be a priority of the next administration, with levels of investment increasing to at least R400bn-R500bn annually and drawing on private and public sector resources. The priority should be improving electricity provision and freight transport for established businesses.
The proposal for pension funds to finance industrialisation comes at a time when the fiscus is constrained and is facing spending pressure from National Health Insurance and possible basic income grants and other social development initiatives.
“The idea must not be that when the fiscus is constrained then industrial policy is dead,” Zuko Godlimpi, department of trade, industry & competition deputy minister, said in the department’s budget vote debate in parliament on Tuesday.
“Financing industrialisation is not limited to taxes and the fiscus. There exists a positive relationship between gross national savings and gross fixed capital formation, which means we need to start thinking of financing industrialisation from the [existing] national savings portfolio,” Godlimpi said.
“One of the discussions that we are proposing to cabinet in this term is new asset classes that can be introduced into regulation 28 to think about the possibility of industrial financing relying on the pensions industry as well.”
The department has placed industrial policy at the centre of its strategy, with 70% of its R30.1bn budget for 2024/25 allocated to investment incentives, sector support programmes, and localisation and transformation efforts.
“We have industrial capabilities as a country. We must stop exporting jobs. In identified industries, including infrastructure build programmes, we will work with relevant SOEs and industry to support local manufacturing of our key products and create jobs,” Godlimpi said.
Update: July 18 2024
This story contains comment from Futuregrowth Asset Management
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