The never-ending reality show that follows Public Investment Corporation CEO Dan Matjila has prevented SA from having a serious discussion about the role the asset manager for the Government Employees Pension Fund (GEPF) can play in SA’s economic development.
The PIC was established in 1911 to hold various public assets. Its assets did not grow much until the late 1980s when the apartheid rulers, fearing that a democratic government might not honour the pensions of public servants, switched from a pay-as-you-go system to a fully funded scheme.
The transition was costly, as academic Fred Hendricks has written: "It led directly to a dramatic increase in national debt." The government issued bonds to the PIC to finance the transitional costs of shifting to a fully funded scheme.
"The government was borrowing and lending to itself. The entire operation was artificially circular."
In a pay-as-you-go system, the contributions of current employers and employees cover the pension benefits of retired employees. There is no accumulation of funds.
The GEPF paid benefits of R90.7bn. A radical restructuring option could see the PIC writing off government and SOCs debt (R640bn) and releasing R250bn to fund the state portion of a R500bn fiscal stimulus over three years
In a fully funded system, the pension fund operates like that of a private company. It accumulates a pile of assets to cover the pension payouts if the company were to close shop and have to pay all benefits at once. However, a government cannot close shop, even if it is bankrupt. It will never need to pay pensions to all its employees on the same day.
Therefore, in the rich countries, most public employee pension funds are either unfunded or partially funded, according to the Organisation for Economic Development and Co-operation.
In the US, the Social Security Trust Fund, which will provide pension benefits of $1-trillion to 63-million Americans in 2018, operates on a pay-as-you-go basis. The GEPF is a defined benefit fund. This means the pension payout is predetermined. Employees do not benefit or make losses if the value of the assets in the PIC increase or decrease.
The fund is the government’s means of financing its obligations to public sector employees. Like a company that is in deep trouble, the time has come for SA Inc to consider a one-off restructuring of its national balance sheet to find a way out of the worst post-apartheid economic crisis.
At the end of December 2017, the PIC had assets of about R2.1-trillion, according to the Reserve Bank. (These include those of the Unemployment Insurance Fund, which has a surplus of R130bn.) Net government debt was about R2.2-trillion. The level of funding in the PIC is obscene in a country with such high levels of poverty.
The PIC’s assets included: shares (R1.1-trillion); government bonds (R451.8bn); and state-owned companies’ (SOCs) debt (R187.5bn). The bonds and SOCs debt is money the government owes to itself. In March 2016, the GEPF had a funding level of 116%, compared with a target set by the fund’s trustees of 90%.
During the year to end December 2017 it had income of R137.9bn. This included contributions of R65.6bn and investment income of R72.1bn.
The GEPF paid benefits of R90.7bn. A radical restructuring option could see the PIC writing off government and SOCs debt (R640bn) and releasing R250bn to fund the state portion of a R500bn fiscal stimulus over three years. Less bold options could include only writing off SOCs debt and funding the stimulus and only releasing the stimulus funds.
Since investment income accounts for 80% of benefits, the GEPF could also have a three-year contribution holiday. The government would save R43bn a year to partially fund the stimulus. Employees would save about R23bn a year, which would be equivalent to a tax cut that boosts consumption.
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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