With government finances in such a mess, the easiest way to plug the hole might be to force you to use your pension fund money to bail out state-owned enterprises.
Read the original article on Financial Mail.
This is the threat of ‘prescribed assets’. It requires a capable state if it is to have any chance of success. As things stand it would be unfair to force savers to rescue clapped-out parastatals with little prospect of a financial return.
There’s an innocuous item in the ANC’s 2019 manifesto, which many people would have skipped past. In soothing, sensible language, it talks of investigating a new framework to mobilise funds for "socially productive investments, including housing, infrastructure for social and economic development and township and village economy, and job creation".
It seems benign enough. Certainly, you could hardly argue against the rationale — until, that is, you grasp the nuts and bolts of this plan. This tool, it turns out, will be a regime of "prescribed assets": forcing pension funds or financial institutions to buy specific assets, decided by the government.
It’s not a new idea: the apartheid government did the same thing in the 1980s, forcing funds to buy government bonds.
This time, however, the idea would be to force pension funds to invest an amount, say 5%, into inefficient and deeply indebted state-owned enterprises (SOEs), such as Eskom or SAA.
These companies, it’s no secret, are battling to raise cash any other way.
It’s a scary prospect, playing to the gallery of sceptics who’re already raising the alarm about the assault on property rights implied in the new law on expropriation of land without compensation.
At the head of this list is financial planner Magnus Heystek, who argues that people "would have to increase their contributions and possibly work and contribute longer due to the poor performance of their investments". Heystek warns, bluntly, that the ANC is coming for your pensions.
"While I’m not a betting man, my money is on prescribed assets within two years."
But is this just scaremongering? Is a regime of "prescribed assets" likely, or just another case of economically incoherent ideas being flighted by the governing party, only to be quietly shelved later?
More cash to plunder
As Futuregrowth chief investment officer Andrew Canter says, prescribed assets is a political, not an economic, phenomenon.
"Politicians see a pile of money to plunder. It can be couched in a benevolent way," he says. "We can be directed to invest in rural development, for example, and I am all for rural development, but are there enough investments in that space which provide competitive returns?"
Canter, who made headlines in 2017 for withdrawing Futuregrowth’s funding for ailing SOEs like Eskom, is the foremost critic of prescribed assets.
He says savers need an incentive to tie up their assets in pension funds or retirement annuities — such as being able to deduct such an investment from your taxes.
But even then, "retirement funds with the burden of prescribed assets could provide worse returns than discretionary savings vehicles such as bank deposits and unit trusts, hollowing out the retirement fund industry".
This would also be a violation of property rights. "These assets are property just as much as land and houses are," says Canter.
There’s another important argument: Canter says that those SOEs that are capable of providing a return are already getting private sector money.
"We are already happy to lend to the Development Bank of Southern Africa, the Land Bank and the Industrial Development Corp. There’s no need for prescription there. We can all guess where the prescribed funds will end up," he says. In other words, pensions are already being deployed into all but the most delinquent state-run companies.
Janina Slawski, head of asset consulting at Alexander Forbes, points out that there are large, successful companies that were built with money invested through the apartheid government’s regime of prescribed assets.
The most obvious one is Sasol. But these are the exception: forcing savers to finance parastatals with poor prospects, which are unable to get money from any sensible lender, can only be a recipe for disaster.
Haroon Bhorat, a professor at the University of Cape Town, argues that there are clear economic development goals that require the financing of public goods which support economic growth. "But it is reliant on an optimally functioning state which is not resource-constrained and debt-laden."
Which we don’t have. And any bid to push through such a rule, in a dysfunctional state, risks spooking whatever foreign investment is left.
So why does this idea have any currency, if it’s such a poison pill for investment?
Absa economist Peter Worthington says: "Prescribed assets appeal to the economically illiterate as they see up to R6.5-trillion of ‘free’ money in the financial system without realising it is there to fund liabilities."
It might look acceptable to shave off a percentage point or two a year to finance prescription, he says, but compound that over 40 years and you’re looking at a considerable loss to your savings.
The Association for Savings & Investment SA (Asisa), which represents unit trusts, life insurers and asset managers, has an even more apt argument against it.
Asisa CEO Leon Campher says it would require people’s pension savings to be redirected to rescue entities that have been mired in state capture and lack of delivery.
"Asset managers are not asset owners," he says. "Behind every asset there’s an ID number. As the owners of these assets, ordinary South Africans elect and appoint trustees to make asset allocation decisions that are in their best interest. Prescription would jeopardise this fiduciary duty."
And it also means that other deserving projects would miss out on that funding, since capital is a finite resource.
"Projects that would otherwise have driven growth and created sustainable employment would now not happen anymore," says Campher.
But if it’s so crazy, who exactly is driving the idea? There is one insider willing to break ranks from the ANC’s Sicilian-style omerta around prescribed assets: higher education minister Blade Nzimande.
Wearing his hat as leader of the SACP, Nzimande mounted a stirring argument in favour of prescribed assets at the ANC’s January 8 jamboree in Kimberley.
"We need a radical change to our economy: we want land expropriation without compensation and we want workers’ pensions and provident funds to be used to build the manufacturing base of our country so as to create jobs and not to fund vanity projects that serve the private interests of the few. We want prescribed assets," he said.
As he’s the leader of a party favouring state control and ownership of private assets, you’d expect that of Nzimande.
It’s an argument full of holes, however. For example, he glosses over the fact that one of the beneficiaries of those assets would be the biggest vanity project of all: SAA. And SAA mostly serves the affluent.
Even Floyd Shivambu, deputy leader of the EFF, sounded more moderate in a recent parliamentary debate on this issue. "There is nothing wrong with prescribed assets if the policy is implemented within the correct developmental assets and strategy," he said.
Proponents also argue that it has worked elsewhere.
Take Singapore. Under its first prime minister, benevolent strongman Lee Kuan Yew, the country made extensive use of prescribed assets to build itself from a fishing village to a world-class financial hub.
But Bhorat argues this would be the wrong approach. Rather, he says, you’d get a better result from creating a Norway-style sovereign wealth fund built with income derived from the country’s natural resources — not its pension savings.
While there are clearly uncomfortable divisions in the ANC, prescribed assets is a rare area of agreement within the DA.
Geordin Hill-Lewis, the DA’s finance spokesperson, says the most fundamental argument against prescribed assets is that they are, by definition, economically inefficient. "If companies were deserving of investment, they would receive it regardless, and prescription would not be necessary," says Hill-Lewis. "Prescription is an admission that these companies would not otherwise deservedly receive this investment. Capital is then allocated to projects which do not maximise efficiency or returns."
And, he adds, you don’t get economic growth in an economy by telling people where and how to invest their money.
"When we see the words ‘capital’ and ‘investment’ we think of huge sums of money. It may be tempting to think: ‘Who cares if these huge sums earn a few percent less here than there?’
"But the ANC, in pursuing prescription, forgets that the huge majority of those funds actually represent the retirement savings of millions of working people," he says.
Rather bizarrely, Hill-Lewis in parliament accused Sygnia CEO Magda Wierzycka, pundit Wayne McCurrie and retired Goldman Sachs banker Colin Coleman of being "sycophants" on the prescribed assets issue.
Looking for a compromise
Wierzycka, it seems, is being flamed by the DA for looking for a middle ground.
"Prescribed assets might be a compromise to help reduce the burden on the state from a stagnant economy," she says.
But Wierzycka qualifies this by saying there is a big difference between investing in government-guaranteed bonds, which have given excellent income for many years, and "forcing savers to prop up businesses which are not financially sustainable".
Perhaps a fair trade-off, she says, is making it compulsory to invest in state-guaranteed bonds, but at the same time increasing the offshore investment allowance from 30% to 40%. As it stands, funds can invest a maximum of 30% globally, and another 10% to African assets north of SA’s border — but that African allowance is rarely used.
At the same time, the Government Employees Pension Fund (GEPF) could make a deal with the government to increase its offshore exposure (barely 10%) in exchange for providing more finance to SOEs.
Thabi Leoka, a member of Ramaphosa’s economic advisory council, also favours leaning to a greater degree on the GEPF, and its asset manager the Public Investment Corp (PIC).
Intuitively, critics seem to be far more comfortable with harnessing the PIC to rescue SOEs, rather than the broader pool of private pensions. True, it is still pensioners’ futures at stake — but since the GEPF is a state-backed "defined benefit" fund, any shortfall in funding would have to be provided by the government.
Anyway, they’ll argue, this is hardly a worse use of funding than the PIC’s decision to lend R9.3bn to Jayendra Naidoo to invest in Steinhoff, just hours before it collapsed.
Leoka says she’s instinctively averse to prescribed assets.
"But we need to decide if we really want to let go of important businesses such as SAA [Leoka is a director of SA Express]. Are we really prepared to play no role in the aviation sector in Africa, leaving the market to Kenya and Ethiopia?" she asks.
Rory Ord, head of unlisted investments at multimanager 27four, says there’s already a form of "prescribed assets" imposed on banks and insurers through the financial sector code. "There are targets for transformational infrastructure, black agricultural financing, affordable housing and black business growth and small and medium enterprise (SME) funding," he says.
Ord says the government would be better served using "blended finance". This is the government’s preferred term for what is usually called public-private partnerships (PPPs), which mobilise commercial finance into commercially sustainable initiatives.
Take the Black Business Growth Fund, for example. This is a partnership between the National Treasury’s Jobs Fund and 27four, but because certain losses were covered by the Treasury, the fund was able to raise R1bn in private sector finance.
UCT’s Bhorat says pension funds should also explore more opportunities in the unlisted, small business space — where employment generation and returns alike "could be surprisingly high".
"It is a pity that alternative investment vehicles such as section 12J [which make investments into venture capital tax-deductible] will be curtailed in the near future," he says.
Alexander Forbes’s Slawski says it is already possible for pension fund members to allocate a proportion of their savings to develop infrastructure and businesses in their home region. Such subfunds already exist in mining areas like Rustenburg.
Renewable energy projects are another template for how to woo private-sector funding — without requiring "prescription".
Canter points out that 75 power projects worth R200bn were rolled out over four years. And these projects were corruption-free, even though they happened at the height of state capture.
This underscores an essential point made by Campher: it’s not that the private sector is unwilling to invest, the problem is the lack of viable projects.
Darryl Moodley, head of tailored investments at Sanlam, agrees. He says while prescribed assets would be considered economically inefficient in a textbook, there are caveats.
"Large investment projects, particularly those that require scale (such as infrastructure, energy, water, sanitation, transportation) do not always possess the short-term investment returns and flexibility that institutional investors desire. But over the longer term those are the projects that can deliver superior investment returns," he says.
However, he warns that a poorly designed and implemented policy of funding SOEs may damage the ability of investors to enforce market discipline, since they won’t be able to deploy capital on merit.
What you could then see is funds closing down.
"Many parastatals such as Eskom and Transnet would not even pass a basic environmental, social and governance [ESG]) screen," he says.
Investec chief economist Annabel Bishop argues that prescribed assets are not necessarily inefficient — they have worked in Asian countries including Singapore and Malaysia. But, she says, "the big risk in SA today is corruption".
This remains the almost insurmountable hurdle: implementing any such prescriptive rule when the government has zero fiscal credibility with investors.
Bhorat says the government will first have to win back the confidence of the market, investors and ratings agencies.
"In the current environment, as government has emerged from a prolonged period of state capture, where debt levels are rising and SOEs are almost without exception bankrupt, such directed investments are not an attractive option for pensioners," he says.
That’s an understatement. With trust so low, you can hardly compare SA today to Singapore and Malaysia.
And considering that Eskom, Transnet and numerous other SOEs are all but uninvestable, forcing anyone to put their savings into these entities is almost tantamount to confiscation. Indeed, it would be more honest to issue a levy to take away 5% of people’s retirement assets.
//WHAT IT MEANS
Critics say that if companies are deserving of investment they will get it, and prescription will not be necessary
The ANC’s head of economic transformation, Enoch Godongwana, says he is not wedded to the term "prescribed assets" — just the concept of mobilising savings for national development and job creation.
But Wierzycka argues that it would be disingenuous to give it a more cuddly name, such as targeted development assets.
"The government has not delivered to the nation and needs to secure funding though extraordinary means from ordinary savers. We should not sweep the truth under the carpet," she says. She says if savers are forced to commit their savings to fix a problem, they should be sufficiently vigilant to hold the government accountable in terms of delivery.
But that seems an overly optimistic hope. If anything, the government has demonstrated that it can’t be trusted — let alone with your future savings.
The wrong signals
Prescribed assets is a poor choice of nomenclature for the compulsory deployment of funds into state-controlled entities.
S A’s original prescribed asset regime, which started in 1956 and ended in 1989, required pension funds to invest on average 53% of their funds in government, government guaranteed and, especially, state-approved bonds. This was increased to 77.5% in 1977. In 1982 there was some relief when this was extended to include cash — and throughout the period international investment, in equities or bonds or even foreign cash, was utterly forbidden.
Life companies also had to invest 33% of their funds in prescribed assets and the government, through what was then the Public Investment Commissioners (now the Public Investment Corp), had a minimum 75% ceiling — though it only started investing a material amount in equities in the 1990s when the Government Employees Pension Fund was set up in its current form.
The PW Botha government could see that the prescribed assets regime was distorting the financial markets — not least by encouraging investors not to trade their equities, as they could not buy and sell them at will.
Many listed companies became overcapitalised because their shareholders did not want a high dividend, as they would then have to reinvest the bulk of that in government bonds. The Jacobs committee set up to investigate the rules in 1988 concluded that they should be abolished and replaced with a series of prudential limits, now called regulation 28. Pension funds still have limits today in the form of regulation 28 and exchange controls. For example, equities cannot exceed 75% of a fund’s assets, property 25% and hedge funds or private equity 10%.
Unsurprisingly, there is no limit on the allocation to government bonds.
The Jacobs committee said that prescribed assets were “originally intended as protection for policyholders and pension fund members but the prescribed investments came to be regarded in time as an assured source of public funding”.
Darryl Moodley, head of tailored investments at Sanlam, says the period from 1956 to 1989, when prescribed assets formed part of the SA retirement fund lexicon, is certainly not the appropriate model, as it simply forced retirement funds to invest in parastatal bonds to fund the country’s deficit.
This was a three-decade negative experience with for pensioners.
The opportunity cost of investing in prescribed assets was considerable: in the 1970s the real return from prescribed assets was a negative 4% a year and in the 1980s, even though bonds were starting their long recovery, there was still a 1% a year negative return.
The Jacobs committee led to a significant modernisation of financial markets with the introduction of primary dealers on the bond exchange, the Bond Market Association, the Financial Markets Advisory Board and, ultimately, a separate financial depository, Strate, which operates independently from the JSE.
“SA now has one of the highest levels of foreign ownership of its local currency bonds,” says Gill Raine, a senior adviser at the Association for Savings & Investment SA. “At 38% it is similar to Mexico and more than double the proportion in Brazil, South Korea and the Czech Republic.”
Sandy McGregor, a portfolio manager at Allan Gray, says bringing in prescribed assets sends the signal to the rest of the world that SA has imposed restrictions as it can’t raise money any other way. That was true in the days of sanctions, when foreigners were reluctant to buy SA equities or bonds. “With captive assets, there was less reason to adopt responsible fiscal policy.”
McGregor believes reintroducing prescription would send a bad signal to foreign investors, and negate the strides made in winning their confidence at recent investment conferences.
Raine says even if the new version of prescribed assets has more laudable aims, such as encouraging investment in developmental projects, “if it is at below commercial returns it will not be welfare enhancing for the economy. It could even be wealth destructive, if foreigners sell bonds and local funds sell equities to meet their requirements.”