ANC plan to use your pension to fund SOEs will fail

The ANC’s plan to force pension funds to invest in certain government-approved investments will fail to benefit the local economy as the issue with state-owned enterprises (SOEs) is not their lack of funding. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who urged investors not to make impulsive decisions based on the ANC’s plan as it is far away from becoming law. 

In its manifesto last month, the ANC pledged to transform the financial sector to ensure it makes adequate funds available for the nation’s industrialisation and economic development.

It said it will “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy, through prescribed assets.” 

The rule was created in 1956 during White-minority rule to force investment in government bonds but was scrapped decades later.

Plans to revive it have been criticised by the pension industry, which fears funds may be threatened if invested in under-performing state-owned enterprises. 

“This is a fairly vague statement. It does not say how big a ‘portion’ could be, while financial institutions, including retirement funds, clearly already invest in ‘the economy’,” Odendaal said. 

The 2022 change to Regulation 28 of the Pension Funds Act means pension funds can already invest up to 45% of their assets in infrastructure. At the time, it was hoped that the change would put to bed the prescribed assets debate. 

There is a simple reason why the ANC’s plan will not benefit the economy. “Let’s put it very simply: South Africa’s economic woes do not stem from a lack of funding,” Odendaal explained. 

“When it comes to infrastructure, the issue is not the appetite of pension funds to invest but rather the lack of bankable projects.”

Internationally, infrastructure is a very attractive asset class for pension funds because it tends to deliver stable long-term returns. 

“Many local pension funds would happily increase exposure. But the pipeline of projects remains thin.” 

This is partly because of the complex nature of many of these projects, which require approvals at multiple government levels and across many agencies and departments. 

Moreover, until recently, the state monopolised many aspects of key infrastructure delivery, notably in electricity, rail and port. 

The Budget Speech also presented further proposed changes to public-private partnership regulations and new infrastructure funding mechanisms to crowd in private capital. 

It is also important to note that private infrastructure funding is only feasible where there is a profit to be made, Odendaal added. 

Pension funds, banks, and investors want the return of capital and return on capital. There is a long list of potential investments that meet these criteria, including rail, ports, electricity, pipelines, bulk water supply, toll roads, airports and so on. 

Many other forms of infrastructure do not have associated cash flows and are, therefore, not ripe for private investments. 

More specifically, the government’s plan to use the prescribed assets to invest in SOEs is unlikely to improve their performance. 

The ANC said the range of prescribed assets would go beyond investing in government bonds to support struggling state-owned firms such as Eskom and Transnet, which are in desperate need of funding.

However, it is unclear how more money will solve the current crises plaguing South Africa’s SOEs after they have already received R331 billion in government bailouts. 

Eskom and Transnet, in particular, have become synonymous with corruption, mismanagement, and fruitless expenditure. 

Without fundamental operational changes at these companies, it is unlikely that more money – wherever it comes from – will improve their performance. 

The ANC said the financial sector would be consulted before its plan is implemented.