The ANC wants your pension money – but it won’t help

In its election manifesto, the ANC suggested reviving an apartheid-era rule compelling pension funds to invest in certain government-approved investments. However, this plan is unlikely to be implemented and achieve its ambitious targets. 

This is feedback from investment strategist at Old Mutual Wealth, Izak Odendaal, who told Daily Investor that such a proposal will take years to implement and will not help the government boost the economy. 

Commonly referred to as 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. 

Zuko Godlimpi, deputy chair of the ANC’s economic transformation committee, said the party would begin investigating the possibility of reviving prescribed assets immediately after the election.

The range of prescribed assets would go beyond investing in government bonds to support struggling state-owned firms such as Eskom and Transnet.

State-owned enterprises desperately need funding after years of mismanagement, theft and under-investment.

“The prescribed assets conversation is about rebasing pension fund investment in productive assets,” Godlimpi told Bloomberg. 

Odendaal, in response to questions from Daily Investor, said that the proposal was worded very vaguely in the ANC’s election manifesto, making it hard to know its exact intentions.

Furthermore, it does not seem to be a priority, and there will be lengthy consultations with the asset management sector prior to implementation.

This is not the first time the government has been down this road of investigating the use of prescription, and instead, we ended up with changes to Regulation 28 that facilitate greater investment by pension funds into infrastructure. 

He said it might be changed from an allowance to a compulsory investment, but it seems unlikely. 

“The problem isn’t that there isn’t enough money to fund infrastructure. The problem is that there aren’t enough bankable projects for the private sector to invest in at this moment. Even if it becomes compulsory, it is likely to be small, perhaps 5% or so.”

The impact on asset managers is unlikely to be significant, as they already run funds across multiple categories and mandates. 

“For instance, if the government says that exposure to a certain asset class must be a minimum of x%, the asset managers will change the allocation of the relevant funds to reflect this.”

Retirement funds already comply with Regulation 28 prudential limits, which change from time to time. 

Odendaal explained that the bigger question is what it will mean for the return that investors/clients/members might earn if asset managers are forced to invest according to certain minimums.

Internationally, infrastructure is a very popular asset class since it tends to deliver a steady return. 

But in South Africa, there aren’t enough projects to invest in at this stage, so if the entire pension fund sector in South Africa is forced to pile into infrastructure, those few projects will be flooded with cash. 

He said that investors, if a prescription is imposed, will still earn a return on investing in the prescribed assets, which may or may not be lower than what is available elsewhere. 

Moreover, this will only be a portion of the overall allocation of the fund. 

Importantly, this might never materialise or only do so years from now. “Do not make financial planning decisions – such as cashing out your pension or halting your contributions – based on rumours and speculation.”