New government’s plan to use South African pension fund money

The new Government of National Unity’s Trade Department plans to proceed with the ANC’s plan to amend legislation to allow pension funds and other asset managers to finance industrial policy initiatives.

Newly appointed Minister of Trade, Industry and Competition Parks Tau told Business Day that his department is considering amending regulation 28 of the Pension Funds Act.

This will allow pension funds and other asset managers to finance industrial policy initiatives. 

Currently, regulation 28 limits the asset classes that pension funds and life insurers can hold but does not prescribe minimum investments. 

The government could direct significant capital towards industrial policy goals by adjusting these limits. 

The South African pension fund industry holds over R4 trillion in retirement savings, with a substantial portion managed by the state-owned Public Investment Corporation.

Tau’s proposal comes after the ANC, in its election manifesto, pledged to transform the financial sector to ensure adequate funds are available for the nation’s industrialisation and economic development.

It said it would “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 Apartheid 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. 

“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.

President Cyril Ramaphosa will soon present the outcomes of the recent cabinet lekgotla, where the proposal was discussed. 

Ramaphosa’s administration is focused on reviving the economy through the Reimagined Industrial Strategy, which promotes infrastructure spending, green industrialization, and leveraging the African Continental Free Trade Area.

“The President said in no uncertain terms that we have to ensure inclusive economic growth, and that is an apex priority for this administration, taking into account the limited growth that we’ve had as a country and the need to accelerate economic growth transformation and job creation,” Tau told Business Day TV.

“Our agenda would be informed by placing industrial policy as the centrepiece of economic policy in the country it is about ensuring that we drive programs of industrialization and reindustrialization, leveraging the various instruments at our disposal.”

Tau said this can only be done in conjunction with other government departments.

“I emphasize the point that we don’t start on the basis of we’re going to regulate and control people and industries,” he said.

“I think that it should be a partnership between the government and the private sector to say what are the efforts that we have to make and what initiatives do we have to put in place.”

The ANC’s proposed amendment to regulation 28 has been heavily criticised by industry roleplayers.

Old Mutual investment strategist Izak Odendaal has said the ANC’s proposal in its election manifesto is vague.

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

A 2022 change to Regulation 28 of the Pension Funds Act allowed pension funds to invest up to 45% of their assets in infrastructure. At the time, it was hoped that this change would end the prescribed assets debate. 

Odendaal said 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.” 

“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,” he said.

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.

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

Pension funds, banks, and investors want the return on capital. A long list of potential investments meets 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.