Government’s plan to use your pension misses the mark

Asset manager Futuregrowth said the government’s plan to force South African pension funds to invest in government-approved investments is understandable but ultimately misses the mark.

This comes after the new 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”. 

However, portfolio manager of Futuregrowth’s Infrastructure and Development Bond Fund, Jason Lightfoot, said that, at best, the outcome of Tau’s proposed amendment could take the form of an “allowable” capital investment to facilitate industrialisation.

This was done in 2022 with the introduction of the 45% allowance for infrastructure. 

“This was a soft nudge, but a better outcome than prescription. Although this approach is understandable given the country’s fiscal constraints, it ultimately misses the mark,” he said.

Lightfoot explained that South Africa’s industrialisation trajectory has been hampered by a chronic infrastructure deficit.

This can be seen in the country’s Gross Fixed Capital Formation (GFCF) rate of 15.2% as a percentage of GDP in 2023. 

Lightfoot explained that this figure persistently lags behind other emerging economies like China, which has a GFCF rate exceeding 40% over the past decade. 

“This underscores the critical gap in investment essential for driving local industrial growth and competitiveness,” he said.

However, Lightfoot explained that investing in infrastructure and industrialisation has changed significantly over the past few years.

While infrastructure remains crucial for economic development, times have changed – its role now differs from that of direct industrial investments. 

Infrastructure projects typically offer stable, long-term returns with lower risk profiles due to their contracted nature. 

“Conversely, industrialisation, particularly in the context of the Fourth Industrial Revolution, involves higher-risk, higher-reward ventures,” he said. 

“These investments – in manufacturing, technology, and innovation – are essential for driving economic growth and competitiveness. But these can sometimes be subject to market volatility and uncertainty.”

Lightfoot further explained that pension funds in South Africa face a critical challenge – a shortage of viable investment options that meet their stringent risk and return requirements.

He said pension funds are custodians of substantial retirement savings and have been instrumental in providing capital to South African industry. 

The South African pension fund industry holds over R4 trillion in retirement savings and has invested significantly in both listed and unlisted companies across various sectors in the country.

Their portfolios span a range of asset classes, from traditional equities and bonds to alternative investments. 

However, despite their appetite for opportunities that stimulate economic growth and job creation, pension funds still face a dearth of viable investment options – and Tau’s proposed amendments will not address this challenge.

Lightfoot explains that this is because the amendments focus on arbitrary allocations and do not prioritise bankable projects.

“Minister Tau’s proposal to amend Regulation 28, which would seemingly introduce “industrial/manufacturing caps”, is a misguided approach that fails to address the core  obstacles to industrial development in South Africa,” he said.

“Given that Regulation 28 already allows for a maximum of 35% in unlisted assets, pension funds have ample surplus capacity to invest in industrial and manufacturing projects that reside outside the realm of the listed universe.”

He said while initiatives such as Operation Vulindlela have demonstrated a commendable commitment to accelerating structural reforms, they do not constitute a complete solution on their own. 

“Investors, including pension funds, are fundamentally driven by the pursuit of optimal risk-adjusted returns,” he said. 

“Arbitrary quotas for industrial and manufacturing investments in pension fund legislation will do nothing to help cultivate a pipeline of projects capable of delivering the right returns.”

Therefore, rather than imposing regulatory constraints, Lightfoot suggested that the government create an environment that allows viable industrial projects to flourish.

He said this entails implementing comprehensive reforms to:

• Address infrastructure deficiencies
• Reduce bureaucratic hurdles
• Enhance regulatory certainty
• Foster a stable macroeconomic climate, including robust skills development programmes

“These initiatives align with Project Vulindlela’s goals to accelerate structural reforms and unlock the country’s economic potential,” Lightfoot said. 

“By focusing on these foundational elements, the government can create an enabling environment for private sector investment in the industrial sector, thereby driving economic growth, job creation and sustainable development.”