Warning about ANC plan to use pension money for government projects

The ANC’s plan to use South Africans’ pensions to invest in government-prescribed projects will fail to stimulate infrastructure investment, harm investor returns, and not improve economic outcomes. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who analysed the potential impact of the new two-pot retirement system on investments in South Africa. 

In the build-up to the country’s elections at the end of May, the ruling ANC proposed a revival of the Apartheid-era policy of prescribed assets in its manifesto. 

The party pledged to transform the financial sector to increase the funds available for government projects. 

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

In the mid-2000s, the government briefly discussed the policy before stiff private-sector opposition resulted in its reintroduction being scrapped. 

The latest rendition of the prescribed assets proposal plans to go beyond forcing pension funds to invest in government bonds and support state-owned enterprises like Eskom and Transnet. 

Newly appointed Minister of Trade, Industry and Competition, Parks Tau, said that his department will consider amending Regulation 28 of the Pension Funds Act to reintroduce prescribed assets. 

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. 

South Africa’s pension fund industry is already heavily regulated in terms of which asset classes it can invest in and how much it can allocate to investments outside of the country. 

Furthermore, Regulation 28 already allows for investment in infrastructure projects, albeit a limited amount. 

“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 industrialisation and reindustrialisation,” Tau said. 

The ANC’s plan won’t work

Odendaal said that the majority of funds held by pension funds or in retirement products are invested in South Africa. 

Even with Regulation 28 being reformed to allow these funds to invest up to 45% of assets offshore, most still must be invested in South Africa. 

While funds invested offshore do not contribute to South Africa’s economic development directly, they do boost national wealth and provide a hedge against rand weakness. 

Ideally, a portion of retirement savings would go specifically to infrastructure projects, and while some politicians like the idea of ‘prescribed assets’, Odendaal said this is neither necessary nor welcome.

“It is unwelcome because it can lead to inferior investment outcomes. It is unnecessary because Regulation 28 already provides ample room for retirement funds to invest in infrastructure,” he said. 

“The biggest reason behind a lack of private investment in infrastructure to date has not been an unwillingness on the part of retirement funds but rather the lack of investable infrastructure projects.” 

Encouragingly, this is starting to change at both an ideological and practical level. 

Ideologically, the government has resisted the view that the state must control the country’s network industries and now welcomes private sector participation. 

Practically speaking, much more attention is being paid to the regulatory impediments.

Odendaal noted that Deputy Finance Minister David Masondo made a similar argument recently. 

Masondo said the government aims to “promote a policy environment that enhances pension portfolio returns, promotes market stability, and avoids compromising both the pre-and post-retirement lives of citizens”.

Reforming Regulation 28 to force pension funds to invest in government-prescribed projects is not a part of this aim. 

The government, instead, should focus on ensuring that new infrastructure projects are investable and that private capital sitting on the sidelines will follow.