Major problem with ANC plan to tap pension funds for government projects

The resurfacing of plans to push South African retirement savings into infrastructure and other government-approved projects fails to address the problem that many of these investments are not bankable. 

The ANC has long touted this policy position as a way to aid investment from state-owned enterprises in infrastructure projects across South Africa. 

Referred to as ‘prescribed assets’, this plan was revived by the governing party in the buildup to South Africa’s national elections in May 2024. 

The programme was last implemented during Apartheid to force investment in government bonds, but it was eventually scrapped after a few decades. 

According to Old Mutual Wealth’s Izak Odendaal, the policy fails to consider why capital was not allocated to these investments in the first place. 

Typically, the rise of this debate means that the issue is not a lack of capital but a lack of projects for the money to be invested in. 

The revival of this policy and its potential implementation, considering it is a main policy stance of the country’s major political party, is likely to result in a repeat of this mistake. 

Deputy Minister of Trade, Industry, and Competition Zuko Godlimpi has been the main proponent of reviving the policy in recent years, saying capital is misallocated in the economy. 

“In terms of how the structure of the economy looks, our financial markets are extremely liquid, but capital allocation is where the problem comes in,” Godlimpi told a Competition Commission conference. 

“That is what merits the discussion about using the entire balance sheet of South Africa Inc. It includes essentially pension funds, and if we don’t do that, we’ll keep on believing that we are capital-starved when we are not.” 

“The point that we are making is that we need to protect the South African economy from capital flight, and the best way to do that is to maximise the use of local capital, most of which is concentrated in our pensions industry.” 

Godlimpi explained that most pension funds’ assets are allocated towards what he termed unproductive industries and are concentrated within the top 100 companies on the JSE. 

“But for the companies that require real capital for real production, it is nowhere to be seen,” he said.

Godlimpi explained that this is because pension funds are viewed as private assets and not part of the discussion around national development.

He said that, in his personal view, pension funds should be seen as national assets rather than private assets. Thus, the discussion around them must be a national development conversation rather than a personal investment discussion.

The real problem

Retirement savings have always presented an attractive pool of capital for politicians and administrators, as the funds are typically held for the long term and are highly lucrative. 

Odendaal recently conducted an analysis of pension fund systems around the world, with many likely to run into major headwinds in the form of declining contributions from a shrinking workforce. 

Sustainable pension funds are vital for the country’s financial success, as they are an important source of capital. 

However, there are major debates about how this capital is used and allocated in an economy to drive the best outcomes. 

In both Australia and the United States, defined contribution funds predominate, and the average equity allocation is around 50%. US pension funds are also big investors in the venture capital funds that keep Silicon Valley’s conveyor belt of innovation turning.

In countries where most assets are in defined benefit schemes, the average asset allocation skews towards bonds, since these can more closely match long-term liabilities actuarially. 

This is the case in the UK, where proposed pension reforms are currently being debated, including how to get funds to increase investments in UK-listed equity and venture capital to support economic dynamism and productivity growth.  

Odendaal said a related argument also surfaces from time to time in South Africa, namely that “prescribed assets” rules should be introduced to force retirement savings into infrastructure and other productive assets.  

This call is often misinterpreted as the government’s intention to confiscate pension savings to fund itself. Regardless, it is unnecessary. 

The challenge is not a shortage of funding but rather a lack of bankable projects. The government recognises this and work is underway to increase the pipeline of investable projects, and prescribed asset regulations are not on the cards. 

However, the prudential asset class guidelines Regulation 28 of the Pension Fund Act already channel investment into the domestic economy, since they limit international exposure to 45%. 

Total equity exposure is capped at 75%, though this adequately leaves room for local pension funds to have significant equity exposure.