Using South African pension money to fund Eskom and Transnet a bad idea

Efficient Group chief economist Dawie Roodt said the ANC’s plan to invest pension funds into state-owned enterprises (SOEs), including Eskom and Transnet, is a bad idea. The good news is that it is unlikely to become a reality soon. 

Before this year’s elections, the ANC said they would go ahead with plans to revive an apartheid-era rule compelling pension funds to be invested into state-owned enterprises (SOEs), including Eskom and Transnet.

In its February manifesto, the ANC 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 White-minority rule to force investment in government bonds but was scrapped decades later.

“Immediately after elections, we have to get into it,” Zuko Godlimpi, deputy chair of the ANC’s economic transformation committee, told Bloomberg.

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

These state-owned entities 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 said, clarifying that it’s not solely about Eskom and Transnet.

“It is not just that,” he said, stressing that the financial sector would be consulted.

“It is about investing in different classes of assets, including private assets themselves, but that is consistent with the industrial output we seek,” he said.

Godlimpi also highlighted that this approach would address the over-concentration of the country’s retirement savings in companies listed on the Johannesburg Stock Exchange (JSE).

He argued that the distribution should be more spread out to other asset classes, hinting at financial instruments linked to South African SOEs.

The pension industry has criticised plans to revive prescribed assets, fearing that funds may be threatened if invested in underperforming state-owned enterprises. 

Eskom and Transnet are specific concerns since they have become synonymous with mismanagement, corruption, collapsing infrastructure, and criminal syndicates. 

Experts have estimated that Transnet’s issues alone will cost South Africa up to 1% of potential GDP growth, with load-shedding having a slightly larger negative impact. 

Problems with the plan

Many experts, including Efficient Group chief economist Dawie Roodt and Alexander Forbes CEO Dawie de Villiers, do not support prescribed assets.

“It’s a horrible idea,” Roodt said. “The trustees of a pension fund are supposed to decide for themselves what’s the best investment for their members.”

He added that investing in South Africa’s state-owned enterprises is a bad idea because they are generally very badly run.

Internationally, infrastructure is a very popular asset class since it tends to deliver a steady return. Pension funds will happily invest in infrastructure if the projects are there.

“But as noted above, 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.” 

“Good for them, but it will depress returns,” Roodt said.

Alexander Forbes CEO Dawie de Villiers also said prescription should not happen. “We are dead against it and think it will not happen,” he said.

He argues the right way to do it is to make the projects accessible for pension funds by ensuring appropriate governance and suitable risk-adjusted returns are achievable.

Old Mutual Wealth investment strategist Izak Odendaal added that South Africa’s economic woes do not stem from a lack of funding.

“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,” he said.

Allan Gray strategist Sandy McGregor previously warned that prescribed assets lead to inefficient capital allocation.

He added that a prescribed assets policy will drive away international investment as investing in local assets will result in suboptimal returns.

Government of National Unity (GNU)

The ANC has pledged to transform the financial sector to ensure adequate funds for the nation’s industrialisation and economic development.

The party also pledged with its plans immediately after the May 29 elections. However, the election results threw a spanner in the works.

The ANC has since lost its majority, and the subsequent formation of the Government of National Unity (GNU) has left questions about how plausible the plan still is.

“I don’t think it’s going to become a reality soon,” Roodt said. Ideological differences between the ANC and the DA would likely delay its rollout. 

The DA has previously been very vocal against pension funds being used to fund an Eskom bailout. 

“Eskom is a hopeless cause, and no amount of funding can save this failing entity,” the DA said, pledging to take the matter to court if necessary.

“So I think they will simply put it on ice, for some time at least,” Roodt added.

Odendaal shared similar sentiments, saying the plan is unlikely to happen soon. “There will have to be a consultation process with stakeholders first, and possibly even legislative amendments.”

“The proposal was worded very vaguely in the ANC’s election manifesto, so it is hard to know specifically what the intention is.”

He explained that the possibility of using prescription has previously been explored, but this led to amendments to Regulation 28, which enabled greater investment by pension funds into infrastructure.

“Perhaps that might be changed from an allowance to a compulsory investment, but it seems unlikely. Even if it becomes compulsory, it will likely be small, perhaps 5% or so.”

Odendaal warned that if South Africa does go down the road of prescription, it is important that people remember, firstly, that this does not amount to the government “stealing your pension money”.

“You will still earn a return on investing in the prescribed assets, which may or may not be lower than what is available elsewhere. And this will only be a portion of the overall allocation of the fund.”

Secondly, 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,” he said.