Battle over South African pension money being used for Eskom and Transnet

The debate over the ANC’s plan to use South Africans’ pension funds to invest in government projects has been ongoing for years, with the government divided on the plan’s viability.

This policy position, referred to as ‘prescribed assets’, was revived by the ANC in the buildup to the country’s national elections in May. 

Prescribed assets are a type of investment that the government mandates certain investors, such as pension funds and insurance companies, to hold. This typically involves investing in government bonds or other government-approved securities.

Specifically, in the case of South Africa, the ANC is looking to amend regulation 28 of the Pension Funds Act.

This will force pension funds and other asset managers to finance industrial policy initiatives, including the funding of state-owned enterprises (SOE) like Eskom and Transnet. 

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 policy was last implemented during Apartheid to force investment in government bonds but was eventually scrapped after a few decades. 

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

The ANC appears to be committed to revisiting the policy of prescribed assets, with the party including the policy in its election manifesto. 

However, since the formation of the Government of National Unity (GNU), there has been discord amongst different government factions about this policy’s viability.

On one side of the debate is Trade, Industry, and Competition Minister Parks Tau, who recently told Business Day that his department is considering amending Regulation 28 of the Pension Funds Act.

Deputy Minister of Trade, Industry and Competition Zuko Godlimpi has also echoed this, explaining why the party wants to revive the policy at the 18th Annual Competition Law Economics & Policy Conference 2024. 

Godlimpi used it as an opportunity to repeat his calls to reintroduce the prescribed assets policy in South Africa. 

“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 said. 

“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 maximize the use of local capital, most of which is concentrated in our pensions industry.” 

On the other side of the debate is the National Treasury, which has strongly opposed the policy.

At a Nedgroup event in September, Deputy Finance Minister David Masondo said that a prescriptive investment policy would adversely impact the effectiveness and efficiency of the country’s capital markets.

He said money allocated to under-performing state-owned companies that they would not otherwise have received could be squandered.  

“Recipients of the prescribed funds may be incentivized to manage the entities inefficiently as they will be guaranteed funds regardless of how they are managed,” he said.

Pension funds may also earn below-market returns, which can impact their ability to meet their liabilities, force them to increase contributions, and subject retirees to lower benefits.

“Foreign investments and investor confidence in the efficiency of the capital markets will be undermined, thus reducing available savings,” Masondo said.

Expert opinion on prescribed assets

The debate within the government over the use of prescribed assets puts into question the likelihood of the policy being implemented.

However, industry experts seem to agree – prescribed assets would not benefit South African pension funds.

Professor Raymond Parsons from the NWU School of Business & Governance said that the GNU and the National Treasury, in particular, should be very wary of reinstating a prescribed assets regime for SOEs, given South Africa’s broader socioeconomic needs. 

Parsons told Daily Investor that the plan was initially instituted by the Apartheid government in 1958 and was abolished for good reasons in 1989. 

“It was found to be inefficient and an inhibiting factor on investment performance,” he explained.

He said South Africa’s current political economy is even less conducive to the prospect of prescribed assets than it was originally under the Apartheid government. 

“The idea of reintroducing prescribed assets cannot be reconciled with an economy that is still on junk status, features on the global grey list, and is committed to making South Africa a preferred investment destination,” he said. 

“A move towards prescribed assets would be negative for investor confidence.”

Parsons said the GNU has as its top priority more robust and inclusive job-rich growth, which needs to be driven by much higher levels of fixed capital investment by the private sector. 

The updated National Development Plan indicated that for South Africa to grow at vastly accelerated rates, total fixed investment (GFCF) needed to reach 30% of GDP by 2030. 

GFCF now stands at barely 15%, of which private fixed investment is by far the largest component. 

“A major inhibitor of growth and investment in the past has been policy uncertainty,” he said. 

The North West University Business School’s quarterly Policy Uncertainty Index (PUI) has improved recently and is on the cusp of positive territory. 

However, Parsons warned there is a serious risk of this positive trend being reversed if the prescribed assets regulations are reinstated. 

“The Minister of Finance, in his MTBPS speech on 30 October, should make it clear that this proposal will not be pursued,” he said.

Below is the latest PUI for the third quarter of 2024.