The prescription of retirement fund assets a turn-off for foreign investment
The prescription of retirement fund assets - last seen in this country during the 1980s - is believed to be back on the government’s agenda at the ANC’s National Elective conference at Mangaung, which begins in just under a week. This presents a number of
The prescription of retirement fund assets was discussed at the Institute of Retirement Funds (IRF) Conference in Cape Town earlier this year, having first been raised at the ANC’s policy conference in June.
Bekker says any new regulation requiring retirement funds to invest in sub-optimal investments could potentially force these funds into riskier assets. “Members are likely to see a potential increase in the risk of their retirement fund assets, by being forced into more risky assets with potentially higher returns, to compensate for the drag on returns caused by assets being invested in sub-optimal prescribed asset classes.”
He says the reintroduction of prescribed assets would require retirement fund managers to invest a certain percentage of money in investments pre-determined by the state and not by market forces. “For example, the government could instruct retirement funds to invest a certain percentage of their investments in prescribed government bonds.“
“Prescribed asset allocations were used by the old regime and as a consequence many pension funds were chronically under-funded. We do not see how the situation would not repeat itself if such a proposal were to be reintroduced into the market now. In effect, the government would be asking the retirement industry to subside its expenditure at interest rates below market and consequently there would be a transfer of wealth from the retirement fund industry to the government.”
Bekker says one of the reasons that prescribed assets are being discussed again is the fact that the South African economy has suffered from a lack of investment in fixed assets. “The ANC believes this has resulted in South Africa accumulating an infrastructure backlog, which will require a much higher level of investment. The prescribing of retirement fund assets would therefore enable the government to borrow funds at interest rates that are below the interest rates that would reflect an open market risk premium.”
He continues, “Our view is that this move by the government directly targets individual property rights and will create a negative perception of South Africa as an investment destination. It will also increase the perceived risk of investing in South Africa by foreigners. This would result in an increase in the risk premium required, and, therefore, the cost of borrowing by the South African government abroad would increase. This could, in turn, lead to an increase in the level of prescribed asset investing to cover the shortfall, resulting in a negative spiral where the state tries to use the retirement fund assets to compensate for lack of foreign investments. We further believe that retirement fund members in general would retire with less security as a consequence of these policies, placing a further burden on the state as they get older.”
In conclusion, Bekker adds, “We believe that such a move could have a significant negative impact for offshore investors for a number of reasons. Firstly, uncertainty of property rights would cause foreign investors to evaluate fixed asset investments a lot more carefully and they would require higher levels of return to compensate for the higher perceived or real risk. Rating agencies would view such a development in a negative light and the country could face downgrades in outlook, which directly affects foreign inflows. Ultimately, there could be a flight of capital as investors evaluate their long-term commitment to South Africa if there is uncertainty over property rights.”
