Prescribed assets will not pull South Africa Inc from the economic abyss

As the extent of the financial carnage caused by pandemic and subsequent national lockdowns becomes apparent, governments around the world are looking for ways to conjure up money to plug every manner of funding shortfall. The South African government is already making noises about dusting off the Apartheid era prescribed assets handbook to force private investors to queue up for its government and state-owned entity (SOE) bonds. Many financial services firms are opposed to the reintroduction of this policy, as evidenced by comments made by Dawie de Villiers, CEO at Alexander Forbes, during a webinar titled ‘partnering for better financial wellbeing outcomes’.

Hands off my retirement assets

The webinar explored the possibility of using alternative developmental investments into the South African economy rather than resorting to tighter state control of retirement funding assets. “We are opposed to any regulations, including prescribed assets, that could lead to sub-optimal investment outcomes by our members,” said De Villiers, who warned that a reintroduction of the policy could compromise the financial wellbeing of millions of South African retirement fund members. The solution, according to De Villiers, was to tweak existing investment models to allow for easier access to attractive investment opportunities that offer higher economic and social benefits. 

Isaah Mhlanga, executive chief economist at Alexander Forbes, took to the podium to address the question: Can the private sector shift the narrative from financial returns towards economic development? “A new focus will allow us to address the return objective of pension fund members while simultaneously meeting the developmental needs of the country,” he said. The difficult debate will take place against the backdrop of an economy ravaged by decades of political mismanagement before being dealt a death blow courtesy of COVID-19. 

V-shaped recovery to Nike-swish

“South Africa is a small open economy that gets impacted by what happens in the rest of the world,” said Mhlanga. The International Monetary Fund (IMF) has forecast a 4.9% contraction in global growth through 2020, and a recovery of 5.4%, from a lower base, in 2021. “What is clear is that we should not expect the promised V-shaped recovery; the economy is now more likely to follow a U-shape or Nike-swish recovery, especially because the underlying health condition is still unresolved,” he said. South Africa faces a range of possible post-pandemic growth trajectories, starting with the South African Reserve Bank (SARB) forecast of a 10% slump in GDP growth this year, and culminating in National Treasury’s worst case prediction of a 16% collapse. 

Mhlanga used the country’s 10-year historic annual GDP growth ‘average’ to illustrate the impact of pandemic over the coming decade. Assuming the pandemic had not happened, the SA economic would have grown to R3.8 trillion by 2030. Under the SARB growth scenario the country would only recover to its year-end 2019 position by the end of 2025, growing to around R3.5 trillion by the end of the decade. The Treasury scenario sees the country clawing back to its 2019 GDP by end-2027, growing to R3.3 trillion by 2030. In either scenario we face rising levels of inequality, poverty, and unemployment. Alexander Forbes proposed a six pillar policy strategy to create the political and social environment to mitigate the various ills that arise consequent the economic malaise we face. 

Playing a familiar growth refrain

These pillars have been trotted out before, beginning with pillar one, macroeconomic reforms, and followed by microeconomic reforms; the role of the private sector and long term savings; reform of trade and industry; reform of the education sector and skills development; and social policy reform. We will only comment on the role of long term savings, given our focus on prescribed assets. “Our third pillar [deals with] the role of the private sector in reigniting South Africa’s economic growth going forward,” opined Mhlanga. “It is important for the domestic private sector to be confident before we can expect inflows of foreign direct investment”. He mentioned the various public / private growth initiatives currently under discussion, before adding that the Public Investment Corporation (PIC) would need to lead by increasing its investment in strategic sectors. 

One way to identify investment imbalances is to consider South Africa’s sectoral economic structure compared to that of other emerging markets (EMs). A quick analysis suggests that we lag our EM peers in investment in sectors such as agriculture, construction, energy, and manufacturing. “These are the underlying sectors that really drive EM economic growth; but they are underrepresented domestically,” noted Mhlanga. Upon expanding this analysis to the JSE he observed that each of these important economic drivers were underrepresented there too. The result is a systemic issue with the allocation of private sector capital in the broader South African context. Why? Because the long term savings sector invests predominantly in the listed sector, and in a benchmark cognisant way. 

The private sector can improve the long term growth outlook by seeking opportunities in the unlisted investment space that additionally fall within the agriculture, construction, energy, and manufacturing sectors. “There is an absolute desperation for investment into opportunities that will lift South Africa out of the pandemic-based economic turmoil,” said Janina Slawski, head of investment consulting at Alexander Forbes Investments. South Africa was in a fiscal bind pre-pandemic, with many municipalities and SOEs unable to fund development due to high levels of debt and being underfunded. It thus comes as no surprise that government has its eye on retirement fund assets to support ongoing infrastructure funding needs. 

The Regulation 28 prescription

Slawski opined that while Regulation 28 was a form of prescription, it was aligned with what was in the best interest of investors. “Anything that were to reverse Regulation 28, in terms of an introduction of something draconian in the form of prescribed minimum assets, would be a significant reversal of the gains that have happened in getting members into investments that actually meet their needs,” she said. There is a long list of reasons why prescribed assets cannot work in the current regulatory environment, including the risk impact on defined contribution fund members and the obvious conflicts with trustees’ fiduciary duties. 

“The alternative is to look at what we call impact investing, where you have an investment which is designed to generate good returns but at the same time has an underlying impact on the community and infrastructure into which it invests,” concluded Slawski. Such investments can be aligned with government’s developmental goals; but remain entirely voluntary, to allow retirees, or trustees on their behalf, to confirm that the promised return is appropriate relative to their risks and desired financial outcomes. Alexander Forbes’ closing refrain: Voluntary impact investment; not prescription. 

Writer’s thoughts:
The debate around prescribed assets seems more intense whenever government runs into debt troubles. One could dismiss any effort by government to appropriate retirement fund assets based on its shocking track record on delivering multi-billion rand projects on time, within budget, and without graft. The question is whether you, as a financial adviser, would be comfortable with prescribed assets for your clients? And what form do you believe such an intervention should take? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.