Prescribed investing back on the agenda
Regulation 28 exists for a good reason, that is, to ensure that funds act responsibly when it comes to their fiduciary duties. Funds have to act in the best interest of their members at all times. How, then, does this square with prescribed investing? G
In the 1980s, the then apartheid government prescribed investing in SANDF bonds to fund the ongoing Border War and if government looks to this model then we could see a scenario in which, out of every R100 we invest, we are forced to put R5 into SAA or Eskom bonds, for example. Technically, government can prescribe anything – say, an investment in a level one B-BBEE company. This is not in contravention of Regulation 28 because it does not dictate the kind of asset you can hold – only the maximum percentage of a particular stock you can hold in your portfolio.
Funding government debt
Chris Becker, market strategist at ETM Analytics, says government wants to lock in more pension savings to finance government debt deeper into the future.
“Through Regulation 28, they allocate those pension savings to financing government debt by limiting the amount that can be invested in equities, commodities, currencies and so on,” he says, adding that the biggest beneficiaries will be government and private debtors because it will help to keep borrowing costs low for longer.
With nearly R1 trillion invested in the retirement market, it’s a not insignificant pool.
Windall Bekker, partner at Rezco Asset Management, says that if government tries to raise the money for infrastructure and development on the global markets, the interest rate they pay will reflect the risk they take. It makes sense, then, that they will consider how to raise the money at home.
Risk and return
While this seems fair from a certain perspective, there are a few red flags, says Bekker. For example, pensioners are not the best-off citizens and most of them don’t have enough money saved for a comfortable retirement as it is. Then there’s the issue of ownership and the increasing negotiation that will arise between what are state and what are personal assets – who owns what?
A key issue, though, is the fact that investments will no longer reflect risk and return. Pension funds, not government, are best qualified to assess which risk-adjusted returns are adequate for specific funds and their members. “If prescribed investing is introduced, I can either accept that I’ll probably be poorer over time if I’m invested in an under-performing asset class, or I’ll have to work out a way to compensate by taking on more risk,” says Bekker. “As we know, risk doesn’t always equate to better returns.”
Playing with pension funds – and yes, government employees are also members of pension funds – is not the way to advance national development, particularly when it comes to bailing out inefficiently run companies. Partnerships with development finance institutions (DFIs) could work provided institutional investors seek risk-adjusted returns.
But telling funds where and how to invest is increasing the likelihood that pensioners may come up short in the long term.
Editor’s thoughts:
It’s perhaps only a matter of time before prescription comes into play. Becker feels it will create more business for financial planners and pension fund managers, so they are unlikely to push back against such a policy. But at what cost to pensioners? Have your say by commenting below or email fiona@fanews.co.za.
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