Would you bet your pension on SA infrastructure?

A couple of years ago, South African retirement savers were biting their fingernails in fear that government would make a grab for some of their hard-earned pensions. The threat of prescribed assets sullied the retirement funding industry for months with the prospect of legislation being introduced to ‘force’ retirement funds to invest a portion of their assets in government debt or state infrastructure projects. Fortunately, common sense prevailed and National Treasury’s eventual amendments to regulation 28, in effect from January 2023, were far more palatable.

An infrastructure asset class for retirees

Retirement fund trustees can now choose to invest up to 45% of their fund’s assets into a newly defined infrastructure asset class. Infrastructure, according to the amendment, means “any asset that has or operates with a primary objective of developing, constructing and / or maintaining physical assets and technology structures and systems for the provision of utilities, services or facilities for the economy, businesses or the public”. The industry seems to love this expanded definition which allows them to consider a range of opportunities in the private markets universe rather than being funnelled into government-sanctioned, socially focused infrastructure projects. 

So, if that multi-billion-rand independent power producer (IPP) project meets a fund’s risk and return criteria, the fund trustees can confidently get behind it, all due diligence taken care of, of course. The writer spoke to Wayne Hiller van Rensburg, Executive Officer at the Institute of Retirement Funds Africa (IRFA) to learn more about the industry’s response to the amendments. The IRFA represents and promotes the interests of the retirement industry in South Africa and across the continent, including representing the industry in negotiations with government authorities and regulators to interact on legislation and tax matters affecting retirement funds, fund members and fund trustees. 

Carving out the regulatory environment

We kicked off the discussion by asking to what extent the association participated in the debate about retirement fund investments into infrastructure, specifically in the run-up to the publication of Amendments to Regulations 28 in Terms of the Pension Funds Act. 

Wayne Hiller van Rensburg: The IRFA has engaged various stakeholders about infrastructure investing and actively participated in consultations with National Treasury. The purpose of these engagements was to better understand what the policymakers wanted to achieve as well as consider what was practical and desirable for the retirement sector and, in particular, members of retirement funds. We made several formal and informal submissions during the consultation process, fulfilling an important element of our advocacy mandate. 

Gareth Stokes: What is the current IRFA view on retirement fund investments into infrastructure, or is this something that is best left to each fund to address? 

Wayne: Retirement funds, whether direct investors or via a product purchased from an investment firm, will [almost certainly] have some exposure to infrastructure. Infrastructure investments are widely viewed as catalysts for economic growth and where suitable infrastructure investment opportunities are taken up, this is seen as a win for the retirement funds and society at large. As such, the IRFA supports the more flexible environment created by the amendments to regulation 28, including the formal reference to infrastructure. A further element of the amendment that we view as valuable is the specific naming of infrastructure which will force all retirement funds, their advisers and investment managers to throw the net wider when investigating what types of investments can deliver the returns needed, while making an impact. 

Gareth: What is the allowance to infrastructure per the latest amendments to regulation 28? 

Wayne: The overall allowance to infrastructure investments is 45% with certain sub limits. The definition of infrastructure will allow retirement funds to better understand how much of their assets are already invested in infrastructure. Many of the existing asset classes will now have to be viewed from an infrastructure lens in addition to the characteristics of the investment instruments, presenting opportunities for funds to carefully review all investment policy statements and strategies. [PS: readers should note that this 45% is “the overall limit for infrastructure across all classes, excluding debt instruments issued by, and loans to, government and any debt or loan guaranteed by the Republic”]. 

Gareth: The industry, and especially individual retirement funds members, were quite concerned that the state would ‘grab’ part of their retirement nest egg to put towards potentially sub-optimal infrastructure projects. Were you happy that National Treasury steered away from the prescribed assets route? 

Wayne: The IRFA supports the National Treasury’s approach of providing an enabling rather than a prescriptive, environment. Prescription would have impacted on asset class valuations in ways that would not have been beneficial to retirement fund members in the long run. It is worth noting that going the prescribed assets route would have likely impacted all asset classes. 

Gareth: Could you comment on the risk versus return issues that retirement fund trustees face when deciding on infrastructure projects? My sense is that their main concerns centre around the size of investment, liquidity and liability matching… 

Wayne: The risk versus return issue is one that trustees need to face with every investment decision. In the context of infrastructure investing, this will be closely related to the type of investment instrument used. For this reason, each investment will have to be assessed on its own merits and the decision making around this will force trustees to better understand all types of investment risk. The specific characteristics of a retirement fund will also have an impact on the type of investments that are most appropriate for the fund. 

A large multi-employer defined contribution fund will have different investment needs from a large single employer defined benefit retirement fund, for example. The reality of the situation is that liquidity and the ticket size of the investment will have the largest impact on a retirement fund’s ability to make an infrastructure investment decision. Another potential upside of regulation 28 is that investment managers will be encouraged to consider how they include the infrastructure theme as part of their service / product offering. 

More tools for impactful investing

The conversation concluded with some reflections on the ongoing evolution of the retirement funding environment. “The amendments to regulation 28 were needed to reflect the current investment environment better; infrastructure investing has been a global trend for some time and was urgently needed in South Africa to kick start economic growth,” Hiller van Rensburg said. “This is an opportunity for all the role players in the retirement sector to consider how they can make better investment decisions in an environment that now explicitly provides more tools”. He reminded readers that the tweaks to the regulation went beyond infrastructure only. 

To illustrate: the infrastructure ‘theme’ is a good focus point for retirement funds, but there were also changes to private equity and hedge funds limits that create room to innovate. Also related to this is the potential to increase a fund’s offshore exposure, which is another hot topic for retirement fund trustees when considering investment strategies. “One area of concern related to the regulation 28 amendments is the new reporting requirements which have not yet been finalised,” Hiller van Rensburg concluded. “The increased reporting will provide more information to the regulators and policymakers, but it does increase costs for retirement funds”. 

Writer’s thoughts:
Having dodged the prescribed assets ‘bullet’, retirement fund members must now put their faith in their investment advisers and trustees to choose infrastructure opportunities that align with the fund’s risk and return mandates. Are you satisfied with how the infrastructure investment debate was dealt with? And what, to your mind, are the biggest risks facing retirement fund members under the new regulation 28 dispensation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.