In the frenzy of national debate, consensus can be an achievement. Such an achievement is in the New Growth Path (NGP) introduced by Economic Development Minister Ebrahim Patel, the erstwhile champion of prescribed assets for retirement funds. The achievement is that nowhere does the NGP refer to prescribeds.
Just as well. For too long has it been obsessed over by retirement funds, fearful that the state appropriating a chunk of their assets would diminish returns for members. Rest in peace, prescribeds, and farewell to the market undisciplined investments that they would have provoked.
That’s at face value. It doesn’t necessarily follow that retirement funds are entirely off the hook.
Endorsing the NGP in his State of the Nation address, President Jacob Zuma mentioned that a government paper on social security reform would be released this year for discussion; yet more discussion, because the first discussion paper was released by the Treasury in 2004. Fresh drafts have floated between the Treasury and Social Development Department, with input from the private sector, ever since.
What’s happening is the intervention of the Economic Development and Labour Departments. The paper to be released, Zuma noted within the economic development plan’s job-creation theme, will focus on issues that include how private-sector retirement funds will fit into a new regulatory structure.
Zuma announced economic measures of R39 billion to stimulate transformation and growth, inclusive of R20bn in allowances and tax breaks for job creation. Patel says that, to meet the objective of 5 million new jobs within the next 10 years (perhaps still insufficient to accommodate the floods of school-leavers and immigrants annually entering the job market), more measures are to come.
The problem can be resolved only partially by throwing money at it. But the tax base isn’t a bottomless trove, and Patel’s infatuation with statism doesn’t sync with the record of poorly capacitated state organs using the money any better than they have in the past. To the bones of noble intentions must be added the flesh of hard money. This awaits the 2011/12 Budget of Finance Minister Pravin Gordhan. The National Planning Commission’s report is still awaited too.
The economic development plan does say that the government will look to ways that it “can mobilise resources from retirement funds”. It singles out the Government Employees Pension Fund (GEPF). Bear in mind that the GEPF is a defined-benefit fund. As the employer, the government is responsible for payment of promised benefits defined upfront. Any shortfall between the fund’s returns and its promise to members is for the account of taxpayers. Were the proposed development bond to be forced on the GEPF at a rate that it considers too low for it to meet its liabilities, the government would be taking with the one hand and giving back with the other.
The overwhelming majority of local fund members are less fortunate. Being in defined-contribution arrangements, they are at risk. Thus fund trustees’ discretion to subscribe for a development bond would turn on their fiduciary duty, related to the purposes of the bond and the return it offers, unless a sinister plan to resuscitate prescribeds under another name is in the wings. There’s no need for this to happen.
Initiatives recently or soon to be launched are market-friendly and market-driven, promising consistency with economic development plan objectives and job creation: They include
n The revived financial sector charter, reached by negotiation with financial institutions. It provides for “equity equivalents” and “targeted investments”. The former means that, as an alternative to pushing direct black ownership from 15 percent to 25 percent, institutions will devote significant assets to finance enterprise development and the like. The latter relates to financing of infrastructure projects in a wide range of sectors. Minimum goals, underpinned by gazetting of the charter, are clearly set out.
n The redrafted Regulation 28, to apply once the Treasury has considered public comments. It offers prudential guidelines for retirement funds’ investments. In the old version, socially responsible investment (SRI) was viewed as a separate asset class in the “other” category, with minimal exposure permitted. In the new, there’s nothing explicit about SRI. Instead, and much better, principles of environmental, social and governance (ESG) criteria are in the mainstream across all asset classes.
n The imminent Code for Responsible Investing, for adoption mainly by asset managers. A core principle is that institutional investors incorporate ESG considerations into their investment analyses and activities “as part of the delivery of superior risk-adjusted returns to beneficiaries”. Note how carefully this has been crafted: ESG does not imply diminished returns for fund members who are the ultimate beneficiaries; in fact, it’s the opposite because securities that don’t meet ESG criteria and don’t offer the prospect of superior returns needn’t be bought.
In a nutshell, they imply a wider range of institutional investment. Directly, and through the asset managers representing them, trustees of retirement funds are stimulated to explore alternatives less subject to market volatilities and more likely to enrich society. The beauty is in a concept of public-private partnership switching from the idealistic to the realistic. For instance, the success of a government bond issue will depend on its market acceptance. Compulsion is out of the equation. Similarly, retirement funds and their mandated institutions have greater leeway to swing their weight behind initiatives that promise positive social and environmental impacts.
It’s been a long time coming, ever since the idea of government targeting “5 percent of investable assets” originated at the Growth & Development Summit in 2003. Spurred by organised labour and the SACP, vociferous in their dissatisfaction with “imbalanced investment” in the economy, prescribed assets were punted.
But problems with this approach were soon identified. Among them: the arbitrariness of 5 percent; what was meant by “investable assets”; which institutions, other than pension funds, would be affected; why pension funds should be forced to accept lower returns; who would decide on the sectors and projects for investment; and whether policy objectives of the state would mesh with private-sector preferences and investment requirements.
What has emerged is an elegant solution. What remains is to make it work.
Allan Greenblo is the editorial director of Today’s Trustee (www.totrust.co.za), a quarterly publication mainly for trustees of retirement funds.