STANDALONE retirement funds anticipate investing 6.6 percent of their assets, on average, or almost R300 billion, in direct infrastructure, according to the 40th Annual Sanlam 2021 Benchmark Survey.
Ageing and inadequate infrastructure are a major obstacle preventing South Africa from realising its economic growth potential, and the infrastructure funding gap is estimated at R1.7 trillion over the next 10 to 15 years.
Proposed regulatory changes will allow retirement funds to increase their investment in infrastructure projects. Umbrella funds were anticipating spending some 4.7 percent of their assets on infrastructure.
Sanlam Corporate Investments head of tailored investments Darryl Moodley said the funds allocated would be well short of the required amount to plug the funding gap.
“Unlike investing in listed stocks or bonds, the amazing characteristic about infrastructure investments is the opportunity to build something tangible, it’s about procuring land, sourcing materials, and most importantly, job creation. Investing in infrastructure really is at the core of improving society’s productive capacity and espousing confidence,” he said.
Historically however, retirement funds have been reluctant to invest in infrastructure mainly due to its seemingly complex nature. The asset class is largely illiquid and unlisted. The large quantum and long-term nature of the contracts - with the government often a central role player - make these investments complicated to structure and they have limited flexibility post-investment.
Moodley believed that with the proposed changes to Regulation 28 of the Pension Funds Act, more visibility had been generated around this asset class and trustees needed to engage deeply on incorporating infrastructure assets into fund portfolios.
“The general philosophy has been ‘If you don’t understand it, don’t invest in it’ and yes, investment in infrastructure requires higher levels of skill, due diligence and governance - but it can have significant rewards especially to early investors in developmental projects, where brand new infrastructure is being developed,” he said.
He said government and regulators needed to create a conducive regulatory environment with policy certainty to ensure that the funds being poured into infrastructure would be into productive assets in high impact sectors of the economy, and not simply white elephants.
“We need to ask ourselves, can I invest with purpose and achieve something that is required in SA and at the same time can I still achieve superior investment returns from my portfolio? In reality, performance and purpose are two sides of the same coin,” he said.
“While having an adequate pot of assets at the end of the rainbow provides financial peace of mind, one also wants to retire and be happy in a viable environment. What’s the point of a retirement system if you’re going to retire in a place that is devoid of essential infrastructure? If the right steps are not made soon, this could potentially be the next pandemic waiting for us in the next 40 years,” he said.
Over the past few years, there had been numerous reasons for custodians of capital to consider shifting to investments that could provide superior investment returns, while addressing the social challenges and megatrends of the future.
One of those reasons was that the number of companies available on listed markets was shrinking, locally and globally, and the opportunity set for retirement funds to invest in listed assets was diminishing.
Adding to this, the property sector, a favoured asset class for retirement funds, had come under significant pressure as a result of the global pandemic, he said.
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