INVESTMENT INSIGHT: Pension funds – a moratorium on offshore contribution required?

By Ryk de Klerk Time of article published Aug 12, 2019

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CAPE TOWN – Desperate times require desperate, and yes, unpopular measures such as a tightening of exchange controls and introduction of new prescribed assets. 

South Africa finds itself at the wrong side of the global business cycle and export markets are unlikely to lend support to the economy, let alone the fiscus. With unemployment surging, a desperate need for capital projects to get off the ground but a lack of funds is a serious drag on the economy.

South Africa’s cost to tap global bond markets could also rise significantly.

With the credit rating agencies getting more uncomfortable by the day as it seems that South Africa is dragging its feet in fixing the ailing parastatals and getting its own finances in order the chances are increasing that the country’s sovereign rating may soon be cut to junk status by Moody’s. The country’s junk status rating by Fitch and Standard & Poor’s may even slip further. 

If South Africa suffers a ratings downgrade by Moody’s and the others, it remains to be seen whether South Africa’s 10-year government bond yield will stay on the BRICS 10-year government bond yield curve given the BRICS’ countries’ credit ratings or join the Africa curve. At this stage it seems that the global bond markets are already anticipating a ratings downgrade relative to the other BRICS members. There is a risk that the SA 10-year government bond yield may jump by 150 basis points or more to 10 percent if the Africa curve comes into play.  

Savings are a cornerstone of economic development. 

According to the Asisa numbers as per at the end of the first quarter this year, the assets of South Africa Multi-Asset Funds, that to some extent can be referred to some sort of retirement funds or pension funds, amounted to R1 037 billion of which R271bn were invested offshore – therefore 26 percent.

From the 2018 27 Four BEE.conomics Transformation in South African Asset Management Survey it was estimated that the total assets of pension funds was R3 619bon of which R1 660bn is managed by the PIC. The December 2018 Survey of Retirement Fund Investment Managers by Alexander Forbes indicated that the average global allocation was about 25 percent for global balanced managers.

The Regulation 28 limits for pension funds are 30 percent for global assets and investments in Africa outside SA is 10 percent.

The total assets of SA Multi-Asset collective investment schemes and pension funds outside those managed by the PIC are therefore approximately R3 trillion. If a 25 percent offshore component is applied it amounts to about R750bn or around $50bn. Currently the pension funds managed by the PIC have an offshore plus Africa component of approximately 10 percengt – the same as the GEPF. It therefore leaves the members of the GEPF at a serious disadvantage to members of other pension funds and individuals who can manage their own retirement funds to comply with Regulation 28 of the Pension Funds Act.

SA is desperate to attract foreign investment. At the same time the economy cannot afford allowing scarce capital to leave our shores via disinvestment by local institutions. What sense does it make for the government to borrow $1m offshore and then allows an institution or company to take it out to invest offshore? 

If the playing fields are levelled and the PIC increases the offshore component of the funds it manages to 25 percent it means that the PIC needs to boost its offshore holdings by more than R200bn or $13bn at today’s exchange rate. It therefore needs to sell South African assets equal to the same amount. 

The impact on the South African economy will be disastrous to say the least and even much worse than a downgrade of South Africa’s debt to junk status by Moody’s which will see the country falling out of global bond indexes.

A moratorium needs to be placed on any further offshore investments by SA pension and retirement funds.

Has the time perhaps arrived for pension funds and other funds such as the CIS SA multi-asset funds to repatriate some of their offshore holdings?

If the Regulation 28 limits for pension funds and CIS SA multi-asset funds are lowered to 20 percent up to  R150bn or $10bn at current exchange rates could be repatriated, while a lowering to 15 percent could amount up to R300bn. To ensure that the repatriated funds are productively employed in the economy a new prescribed asset class may or should be introduced – a minimum exposure to a South African sovereign fund. 

There is an urgent need to establish a South African sovereign fund aimed to fund specific projects to fast-track economic development. Such a fund could be a US dollar or Chinese yuan or other hard currency denominated fund. This will allow effective indirect exposures to hard currencies and could be open to all investors, including other sovereign funds.

Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice. See the full article on BR Online.


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