Prescribed assets: How afraid should you be?
Will prescribed assets open a way for the government to dip into our hard-earned financial futures or are they an overstated threat?
The mooted policy requires private-sector institutional investors, such as pension funds, to invest a certain percentage of their assets in state-owned enterprises (SOEs) or other state-backed initiatives or instruments.
This week, the Association for Savings and Investment South Africa (Asisa) responded to what it claimed was an attempt by the Institute of Race Relations (IRR) to “once again” draw Asisa members into the prescription debate.
With a decimated economy and the government’s back against the wall, prescribed assets are an attractive option, to force the funding of state projects and provide liquidity. With R6trillion at stake, investors have cause for concern about using this money to prop up uneconomical SOEs.
On August 17, the ANC’s economic policy chief, Enoch Godongwana, assured the public that prescribed assets would not be used to bail out SOEs or fund a state bank. Changes to regulation 28 of the Pension Funds Act (which governs how pension fund assets are invested) were still in the “investigation phase”.
Last month, he said the ANC had moved away from talk of prescribed assets, but still wanted to find ways to “unlock” pensions to help with infrastructure goals.
This week, Asisa’s chief executive, Leon Campher, accused the IRR of deliberately stirring up panic among investors “during a time when calm and rationality is needed more than ever”.
He said recently the National Economic Development and Labour Council’s social partners tabled their economic recovery plans and “not one mentioned the prescription of assets as a possible solution”.
Asisa had also engaged “extensively” on the issue with the government. “Not even the ANC discussion document on economic recovery mentioned prescription of assets as an option that should be considered.”
Campher said proposed amendments to regulation 28 to include a separate category for retirement funds to invest in infrastructure assets “does not equate to prescription”.
He said although Asisa members were opposed to prescription, “we do not believe that there is an imminent threat of this happening”.
“The bulk of the assets that could be prescribed are owned by retirement funds on behalf of their members. Roughly half of these assets are held by the Government Employees Pension Fund, which is a defined-benefit fund. These assets would therefore need to be carefully managed to ensure that there are sufficient funds to cover liabilities, namely the benefits payable to public servants on retirement.”
Furthermore, all retirement funds have a board of trustees, who decide on asset allocation in the best interests of their members.
“Retirement funds have an important role to play in the development of any country through their investments. For this reason, pension funds worldwide invest in real assets.
“Asisa has always maintained that the problem in South Africa is not the lack of willingness of capital markets to invest, but rather the absence of viable infrastructure projects,” Campher said.
“Where there have been viable projects, funding has been made available by the private sector. A good example is the Independent Power Producer Project, which attracted private funding in excess of R200billion.”
But the DA’s finance spokesperson, Geordin Hill-Lewis, says he is “absolutely certain that [prescribed assets] is the direction in which government is going. The time frame is up in the air and uncertain, but the direction of travel is absolutely certain.”
On Wednesday, IRR deputy head of policy research Hermann Pretorius fired back at Asisa, saying: “President Cyril Ramaphosa and ministers Pravin Gordhan and Tito Mboweni have all placed prescribed assets on the table, with Godongwana stating in so many words that prescribed assets will (not ‘might’ or ‘could’) apply in cases where people are unwilling to invest.”
Pretorius said the government “can’t tax, borrow or cut” its way out of its financial difficulties, which meant the only remaining options were to print money - or grab assets.
“The questions that arise are: Will the government reduce the proportion of offshore exposure? Will it reduce the proportion of equity exposure?
“Doing this would mean introducing prescribed assets by the back door, as government bonds would essentially remain the most feasible investment destination.”
Pretorius said even Asisa must be aware of the enormous difference between July last year, when it first responded on the issue, and October 2020 in the finances of ordinary South Africans, the economy, the fiscal situation, and government expenditure plans.
“We’ve heard the most slithering rhetoric from corporates, willing to use the savings and pensions of ordinary people as bargaining chips: ‘no’ to prescribed assets but, if you absolutely must ”
Foreign investors fund less than 40% of South Africa’s government debt, so corporate savings have been key contributors to the rapid expansion of government borrowings and expenditure.
This has enabled government debt and expenditure to climb to “such a degree South Africa has seen a successive number of credit rating downgrades”, notes Annabel Bishop, Investec’s chief economist.
She says pension funds are already key holders of SOE debt and own a substantial amount of government debt.
“A prescribed asset policy is dangerous in an environment where government and SOE finances have been materially deteriorated, as pensioners can risk losing their pensions, especially if further financial deterioration occurs.”