Forcing pension funds to invest in SOEs ‘violates bill of rights’
ConCourt would challenge ANC’s prescribed assets plan, says asset manager
Any attempt by the government to force pension funds to invest in bankrupt state companies will likely be met with a Constitutional Court challenge, one of SA’s largest fixed-income lenders has said.
In the ANC election manifesto, released at the weekend, the ruling party committed to “investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development”.
In effect it could mean that pension funds are forced to invest a portion of their funds in state projects and possibly even in unsustainable entities such as Eskom.
To prescribe how pension funds invest would be destructive and panic-inducing, said Andrew Canter, chief investment officer at Futuregrowth Asset Management – which in 2016 temporarily suspended lending to state-owned companies because of poor governance.
Moreover, Canter said, it would also be a violation of property rights as enshrined in the bill of rights. “It’s a property rights issue and probably would end up in the Constitutional Court.”
Constitutional law expert Pierre de Vos said any such court challenge would have to prove the arbitrary deprivation of property. “Even if you think the policy is catastrophically stupid, it may not be arbitrary,” he said.
The idea of prescribed assets harks back to the tail end of the apartheid era when the government forced pension funds to invest in government bonds at at time when the state was cut off from global markets.
Canter said there was no need to force pension funds to invest in state assets today. “Domestic pension funds are already very meaningful investors in national development,” he said. Certain state entities, such as Eskom which is overgeared and unprofitable, battle to raise funding for good reason, said Canter.
“Eskom is currently a financially unsustainable enterprise. If a company is unsustainable it should not be able to raise money. But there is a whole range of perfectly creditworthy SOEs which we lend to,” he said.
Canter noted there was never a shortage of money for bankable projects. “Prescribed assets is a stick to swing which serves no purpose except to scare investors.”
Leon Campher, CEO of the Association for Savings and Investment SA, said prescription would also have a negative effect on SA’s credit rating. “If SA loses its investment grade rating, foreign investors, many of whom are pension funds, would be forced to withdraw their money from SA,” he said. “This is something the country can ill afford.”
The timing of the matter is also a cause for concern. It coincides with a specific need for funding for Eskom, said Peter Attard Montalto, head of capital markets research at Intellidex.
Eskom is in the throes of a financial crisis. Its chairperson, Jabu Mabuza, has warned the utility requires an equity injection or a debt reduction if it is to survive.
Attard Montalto said: “While the ‘normal’ path may well be a five year programme towards this by the party, resisted at every stage by the national Treasury, an Eskom shock could force the hand of ‘sensible’ policy types in the ANC.”
Prescription of assets would require an amendment to regulation 28 of the Pensions Fund Act and would apply to private pension funds. It may not apply to the Government Employee Pension Fund (GEPF), as managed by the Public Investment Corporation. The GEPF is a defined benefit fund and hence not subject to regulation 28, although its board of trustees has elected to comply with its terms.