Prescribed assets point the finger of doom at investors
The in thing in the dying days of apartheid, pension fund members have good reason to fear their comeback
Prescribed asset requirements (PARs) are being seriously considered by the ANC government in its election manifesto, intended to provide it with funds for future infrastructural development. This means forcing pension funds to invest in infrastructure projects such as low-cost housing and water reticulation.
Most private sector observers regard this as an especially unhelpful suggestion as it could have a catastrophic effect on the performance and risk profile of pension funds. Fixed-income returns usually lag equity performance, and if portfolios are compelled to invest a greater component into this asset class, total returns should regrettably fall.
Destinations for PAR money are of huge concern, as the government’s disastrous track record of running infrastructure projects – such as those contained in Eskom, Transnet and the various water boards – hardly fills one with optimism.
PARs were apparent in SA in the dying days of apartheid. Faced with the enormous costs of fighting a ruinous guerrilla war, the National Party government resorted to using them in the 1970s. At their peak, pension funds were forced to put more than 70% of their cash flows into SA government or similar bonds, with this requirement finally abolished in the early 1990s. During this era, the Public Investment Corporation was 100% invested in PARs and only in 1995 did regulations change to allow it to invest in equities.
This regime saw government and private sector employees receiving much lower returns than if enhanced equity investment had been allowed. Positively, this damage was contained, as pension funds in those days were predominantly defined benefit, meaning beneficiaries at least retired on a known percentage of final salary. Most private sector pension funds are now defined contribution, with no guarantee of final income on retirement, and a PAR requirement would notably compromise pension benefits.
Andrew Canter, chief investment officer of Futuregrowth, is not a PAR fan. “We have a fairly efficient capital allocation mechanism in SA,” he says “and anything that disrupts this, such as threatening prescription into poorly run operations, is a bad idea. Government’s suggestion of a return to PAR is indeed using people’s pension funds as a tool of political policy. Prescribing means losing choice for the investor.
“Taken to its ultimate conclusion, it’s a constitutional issue and will likely end up in the Constitutional Court, if government eventually decides to implement PARs. We should leave political policy to the politicians and they, in turn, should let us in the pension fund industry do our job.”
This is not to say that there isn’t an appetite for investment in infrastructural investment as an alternative asset class.
“There are many private sector funds lining up to invest in appropriate projects all around the world and capital markets respond appropriately to requirements in rail, road, harbours and the like,” says Canter. “Investors are keen to get involved in alternative asset classes. The problem isn’t money: the problem is delivery by government of those infrastructure projects.”
And Canter isn’t just an observer in this regard. “There is a whole range of perfectly creditworthy state-owned enterprises which we willingly invest in,” he says.
Canter cautions the government to be mindful of the legitimate concerns of members of the Government Employees Pension Fund.
“Back in 2015, many teachers and police personnel cashed in their pension funds, based on misinformation relating to concerns that regulation was to be introduced that would prohibit them from receiving a lump sum on retirement.
“If these members now believe their pension fund money could be spent on fruitless infrastructure projects, they might well again decide to cash in. This could be just one potential unintended consequence of PAR reintroduction, with great potential for savings all round to decline as contributing employees become scared off.” The general election is coming up and inevitably populist outpourings such as the reintroduction of PARs will grow in volume. Hopefully, common sense prevails, and the government will not resurrect a restrictive apartheid relic that goes against free market principles.