Plan to allow South African workers' pensions to back state assets raises concerns

The government is seeking access to capital to help fund state-owned enterprises and infrastructure projects

The ANC government is proposing rule changes that would allow South African pensioners' savings to be invested in state-owned enterprises such as utilities provider Eskom, which is $26bn in debt. ReutShow more

Desperate for cash, the South African government wants to use its citizens’ pension savings to bankroll ailing state enterprises and a post-covid stimulus package.

The plan has sent ripples of alarm through the $175 billion (Dh642.6bn) investment fund industry, one of the largest in the developing world.

“We are having discussions with the pension fund industry and the Treasury,” Enoch Gondongwana, the head of the governing African National Congress’s economics team said at a news briefing in late July. Primarily he said, the party wanted to change the law that currently protects pension funds from investing in assets that do not guarantee a good return for members.

The current law leans heavily on the term ‘fiduciary duty’, a legal and ethical framework that requires funds investing other people’s money to seek the best returns and safest assets. Right now, it is not possible to invest in state businesses such as state electricity utility Eskom, but as the utility owes around $26bn in debt with little clarity over how this will be repaid, it is doubtful how much appetite there would be to do so.

Moody’s warned last week that total government debt could rise by 40 percentage points over the next three years, to reach 100 per cent of gross domestic product. The government meanwhile has laid out a 500 billion rand (Dh111bn/$30.2bn) stimulus package in response to the Covid-19 crisis. The economy has already shrunk 6.5 per cent following a two-month lockdown over April and May.

“We have an infrastructure programme that has to be developed,” Mr Gondogwana said. “If properly packaged, there’s no reason why pension funds should not invest in that infrastructure directly instead of using third parties in the form of asset managers. It just increases the cost for development.”

The country has around 5,200 pension funds, according to the Financial Services Board, the industry regulation body. Around 17 million people are members of such funds. These represent one of the last untapped sources of revenue for the government, that must also now contend with cratering tax returns as businesses struggle to emerge from a global lockdown.

"Using pensions and savings to fund the government is nothing but a new form of state capture," Herman Pretorius, head of policy research at the Institute for Race Relations in Johannesburg told The National. "The question is, will investment fund managers side with their clients – the people who trust them to look after their money and financial wellbeing – or, in silence, only appease a government intent on expropriating pensions and savings?"

Some pension advisers have been urging investors to seek offshore funds for savings instead. Magnus Heystek, director of Brenthurst Wealth Management in Johannesburg, has spent the past decade or so promoting safe havens, such as Mauritius, as an alternative for South Africans.

As a result, Mr Heystek has come under intense criticism from media commentators and government ministers for his views, who accuse him of scare-mongering. Now he says, as the ANC shows its intentions, he’s been vindicated.

“I really feel sorry for those investors who still stick to their local funds due to massive marketing clout and the storyline that "if you sell now you will miss the upturn", he said via Twitter. “Note to investors: there is no upturn on the horizon. The ANC has structurally damaged the economy.”

However, Isaah Mhlanga, chief economist at fund manger Alexander Forbes, says the latest plan is an improvement over earlier discussions around state-directed investments, which called for ‘prescribed assets’ – that is, a legal requirement that funds invest a set percentage of their holdings in state projects.

This particular version though, drops the prescriptive approach and appears so far to be voluntary.

"The implication of prescription is that investments are in some way unattractive for voluntary investment by investors," Mr Mhlanga told The National. "After all, if investments have an attractive risk/return profile then investors will be keen to invest, and prescription is not required."

Until now, few fund managers considered state assets or projects as an investment, as there was no way to access them. Allowing voluntary access to these may entice private sector money into them, at a time when it is clear the state lacks resources to fund development projects. In particular, the state needs to lure international funds, not just local investors, if it hopes to meet its capital spending goals.

“Investment will only be considered by international investors if the risk and return profile, as well as the overall regulatory environment, stacks up versus alternative investment opportunities across the world,” Mr Mhlanga said.

“The need for policy certainty and discipline in implementation thus continues to be paramount for the success of the planned infrastructure programme, as well as its ability to attract investors.”