As we hear in this forthright interview with Andrew Canter, the ANC’s proposal to re-introduce Prescribed Asset Requirements is only being advanced because the Government is not prepared to apply the correct economic medicine. The chief investment office of Futuregrowth explains that this is a blunt tool which taxes pensioners to protect those making poor economic policy decisions. He attacks the premise that such regulations promote development by unlocking domestic capital for capital projects – the popular refrain of those who promote the concept. Canter was interviewed in this week’s episode of Rational Radio. – Alec Hogg
Andrew Canter – the chief investment officer of Futuregrowth joins us. Andrew, I believe you had a wonderful debate with Mark Barnes – ex CEO of the Post Office and Capital Alliance – on prescribed assets. Mark believing South Africa should have them, you took an opposing view. For those who don’t know what prescribed assets are – I recall as a young journalist that they existed in South Africa under the apartheid regulation – up to 53% of pension fund assets had to go into these things called prescribed assets. What exactly are they?
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Prescribed assets is when government tells pension funds that they must have a minimum holding of certain assets or asset classes. So in the case you’re talking about, we’re at the tail end of the apartheid government which prescribed that 53% of pension fund assets had to be in government bonds. So what was the consequence of that? The consequence is that it takes away investment choices, it skews asset allocations and ultimately it’s been proven that over that period – in South African history – it cost pension fund holders quite a lot of money. They could have earned much higher returns with a normal asset allocation – with normal allocation – into say equities or properties.
So there’s no surprise then, that pensioners are not very happy about the talk that prescribed assets are coming back?
Yes indeed. And in fact, that South African experience is not what you would call disastrous, because returns were earned and the government also paid back the debt. But if you look more broadly globally, there’s no global experience where governments prescribing where pension funds had to go, was beneficial for those investors in the long run. Disastrous cases like Egypt, Nigeria, Zambia even Namibia and Ghana, there are huge losses, but in cases like Singapore, Malaysia and Sweden there was just a minor diminishing of returns. It really looks to me like a money grab, it looks to me like a political system where – rather than take hard decisions to make choices about how to run government departments and state owned enterprises so they can properly access capital through a free, fair and efficient capital market – they’re trying to skew it so they get easy access to cheap capital. What does cheap capital mean? It means lower returns to pension fund investors – below what they should earn in a free market.
So there shouldn’t be any prescribed asset requirements?
Well that’s right. I would say Mark wasn’t pro prescription, Mark was pro development. There is a counter argument that all of us as citizens, taxpayers, even as pension fund investors, feel we need to do something to help South Africa develop through this difficult period of low growth, high unemployment, inequality, we all want to play a part in that. I think what people forget is they’re muddling up the good intention and the goal with the methodology. The methodology of telling people how to invest would be a complete distortion of the capital market that we have. We have a really great pension and savings industry and asset management industry. I know there’ve been notable failures – where things weren’t spotted in corporate governance – but broadly speaking, it is a great national asset to have an independent, free and fair capital allocation mechanism so that savings can flow into investments. That’s the key economic equation – more savings equals more money available for investments. If you start messing around with people’s pension fund savings – we’re seeing it already – people are nervous about saving in the pension fund. We’ve seen people quit their jobs to crystallise their pension funds, to take it out of government’s potential hands. If you reduce the savings culture you reduce savings and you increase the cost of money, the cost of capital, the interest rates across the entire economy.
Andrew, just before the budget this year, the Department of Finance – the Treasury – had a very poorly attended press conference, not surprising because it was quite technical. They touched on prescribed asset requirements. They said pension funds are already investing heavily into government bonds – gilts and semi gilts – Eskom stock etc… Isn’t that something to take into account, the fact they are already in those vehicles?
It is part of the ridiculousness of this whole proposal. So let’s go back to the base principle. There are two assumption underneath the concept of prescription. The first assumption is that the problem is a shortage of money for development. That is absolutely untrue. South Africa has a large capital market, a large savings industry. If the government brings in intelligent, sustainable SOE’s with developmental projects, there is plenty of money to fund it. The second assumption – under prescription – is that if we don’t force pension funds to do it, they won’t do it. That is utter rubbish. We’ve been doing development investment for 25 years – we’ve never had a shortage of money. Rough statistics – and they get out of date quickly, maybe it’s 18 month old statistics – roughly about 25% of private pension funds in South Africa today are invested in government bonds, SOE’s or other tangible developments. So what are you going to prescribe? In fact I heard a funny joke the other day, somebody said they should prescribe that we have to use the all bond index – as as a benchmark – because it’s all government bonds and SOE bonds. We all get the joke and we all use the all bond index, so what is prescription for? What’s the point. What are we trying to accomplish? I just see it as as as a political ploy, to channel an easy and weak source of capital, into politically favoured developmental areas. Maybe somebody thinks they want to channel pensioner money into rural development in a certain province where you and I know will go and never come back – because it’s a political movement – that’s why people are justifiably scared.
Does that also put some red lights on about corruption because if you start allocating resources to areas where they’re not going to be giving you returns – to those who are providing the resources – sometimes you’d believe that there’s some nefarious motive?
Sure. Well even if it’s not that – which it could be – it’s just shoving a lot of money in a particular direction. You’re going to get people saying, “the government says we must do this”. You’re gonna suddenly get funds pop up that are going to do whatever the government prescribes – building low income housing in rural areas – even though those teams don’t have a track record, they haven’t done the economic research, they haven’t done the on the ground work, they don’t know how to lay bricks. You’re gonna have a lot of money forced to flow into those funds and products into those areas and it will be lost – or at the very least – you’ll have diminished returns. I want to be careful here. Not all SOE’s are bad. There are some SOE’s that we know are well governed, well run, good sustainable fundable businesses – the IDC, Land Bank being the most notable examples – and there are others, they access the market on a weekly, monthly basis. At fairly efficient rates, large volumes for long term debt. And then there’s other SOE’s that really should not be able to access capital at this point, because they may not be running as a sustainable enterprise. You could throw in that pot the SABC’s, the SAA’s and the SA Expresses… But let’s not go there.
Andrew, how do you feel now? You’ve been waving flags and blowing whistles, telling the country that there was a problem in the SOE’s – in fact you’re the first one not to invest in SOE’s – how do you feel about that whole debate, given what’s happened subsequently?
We always said what everybody was thinking. This is a classic case of the little boy saying the emperor has no clothes. Everybody in the country knew in their hearts – at that point – that the governance in various SOE’s was problematic. All we said was we have decided we will make no more new loans to these SOE’s until we can conduct a governance review. In fact we did four of them and named three of them – DBSA, IDC and Land Bank – which we cleared and we continued funding them. We issued a report on Sanral. We said governance was satisfactory from an operational point of view but there were some overarching legislative issues about how that company is run, which made us very uncomfortable. For example the board is limited to eight members – you can’t run an entity that size with only an eight member board. It’s just crazy but we can’t change that. And the other two being Eskom and Transnet – we never cleared for funding and in fact we have not done additional funding to them at all in the last three years.
