Did activists against prescribed assets go too far? Sygnia accuses IRR of making threats

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When the term “prescribed assets” is used, it is understood that the government is forcing the savings industry to buy government stock, as well as bonds issued by state-owned enterprises (SOEs) on behalf of investors such as retirement funds, Solidarity, the union, explains to its members. An alliance between South Africa’s ruling party and labor unions is pushing for the mobilisation of domestic pension funds to drive economic growth, Bloomberg reported in June. “A discussion document dated May 25, prepared for meetings of the alliance members, cited the use of so-called prescribed assets during the apartheid era to fund infrastructure.” The Institute of Race Relations (IRR) has been campaigning against the use by government of this “well-intentioned regulation for their own devious ends”, saying “it is no secret that the government has run out of money, and quite frankly out of options”. The IRR has demanded answers from investment providers on their stance on prescribed assets. But Sygnia CEO Magda Wierzycka says the IRR approach is ‘blackmail’. A row has exploded on Twitter. – Jackie Cameron

From Sygnia CEO Magda Wierzycka: Open warfare on prescribed assets won’t achieve much

We are releasing our ‘position’ note on prescribed assets today. I will make sure you receive it (see full position note below). As to IRR you can’t demand answers to complex issues and threaten bad publicity via social media campaigns if recipients don’t comply with your demand – the  demand being a response to their specific questions.

Also when it comes to prescribed assets, if this debate does becomes a topic for discussion which it isn’t at the moment, the first step would be to negotiate with government using diplomacy, rather than open warfare which often just antagonizes without achieving much.  We must all be free to engage in any manner we see fit, and not dance to the tune of IRR, the self-appointed representative without a mandate from anyone on this issue. Sygnia would obviously oppose the return of prescribed assets. We also don’t think it is easily achievable (our note describes why).

Magda Wierzycka and prescribed assets: where the IRR stands

The IRR notes the social media reaction of Magda Wierzycka, CEO of Sygnia Limited, to an open letter from Hermann Pretorius, deputy head of policy research for the IRR.

The letter which Ms. Wierzycka considers to be “blatantly” threatening is a follow-up letter from the IRR regarding the position of Sygnia Asset Management on the issue of prescribed assets. This follow-up letter was sent after no response to the first letter was received.

To quote from the letter in question:

“Silence from corporate South Africa, especially from those intimately involved in asset management, is not acceptable nor tenable. Those whom South Africans have entrusted with their earnings, savings, and pensions have responsibilities, morally, ethically, and legally, to provide clarity on and insight into important governmental policy risks and developments affecting the management of such assets.

It is therefore vital to repeat the core inquiries of the letter of 31 August:

1. Does Sygnia Asset Management believe that prescribed assets as a policy is a serious threat to the finances of ordinary South Africans?
2. If Sygnia Asset Management does not believe prescribed assets to be a serious threat to the finances of ordinary South Africans, why is this the case?
3. If Sygnia Asset Management does believe prescribed assets to be a serious threat to the finances of ordinary South Africans, why is this the case and what steps are being taken by the entity to address this?
4. If a policy of prescribed assets is implemented, will Sygnia Asset Management surrender the assets of ordinary South Africans that are under its management to the government?

Please note that, accompanying correspondential enquiries such as this letter, the IRR will be launching a social media campaign identifying individual corporate entities, such as Sygnia Asset Management, and seeking to provide clarity to members of the public as to whether such entities are likely or unlikely to act in the best interests of their clients in opposing prescribed assets as possible government policy.”

Said Pretorius: “It is regrettable that, too often, corporate South Africa has chosen every trick in the book to remain on the fence on issues such as prescribed assets and expropriation without compensation. South Africans are going through immensely tough times and deserve to know that those they have entrusted with their savings, pensions, and assets will not sell them out to a parasitic government.

“As long as the threat of government expropriation of savings and pensions hangs over South Africans, the IRR will continue fighting for the right of every South African to own rightfully and securely what they have worked hard to earn.”

Sygnia statement on prescribed assets: Our position is unequivocal

We will oppose them through whatever means are available to us. The ANC’s 2019 election manifesto contained a statement that the ANC would “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation”.

The current Covid-19 crisis has brought this issue into the spotlight again, simply because we all know that the government has two priorities: to deal with a major tax revenue shortfall and to mobilise investment in domestic infrastructure projects as a job creation scheme and as a mechanism to fund debt-ridden state-owned enterprises (SOEs).

Not surprisingly, investors have started to panic about the reintroduction of the so-called “prescribed assets regime” and the security of their savings. While some of this alarm may be justified in time, we do not believe there is currently a cause for panic. The prescribed assets regime introduced by the apartheid government in 1958 forced retirement funds to invest 53% of their assets in parastatal and government bonds, allowing the balance to be invested in “growth assets” such as equities; no international investments were permitted.

This resulted in the distortion of local bond markets, and investors earned lower returns than would have been earned on preferred asset class investments. That prescribed assets regime was abolished in 1989, and much else has changed since then. In particular, the wide-sweeping transition from defined-benefit to defined-contribution arrangements means that investment risk is now carried by retirement fund members and not by the sponsoring employers.

Read also: Prescribed assets – Could ANC be going for savers as it runs out of options?

Maximising risk-adjusted investment returns to optimise their retirement outcome has become the only objective for members, and the introduction of prescribed assets would infringe on that objective and encounter much resistance – even court challenges – from members, trade unions and boards of trustees, who have a duty to protect members’ interests.

As retirement funds enjoy tax breaks, however, government might counter that it should have a say in how the money is invested – in which case, funds might well demand a “grandfathering” of existing investment strategies. While members could then choose to reduce their contributions to the lowest possible levels, some might well resign to access their savings. And hence the concept is actually a very blunt instrument. Those employers still sponsoring defined benefit funds will also resist prescription as the prospect of lower investment returns would lead to higher employer contribution levels.

Lower returns will likely also give rise to lower pension increases. To be clear, the government is not currently considering a prescribed assets regime. Amendments to Regulation 28 (which limit retirement savings to particular assets and asset classes) are on the table to enable higher levels of investment in unlisted asset classes, such as infrastructure projects or “green projects” funded by debt. Any such investment would be voluntary rather than prescribed, however – an important distinction!

In practice, we anticipate that individuals and small retirement funds, where liquidity is paramount, would not participate, and the higher limits would only be utilised by large retirement funds, many of them associated with SOEs. To be clear, the government is not currently considering a prescribed assets regime. Amendments to Regulation 28 (which limit retirement savings to particular assets and asset classes) are on the table to enable higher levels of investment in unlisted asset classes, such as infrastructure projects or “green projects” funded by debt.

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In fact, at a webinar organised by the ANC’s Progressive Business Forum in August 2020, the ANC’s economic policy chief, Enoch Godongwana, stated: “You will recall in our ANC National Conference we emerged with a proposition which suggested we should look at prescribed assets. When we talk about tweaking Regulation 28, we are moving in a slightly different direction than what conference said. We are moving from an environment where there is no enforced prescription to creating an environment where trustees can invest in infrastructure projects as long as those projects are profitable.”

Government has also conceded that such infrastructure projects would be run as public-private partnerships, rather than by government alone, which would introduce a level of governance and cost oversight absent from the ruling party to date. The investment opportunities themselves will take the form of products or funds offered by asset managers to investors; to attract assets, some of these managers may offer liquidity to investors for a fee. The involvement of the asset management industry in managing investments in a variety of infrastructure projects, even at a fee, would require yet another layer of checks and balances.

Furthermore, the tax advantages of saving through retirement funds remain substantial, and it would be foolish to give those up just yet. Hence, panic is premature. Given that so many listed companies have opted to delist, though, a genuine investment issue worthy of concern is the dire lack of diversification within the domestic equity sector as an asset class. Another issue is the stringent 30% limit on foreign investments – without access to a diversified range of “growth” asset classes, investment returns are likely to remain in single digits.

Sygnia’s position on prescribed assets is clear: we would oppose them through whatever means are available to us – as, we suspect, would the rest of the financial services industry (including boards of trustees of retirement funds and trade unions). If no other options are available for South Africa, a form of “negotiated” solution might become necessary, but that would only be acceptable if carried out in consultation with investors (e.g. being allowed to invest 40% to 50% of assets offshore in exchange for a commitment to invest, say, 20% of assets in government-guaranteed debt). Either way, you have our ongoing commitment to always act in the best interests of South African savers.

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