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The concept of prescribed assets boasts an unfortunate history in South Africa and its proposed resuscitation to fund mega infrastructure projects is inducing a knee-jerk reaction among many investors planning for their future. There’s no need to panic though, says independent advisor Dawn Ridler, because there are ways to plan for the eventuality and mitigate the impact on retirement savings. – Derek Alberts
Prescribed assets and your retirement.
By Dawn Ridler*
Prescribed Assets resurfaced during the pandemic as a possible way to fund government a couple of years back when it became apparent that taxpayer’s funds were being depleted faster than they could be collected. To refresh your memory, this is a proposed change to the ‘Regulation 28’ clause of the Pension Funds Act, which controls the asset allocation of your formal retirement funds. (I have recently written a blog on Retirement Annuities available here.
The limits are as follows: 75% in stocks, 30% offshore, 25% in listed property and 10% in hedge funds. Most asset managers have been using bank money market and corporate bonds to generate ‘cash’ or fixed income in the portfolio, and not government bonds in this slice. Prescribed Assets would mandate a certain percentage to be allocated to Government Bonds.
These shenanigans are all part of the government’s ‘redistribution of wealth’ agenda (and includes the Acquisition without Compensation’ initiative.). The pandemic has just put this little trick back on the table in a big way because the Treasury is running on fumes with even less from the taxpayer than previously anticipated at the beginning of the year. Prescribed Assets are no longer just an ANC manifesto item, but is now at ‘Green Paper’ (“Discussion document”) stage, this is usually followed by the ‘White Paper’ which would then have to be signed into law by CR.
Prescribed Assets force retirement funds governed by the Pension Funds Act to invest a certain percentage in ‘selected’ government assets. Just to refresh your memory, Prescribed Assets are an Apartheid era policy. In 1977 this “prescribed asset ratio” reached a peak of 77.5% (and was still over 50% in 1989.) The net result was a dramatic drop in savings – something this country can ill afford – to say nothing of the damage to the pension portfolios.
Here is the quote from the ANC manifesto:
“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 while considering the risk profiles of the affected entities”.
This is the wording in the Green Paper/Discussion document.
“Amend Regulation 28 of the Pension Fund Act in order to increase the access of the Savings of South Africans to fund long-term infrastructure and capital projects, as a result increase the availability of funds to DFIs and financial intermediaries at a reasonable rate of interest.”
The slippery word-use is extremely disconcerting. At least they are being honest – they want to “Increase the Government’s access to the savings of South Africans”. That thud you heard was my jaw hitting the table at the blatant admission that government want to get their hands on your savings.
No soft talk of ‘mobilising funds’, they have gone straight to filching your savings. If you want to have a model of how funds are allocated for ‘infrastructure’ have a look at the World Cup. It was a free-for all and riddled with corruption. More recently the Covid pandemic silence of Lockdown level 5 was drowned out by the obscene guzzling sounds of corruption pigging out in the new gravy train.
Unlike the 24-hour about turn on the prohibition restrictions we saw a few months back, we will have some time to make decisions on how to mitigate this. If you have an RA (not invested on an insurance platform) you should be able to stop all additional contributions. Stopping additional contributions to your pension or provident fund will require company by company activism by employees, so I doubt we will see that happening on a widescale basis. The government could make this prescription applicable to new funds only, or to the entire pension base. The second scenario would create a bloodbath in the markets as asset managers sell of chunks (billions) in stocks and corporate bonds to fund this folly.
- Prescribed assets policy is just pension fund theft; SA must fight – IRR
- Your pension is worth 30% less – Magnus Heystek
- Prescribed assets – Could ANC be going for savers as it runs out of options?
Not all government bonds are equal, and some, like the R186, 10-year sovereign bond (which is auctioned and so the interest rate is a measure of the ‘risk’ of SA Inc), can be found in many existing retirement portfolios. On the other hand, do you really want SAA, Denel or SABC bonds stinking up your portfolio (all of whom could have an “infrastructure” component)? Saying that Prescribed assets will be used for “infrastructure” is just sugar coating the bitter pill. Call me cynical, but having been shown by the private construction companies how to loot ‘infrastructure’ funds for the World Cup, they can’t wait to get their hands on some more loot. Look at two huge government ’infrastructure’ projects – Medupi and Kusile. They are years late, running billions over cost and just don’t work as they should. Portnet, railways are two more examples of rampant ‘infrastructure spend’ ending up in Fat Cat pockets.
Even before considering the prospect of Prescribed Assets, retirement funds have been in trouble for years, thanks to our decidedly lacklustre stock market and an unsupportive, ransacked economy. There is little doubt that the Zupta years of wholesale kleptocracy resulted in a lost decade for SA Inc, and the 5 years of flat equity returns are symptomatic of that. There are currently 17 million people in RSA receiving state grants, up 350% since 2001, now over R150bn a year. Post pandemic this number will have ballooned.
How can the ANC be made to see sense when it comes to Prescribed Assets? The IMF has been working behind the scenes to try and get the right spending focus by government for a possible IMF loan (not the soft loan they gave us a few months ago). I have never been a fan of IMF loans, because they always come with austerity requirements, but if that is what it takes to cut the bloated government payroll, then all well and good. In my opinion COSATU need to get involved, they have successfully stopped swathes of proposed pension reform in the past and they need to see how their worker’s pensions will be adversely affected.
“Prescribed Assets” is not like AWC – in other words a populist (vote buying) move – it is purely a way to ‘access the savings’ of working South Africans. Yes, there are ways that you can mitigate this, but don’t make a knee jerk reaction and mess up years of contributions. There have been a rash of articles and podcasts by advisors suggesting that Retirement Annuities (specifically, but Preservers are in the mix) should be ‘retired from’ immediately when you turn 55. This is an emotional, knee-jerk response and you need to look at the pros and cons first.
- Johannesburg-based intermediary Dawn Ridler, MBA, BSc and CFP ® is founder of Kerenga.
* In the BizNews Finance Friday webinar, at noon, independent financial advisor Dawn Ridler, of Kerenga Wealth Ecology in Johannesburg, is one of our special guests sharing insights on how to build your wealth for the long term. Free. Register here: https://attendee.
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