Government support for a prescribed assets rule for pension funds seems to be growing. Investors fear new rules that would force retirement funds to invest in government debt, which would effectively mean bailing out disasters like Eskom using your retirement savings.
The idea is that the government would add to existing rules that, for example, limit retirement funds’ offshore investments to 30% of total assets. It could mandate that funds must invest, say, 40% in government assets, including state-owned enterprise (SOE) debt.
From a certain perspective, this would be great for the government. It would enable our leaders to plug the ugly, trillion-rand holes left in state finances by corruption and mismanagement using the R4.4trn pension pot South African savers have accumulated. It would help the state avoid the brutal necessity of an IMF bailout. It may even make it possible for the government to deal with some of the country’s crumbling infrastructure – assuming there are enough honest civil servants around to manage some useful projects.
But this would all come at a terrible cost, especially to South Africa’s savers.
The prescribed assets approach
In considering a prescribed assets rule, the ANC is drawing inspiration from an unlikely source – the apartheid era. Between 1956 and 1989, the apartheid government forced retirement funds to invest in government assets. The resulting cash was used to invest in infrastructure and various other National Party boondoggles.
Unfortunately, this meant that there was less capital available for the private sector. It’s impossible to say what state the country would be in if money had flowed to entrepreneurs and businesses instead of being used to prop up a reprehensible regime. SA might be a manufacturing hub or a leader in technology – who knows?
It also meant that pensioners didn’t earn the best possible returns on their savings and is likely one reason why so many defined benefit funds from that era have massive deficits and cannot support their promises.
So, the Nats prescribed assets regime was harmful. But they, at least, had the benefit of operating in an entirely different global environment – and of being locked out of international financial markets for part of the time too. The ANC faces a very different world. Democratic SA is fully integrated into world markets and the government relies heavily on international capital flows. Interventions in capital markets are regarded with suspicion by global capital, and the ANC would risk seriously damaging its ability to raise money abroad in a way that the pariahs of the apartheid government didn’t have to worry about.
Thus, prescribed assets would hurt savers, the broader economy, and the country’s global standing (which would further hurt the economy). An IMF bailout may be kinder.
Reason doesn’t always prevail
Sadly, despite many excellent arguments against the prescribed assets approach, reason does not always prevail – ask anyone who had that extra cocktail on a weeknight. The ANC, faced with the imminent threat of a rating downgrade and a complete meltdown at Eskom, may be willing to trade short-term benefit for long-term harm – it’s happened before.
So, if prescribed assets are on their way, what can you do?
First, if you are a member of a trade union, you should make your voice heard. Explain to your union what’s at stake and agitate for action. This move will hurt workers and workers should respond.
Second, sit down with a financial planner and look at your overall savings plan. Retirement savings vehicles offer tax benefits, which makes them attractive. But the calculus changes if investing in a provident fund means giving 30c of every rand to Eskom. It may mean you have to rethink your approach to savings – almost certainly, it would mean that investing offshore becomes essential.
Prescribed assets would mean that a larger proportion of your retirement savings would go into (low-quality) domestic assets. This dramatically increases your risk, because it makes you even more exposed to SA. Therefore, it would make a lot of sense to start investing more aggressively offshore to diversify your portfolio. It may make sense to reduce your monthly retirement savings and redirect some of that money into an offshore option – your financial advisor can help you decide.
Third, and finally, you need to get much more politically active. Too many South Africans complain about the state of the nation without taking part in attempts to fix it. SA lacks political alternatives and most debate is dominated by one set of ideas. It’s up to South Africans to change this. Volunteer. Lobby your municipality. Arrange a worker protest. It really is all up to you, the individual South African, to make the country a better place.