The Financial Sector Conduct Authority (FSCA) has denounced and is opposing any proposals by President Cyril Ramaphosa’s government that would allow pension funds to be used for government investments.
What are prescribed assets?
Prescribed assets refer to laws requiring that a portion of one’s investments be allocated to certain types of assets. The requirement would apply to pension funds, but could include retail investments, such as unit trust funds. The funds would be forced by law to invest in government-backed social and infrastructure projects and state-owned enterprises in the form of government bonds.
FSCA sounds the alarm
Before the elections, the African National Congress (ANC) said that it would introduce prescribed assets that would help ensure the financial sector had enough funds to fund SA’s industrialisation and economic development.
Having lost its majority in the May 29 elections, the ANC now has to decide if it will pursue this policy with its new coalition partners, which presents a challenge, especially since some of these political parties oppose the plan.
Olano Makhubela, a divisional executive at the FSCA who heads the market integrity and decision sciences division at the organisation, said that using pension funds to bankroll government projects would not be a great idea as it would hurt market returns.
Makhubela said that it would also impact South African retirees’ outcomes.
“There’s a fiduciary duty in the Pension Funds Act, which requires trustees to exercise proper duty toward the fund and the members,” Makhubela said on Tuesday.
“Any interference with that is tantamount to a breach of the Pension Funds Act, and so we remain of the view that prescribed assets are not something that we should be considering.
“You are compromising the overall return of the fund, and we don’t think that is right. The moment you weaken that due diligence because you have prescribed assets, you are going down a very slippery road,” Makhubela explained.
The FSCA executive further emphasised that such an act by government is wholly unnecessary, as new amendments have been created to force pension funds to put as much as 45% of assets into infrastructure as an investment class.
“Prescribed assets are the prerogative of government and particularly Treasury, but we are quite unequivocal on this one; we don’t think prescribed assets are the way to go,” he concluded.
Andrew Davison, former head of advice at Old Mutual Corporate Consultants also noted that although it’s debatable what the appropriate level should be, retirement funds are already allocating funds towards social and economic development projects.
He said that there is room for more funds to allocate more of their assets to these types of investments, but using prescribed assets is not the answer.
“In our view, prescribed assets may drive higher allocations, but probably at the expense of altering the risk-versus-return dynamic of these assets, to the detriment of investors,” he said.
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