Talk in the run-up to the elections about the introduction of “prescribed assets” generated angry rumblings from the investment industry. But what exactly are prescribed assets and how would their adoption affect consumers?
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.
In other words, if the laws regulating pension funds were amended to allow for prescribed assets, funds might be required to apportion, say, 15% of their capital to bonds for specific government initiatives.
The issue was first raised at the ANC’s 2017 elective conference, where it was agreed that “a new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions’ funds be invested in public infrastructure, skills development and job-creation”.
In its 2019 election manifesto, the ANC promised to “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 while considering the risk profiles of the affected entities”.
The issue lay dormant until early this year, when it resurfaced in the ANC’s 2024 election manifesto.
State plunder?
Alarmists in the financial services industry have called prescribed assets “a raid on your pension savings”. Is this true? Will the government be stealing your savings?
The answer is no. A relatively small portion of your savings will be allocated to government bonds, which have a guaranteed return on investment and capital payback when the bond expires.
Pension funds allocate vast amounts to government bonds – in fact, alongside the equity market, the sovereign bond market represents one of the biggest receptacles of wealth globally.
It is not the type of asset the investment industry has a problem with, nor is it that the industry is against investing in developmental initiatives. What irks the industry is the word “prescribed”. It is the prospect of being forced by law to do something it would rather have discretion over.
In 2019, Andrew Davison, then head of advice at Old Mutual Corporate Consultants, wrote: “Although it’s debatable what the appropriate level should be, retirement funds are already allocating funds towards social and economic development projects. There is undoubtedly room for more funds to allocate more of their assets to these types of investments.
“Is prescribed assets the way to do this? The answer is a firm ‘No’, 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.”
In other words, the less the interference from government, the more effective investment managers can be in selecting assets that benefit investors in particular and society in general.
Davison qualified his argument by saying outcomes would depend on the form such legislation took and how narrowly prescribed assets were defined.
Comparing performance
In a recent hard-hitting paper for the South African Institute of Financial Markets, Daniel Makina, a professor of finance at Unisa, said prescribing assets was “a form of financial repression” from apartheid and colonial times.
Makina notes that the Nationalist Party government introduced prescribed assets for pension funds in 1956. “(For about 30 years) pension funds and insurance companies were compelled to invest part of their funds as prescribed assets in government bonds, government guarantee bonds, and bonds approved and specified by the registrar of pensions, often at rates below the fair market rates,” he says.
Makina goes on to compare the performance of the assets against the JSE over that period: “During the 1960s, when inflation averaged 3%, prescribed assets had a positive real return (1.9%) but were outperformed by real returns (8.3%) on the JSE so that the opportunity cost in nominal terms of investing in prescribed assets was -6.4%.
“In the 1970s when inflation averaged 11.3%, prescribed assets posted negative real returns of -4.0% while real returns on the stock market were positive at 13.2%, and the opportunity cost was -17.2%.
“During the 1980s when inflation averaged 14.5%, prescribed assets posted negative real returns of -1% while real returns on the stock market were positive at 5.7% and the opportunity cost was -6.7%. Thus, it is clear that prescribed assets only served to erode the wealth of investors.”
Reaction to overreaction
News reports quote Zuko Godlimpi, the deputy chair of the ANC’s economic policy formulation subcommittee, as saying the reaction to the prescribed asset proposal was alarmist.
“The reaction so far has been” ‘Oh no, they are raiding our pensions; they want us to buy government bonds.’ The manifesto is not predicated on a lunatic misunderstanding of how markets and the economy function,” Godlimpi said.
He said the ANC was trying to fix an anomaly where most private retirement fund assets were invested in the JSE’s top 100 listed companies.
