S. African Regulator Cautions Against Prescribed Assets Plan
(Bloomberg) -- South Africa’s financial regulator said it’s opposed to any proposals that would compel pension funds to plow money into government-approved investments, as it could compromise market returns.
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The African National Congress pledged to introduce so-called prescribed assets after May 29 elections to ensure the financial sector makes adequate funds available for the nation’s industrialization and economic development.
It’s unclear if the ANC will still pursue the policy after it lost its outright majority in the elections, which led it to form a coalition government with 10 parties, some of whom are opposed to the plan.
Mandating pension funds to bankroll projects would not be advisable as it could compromise market returns and affect retiree’s outcomes, said Olano Makhubela, a divisional executive at the Financial Sector Conduct Authority.
“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 Tuesday on the sidelines of a forum in Johannesburg. “Any interference with that is tantamount to a breach to the Pension Funds Act, and so we remain of the view that prescribed assets is not something that we should be considering.”
The policy was first tried in South Africa in 1956 during White-minority rule to force investment in government bonds, but was scrapped decades later. Plans to revive it have been criticized by the pension industry, which fears funds may be threatened if invested in under-performing state-owned enterprises.
“You are compromising the overall return of the fund and we don’t think that is right,” Makhubela said. “The moment you weaken that due diligence because you have prescribed assets, you are going down a very slippery road.”
He also said such a step is unnecessary as recent amendments already allow pension funds to put as much as 45% of assets into infrastructure as an investment class. As such, the government need only provide bankable and investable projects that can pass due diligence checks, and provide attractive returns to lure investments, he said.
South Africa needs as much as 1.6 trillion rand ($88 billion) in public sector infrastructure investment and a further 3.2 trillion rand from the private sector to achieve its infrastructure goals by 2030.
“Prescribed assets is the prerogative of government and particularly Treasury,” he said, “But we are quite unequivocal on this one; we don’t think prescribed assets are the way to go.”
(Updates with infrastructure funding needs by 2030 in penultimate paragraph)
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