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significantly in the last seven decades and so have the risks associate with it: ‘Back then, most retirement funds were defined-benefit funds, where the risk of underperformance was carried by the employer,’ says Davison. ‘Now
most funds are defined- contribution funds, which means that it’s the members who carry that risk.’
And those risks are significant.
‘As soon as an asset becomes a prescribed asset and investors are forced
to invest in it, its pricing is no longer determined by market forces,’ Davison warns. ‘That causes price distortions and reduced returns, even on assets
that would otherwise have great investment potential.’
‘What’s more, because you’re forced to hold certain assets, you can’t resell them and when there are not enough sellers, it affects assets’ liquidity. If pension funds are legally obliged to invest 80% of their assets in government bonds, they will have to be liquidated from somewhere – and
a large part would come from the stock market.
‘We’re not suggesting that prescribed assets will come in at 80%, but even 20% will result in a substantial outflow from the stock market.’
That, Davison says, will crowd out foreign investors. ‘As soon as prescribed assets are made law, all local investors will be forced into the bond market and pricing will be distorted,’ he explains. ‘Foreign investors will avoid such assets.’
Finally, he cautions that prescribed assets could put companies off providing retirement funds for staff. In fact, he says, it’s happening already. ‘Because of the noise around prescribed assets, many employers are concerned about starting a retirement fund
for employeees. That’s
bad for the retirement industry, and it’s bad for individual employees who probably won’t have enough retirement savings when they reach retirement.’
ALL THE BENEFITS WITH NONE OF THE DOWNSIDE In October 2020, in his Medium-Term Budget Policy Statement, Finance Minister Tito Mboweni
said, ‘Government has initiated a process to review Regulation 28 [of the Pension Funds Act] to make it
easier for retirement funds
to increase investment in infrastructure – should their board of trustees opt to do so. At all times, trustees
are expected to put the interests of retirement-
fund members first.’
Davison says he and his colleagues were encouraged by this. ‘We think it signals support for impact investing, rather than the introduction
of prescribed assets. That’s a significant shift, because while retirement savings are definitely a valuable source of funding for growing
the economy, prescribed assets are categorically not the way to achieve it.
‘Impact investing, instead, offers all of the good that comes from attracting funds into projects that
will contribute to the development of South Africa without the negative effects of prescribed assets.’
This does not mean that impact investing comes without any challenges. Chief among them is the need for bankable projects that will deliver the returns retirement-fund members want. ‘Public-private partnerships are also essential if we’re going to unlock the full benefits of impact investing,’ says Davison. ‘Government can’t do it on its own and the private sector can’t do
expertSPACE investments it on its own. We have to
collaborate, and we need trust between the two parties if we are to get such projects off the ground.’
If everyone can get
this right, investors will have many options, since impact investments come in many forms from green bonds and Sustainable Infrastructure Development Symposium projects
to opportunities in
private markets and the listed environment.
‘Impact investing has
a credible track record,’ Davison concludes.
‘Old Mutual is already investing in renewable energy (R34 billion), education
(R2.3 billion) and transport infrastructure development (R20 billion). I don’t think anyone can say that these sectors are not valuable investment destinations, which could help to rebuild our country after the crisis we experienced in 2020.’ M
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WRITER: MARK VAN DIJK. ILLUSTRATIONS: GALLO IMAGES/GETTYIMAGES