South Africa’s National Treasury has proposed amendments to Regulation 28 of the Pension Funds Act, which (if implemented) would allow pension funds to invest in infrastructure across all asset categories, with up to 45% in domestic exposure and an additional 10% in the rest of Africa.

Malusi Ndlovu, Director of Large Enterprises at Old Mutual Corporate, believes this would be a step in the right direction, with a number of promising possibilities.

‘The amendments are intended to make it easier for retirement funds to offer members better investment growth and improved diversification, which come with infrastructure investments, particularly in the context of low economic growth and a shrinking local equity market as seen in South Africa,’ he says.

Ndlovu says that, alongside other asset classes like bonds, equities and property, infrastructure offers retirement fund members good diversification, especially with regard to the comparatively small local equity markets.

‘This is because infrastructure assets are less volatile than equities and do not correlate with traditional assets like property,’ he explains. “Moreover, infrastructure investments can deliver inflation-beating returns over the long run if properly structured and managed.'

A good start

Ndlovu’s only reservation about the proposed amendments is that the current proposal is – in his view – not enough to unlock the full investment opportunity envisaged in the Minister of Finance’s February 2021 Budget Speech.

Ndlovu points to a McKinsey report which found that Africa is suffering from an infrastructure backlog of at least $70 billion per annum, representing a significant opportunity for long-term investors such as retirement funds. Closing the gap would require several aspects of the investment ecosystem to improve, including a steady flow of well-structured investable projects, security of revenue for investors, enabling partnership models with the public sector, skilled professional advisers to help investors navigate the associated risk and enabling state involvement.

‘However, I’m optimistic that measuring retirement funds’ current infrastructure investments more precisely, which is part of the proposal, will raise the visibility of this asset class and spur more interest among trustees and investment consultants,’ he says.

It could be exactly what South Africa needs, given the urgency to stimulate the national economy in the wake of the 2020 lockdown recession.

The benefits of infrastructure investment

‘The great thing about infrastructure is that you are physically building something from scratch,’ Ndlovu adds. ‘You’re buying land, buying materials, hiring people who would have been unemployed, bringing in different suppliers, bringing in professionals, architects, engineers, lawyers. It really is the very essence of creating economic activity when you put up infrastructure.”

Not only that, he says: ‘Once up and running, infrastructure makes economic activity easier.’ This makes it one of the investment themes that generate not only good financial returns for investors, but also improves society’s productive capacity, he says.

Ndlovu points out that, according to National Treasury’s proposal, the decision around whether or not to invest in infrastructure would remain the prerogative of a retirement fund’s board of trustees.

‘The proposal to amend Regulation 28 is not the prescription of assets,’ he says. ‘It has nothing to do with the controversial proposal that would force retirement funds to invest in specific government-approved instruments. This is a relief, as there is ample evidence that the previous prescribed assets regime that existed up until the 1980s in South Africa resulted in significant opportunity cost for investors.’

Ndlovu clarifies that the purpose of Regulation 28 is to protect investors against inadequately diversified investment portfolios, and to ensure that trustees protect investors against unnecessary risk. Taken together with the potential benefits to the broader economy, the proposed amendments could give retirement fund members the best of both worlds: a better retirement in a better country.

• Listen to Malusi Ndlovu’s conversation with SAFM’s Nompumelelo Siziba about how the proposed Regulation 28 amendments will affect your retirement.