The impetus for prescribed assets is expanding for the simple reason that the government is running out of other people’s money.
While the nation remains transfixed by Jacob Zuma’s accusations and excuses at the Zondo inquiry into state capture – and by the ‘egregious’ conduct of a public protector found by the Constitutional Court to have lied under oath – the introduction of prescribed asset requirements for pension funds is likely to be edging ever closer.
One of the key objectives of the National Democratic Revolution (NDR), as the SACP put it in The South African Road to Socialism, adopted in 2012, is to ‘mobilise…the immense resources…controlled by…private capital’ into serving the needs of the revolution. This could be achieved in various ways, including ‘effective state…regulation’, the SACP stated.
The ideological impetus for prescribed assets thus goes back at least as far as 2012, when an ANC discussion document duly recommended their introduction. At the Nasrec national conference in 2017 the ANC took up the issue once again, resolving that ‘a new prescribed asset requirement should be investigated’. The ANC’s 2019 election manifesto, unveiled in January this year, repeats this call.
The practical impetus for prescribed assets is now expanding, too. This is for the simple reason that the government is rapidly running out of other people’s money.
Some R230bn has been pledged to Eskom over time, while still more is likely to be needed in due course. Other failing state-owned enterprises (SOEs) are battling to pay salaries and need urgent bail-outs too. At the same time, the inflated public service wage bill is proving difficult to trim, the number of people on social grants will soon rise to 18.6 million, and government spending on free tertiary education for the poor is budgeted to grow at close on 14% on average over the next three years. In addition, an enormously expensive National Health Insurance (NHI) system – expected to cost at least R256bn a year under outdated 2011 projections – is soon to be introduced.
The pressure to spend is going up sharply – as is the already high burden of public debt. Tax revenues, by contrast, are largely static and likely to remain so. As the Bureau for Economic Research reports, net tax hikes of R92bn have already been introduced since 2014/15, whereas private-sector real wage growth has averaged 0% over the same period. This, says the Financial Mail, has made for ‘pervasive weakness in domestic demand’, which has ‘depressed’ the growth rate. This has helped bring the South African Reserve Bank’s 2019 growth projection down to 0.6% of GDP.
These factors make it all the more tempting for the ANC to try and harness the country’s pension savings to its costly NDR goals.
There is also, of course, a disturbing apartheid-era precedent on which the ruling party can rely. The National Party government had a ‘prescribed assets’ policy which obliged private-sector pension funds to invest at least 50% of their new cash flows into either cash or ‘gilts’ (the old name for government and parastatal bonds), at interest rates set by the Treasury.
This limited the returns that pension funds could generate and left all their members poorer. According to Isaah Mhlanga, executive chief economist at Alexander Forbes Investment, prescribed assets in the apartheid period (as the Financial Mail reports) gave an annual return that was ‘four percentage points below inflation and 17.2% behind equities’
The ANC can simply follow in its predecessor’s footsteps by introducing a new prescribed assets regime. However, at least three fundamental differences will apply. First, Eskom and other parastatals were more efficiently administered in the past, reducing the risk of negative returns. Second, the money lent to failing SOEs is now likely to be squandered, rather than effectively deployed. Third, pension funds were generally then ‘defined benefit’ funds, meaning that the funds were obliged to provide the pensions promised. By contrast, most are now ‘defined contribution’ funds, in which pension benefits critically depend on how much individuals have saved for their retirement and how strongly their savings have grown.
Despite the likely damage to all the people already on pension or trying to save for their retirement, the country’s pension savings remain a tempting target. In the words of economist Mike Schussler, South Africa’s pension-fund savings – at some R4.3 trillion in total – are ‘the fifth largest in the world as a proportion of GDP’.
If prescribed asset rules are re-introduced, all pension funds could be compelled to invest a specified portion of the savings under their control – Cosatu has suggested 50% – in government or SOE bonds or other ‘job-creating projects’. Initially, these might be issued at the same rate as the inflation rate. However, warns Schussler: ‘Later, bonds could be issued at inflation minus 3%. The country’s retirement saving would be used to bail out SAA for the umpteenth time. The looting and waste would continue – and pensioners would bear the costs.’
Adds Leon Campher, CEO of the Association for Savings and Investment (Asisa): ‘Corrupting the investment decision processes by the introduction of prescription would be damaging for the entire economy’. It would ‘increase losses and reduce returns on investments’ and erode confidence in the financial sector. It would also ‘undermine the country’s hugely effective pension-fund savings system’, which is a vital vehicle for the limited savings the country is able to muster.
South Africa’s moderate majority must mobilise to prevent this. Two provisions in the Bill of Rights can be invoked to help achieve this goal. The first is the property clause, which currently protects all South Africans against the indirect or regulatory expropriation of any portion of their pension savings.
The second is the right to social security, under which the government must take ‘reasonable’ measures to ensure that everyone has access to ‘social security’, including ‘appropriate social assistance’ for those unable to support themselves and their families.
Introducing prescribed assets to help fund the destructive NDR – and especially at a time when about R1.5 trillion has reportedly been lost to state capture – is hardly a ‘reasonable’ intervention on any objective assessment.
Dr Anthea Jeffery, Head of Policy Research at the IRR, is the author of People’s War: New Light on the Struggle for South Africa, now available in all good bookshops and as an e-book in abridged and updated form.
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