South Africa’s stringent lockdown has so hurt the poor – including the hundreds of thousands now newly jobless or otherwise unable to work – that the government is urgently casting around for billions of rands to help support them.

But the fiscal cupboard is almost bare, while public debt is already inordinately high. All of which makes the country’s pension pot – the 4th biggest in the world as a percentage of GDP – a particularly tempting target for the government to tap for its stimulus package.

South Africa’s pension funds, both public and private, are valued at close on R4 trillion, even after the recent market carnage. More than 11 million South Africans of all races (72% black, 28% white) contribute to these funds or draw from them after reaching retirement age.

Taking families into account, the country’s pension funds benefit some 33 million people – or more than half the population, as Mike Schussler, head of Economists SA, pointed out at an IRR media briefing earlier this week.

Yet big business, according to a recent report in the Daily Maverick, seems willing to work together with the government in ‘raiding’ the country’s pension funds – both public and private – to help provide relief for the massive economic damage from the lockdown.

‘We need to be raiding resources wherever we can find them,’ said Busa president Sipho Pityana at last Friday’s meeting of the National Economic Development and Labour Council (Nedlac), called to discuss a stimulus package.

Private sector savings

At this meeting, investment banker Martin Kingston assured the government and Cosatu that the business community was already identifying what ‘reserves were available’. The meeting also discussed how ‘funds from SA’s private sector savings (including pensions) and investments, which are estimated to be worth about R8-trillion’ could be ‘mobilised for the stimulus package’.

Mr Kingston stressed that adequate returns on such savings would need to be maintained. But this caveat is likely to count little if ‘the government opts for directly using private sector savings and investments’, as Mr Pityana and Cosatu spokesman Matthew Parks seemed willing to propose.

Though Mr Pityana also expressed a need for caution in ‘using public and private savings’, this too will mean little if pension funds are forced to invest in government and SOE bonds at artificially low rates – and with little guarantee that their capital will not be frittered away.

Singularly unclear

The R500bn stimulus package unveiled by President Cyril Ramaphosa on Tuesday evening makes no mention of tapping into pension funds. But it is also singularly unclear on how the necessary funds are to be found.

A R90bn ($4.2bn) loan will be sought from the Covid-19 relief funds of the International Monetary Fund (IMF), at an interest rate of round 1%. Since this loan, if approved by the IMF, would come without conditions, the tripartite alliance is willing to sanction it. Additional loans from the World Bank, the New Development Bank, and the African Development Bank could bring the country’s total borrowings from international finance institutions to about R100bn.

But that is far short of the R500bn the president has promised. Another R130bn is to come from rebalancing the budget, but that will be hard to do when finance minister Tito Mboweni barely scraped together R260bn in savings over three years in his February 2020 budget. Hence, most commentators doubt whether rebalancing will be achieved.

But even if the R130bn can indeed be reallocated, a major funding gap will still remain – and no clarity has been provided as to how this will be filled. More state bonds may need to be sold, but demand might not suffice (despite yields exceeding 10%) while the costs of borrowing in this way (given these high yields) could be enormous.  

Annual interest payments on public debt could rise in three years from 4% of GDP, as now, to 9% of GDP or more. Current interest spending, at 4% of GDP, is much the same as this year’s budget for public health. At 9% of GDP, however, the interest burden will increasingly squeeze out spending on all other vital needs.

Treasury fears

But the government will be reluctant to keep trimming the public service wage bill or to reduce its spending on social grants. As part of the stimulus package, that spending is also to be increased by R50bn, albeit as a temporary measure. But the Treasury fears (and with good reason) that temporary increases to existing grants – along with a monthly (R350) social relief grant for more than 10 million jobless people for six months – will in practice prove impossible to end.

How then is all the extra money for the stimulus package (and post-Covid poverty relief) to be found? According to Mr Schussler, a further R300bn could be obtained from the IMF by taking advantage of South Africa’s ‘special drawing rights’ or SDRs.

SDRs are the reserve assets created by the IMF to supplement the official reserves of member countries. Though South Africa has only about R30bn in SDR holdings, during the 2008/09 global financial crisis the IMF allowed member countries to access between six and seven times their SDR holdings.

Given the scale of the current Covid-19 crisis, the IMF is now considering allowing member countries to access ten times their SDR holdings. If this is agreed, it would allow South Africa to access some R300bn. The interest payable would again be low, at around 1%.

National democratic revolution

A crisis of the magnitude that Covid-19 has unleashed needs to be dealt with at the international level, as Mr Schussler says. But the ANC has little interest in pursuing this option because of its long-standing commitment to a national democratic revolution (NDR) aimed at taking South Africa from a capitalist to a socialist (and ultimately a communist) future.

A particularly important NDR objective is to ‘mobilise…the immense resources…controlled by…private capital’ into serving the needs of the revolution, as the SACP states in The South African Road to Socialism. How this is to be achieved will ‘vary according to circumstance’ and will often depend on ‘effective state…regulation’. It may also require ‘straightforward compulsion and even expropriation’.

One way of ‘mobilising’ the private sector’s ‘immense resources’ is to introduce prescribed assets for pension funds, which would then be compelled to invest stipulated percentages in government and SOE bonds at interest rates set by the state. The ANC has long wanted to do this, as is evident from its 2012 policy documents, its 2017 national conference resolutions, and its 2019 election manifesto.

Now the Covid-19 crisis – and an unnecessarily stringent and prolonged lockdown – have given the ANC/SACP alliance the chance to achieve this long-standing ambition. The crisis has also reduced the need for compulsion, as big business seems more than willing to tap into the country’s pension funds to help provide relief.

The prescribed asset option is easy to implement, moreover, which makes it all the more attractive. This can be done by amending Regulation 28 (issued under the Pension Fund Act), which already allows the government to give directions as to how pension funds are to be invested. 

Relatively small step

Under Regulation 28, pension funds must currently invest 25% in interest-bearing investments, such as bonds, even if their members would prefer a higher equity exposure. It would thus be a relatively small step to amend Regulation 28 to require, say, a 50% investment in state bonds. Since shifts in regulations do not generally need legislative endorsement, Parliament could be left out of the process.  

Initially, these state bonds might be issued at an interest rate mirroring the inflation rate: currently about 4%. But, as Mr Schussler has pointed out: ‘Later, bonds could be issued at inflation minus 3%, while our retirement savings would be used to bail out [the failing state] for the umpteenth time. The looting and the waste would continue – and pensioners would bear the costs.’

The potential blow that could be visited upon the 33 million South Africans with accumulated pension benefits is massive. All will suffer greatly, regardless of their race. However, since most of the individuals affected happen to be black, the upshot, as Mr Schussler warns, could be ‘a huge destruction of black assets, the worst the world has ever seen’.

If you like what you have just read, subscribe to the Daily Friend

11 COMMENTS

  1. The incessant desire by Government and Business to steal money from the citizen must be stopped in its tracks.
    First Government needs to cut its bloated cove of bureaucrats, cut down the size and number of ministerial posts.
    Next reduce the number of provinces back to four.
    close down the council of provinces and traditional leaders
    Force unions to register as political parties to stop the interference in the right of citizens.

  2. The realistic danger of government using private sector savings and investments is precisely why nationalisation oops I mean Expropriation Without Compensation is such a daft idea. Well, it’s a great idea if you are the government, because you have no skin in the game there, and you get a free pass in terms of moral hazard.

    The fact that these extremist authoritarian measures are already considered, without due diligence done regarding the obvious choices presented to the country by every sane economist worth listening to, testifies that every person who emigrated post 1994 away from our alleged freedom and democracy was right.

  3. I’m getting very confused here Anthea. Since pretty well every country in the Western World is in debt to a greater or lesser extent and they are all needing to bail their own economies (the bigger you are, the harder you fall) where exactly does this vast amount of IMF money come from?

  4. The pension fund is the sum of the individuals retirement savings and belongs to the person for old age, if all to pay, raise VAT by 2%!!

  5. I am of the opinion that our investments will dry up and our pensions will amount to nothing. I am strongly against the amendment of Regulation 28 most profusely.

  6. You are right to draw our attention to this Anthea.
    SA has the 4th biggest pension savings in the world, could that be at all related to a lack of trust in Government?
    The names that you mention as having attended the Nedlac meeting do NOT inspire any confidence in me. They are all compromised in one manner or another. This is a chilling statement from Pityana ‘We need to be raiding resources wherever we can find them’. Kingston recently resigned from the board of that local success story, SAA. He departed in a hurry, WHY?
    Mike Schussler is well known and respected, but he does not put forward plans that he knows the ANC will eagerly grab and then fail to deliver on. Like, for example, honoring the interest payments to monies ‘borrowed’ from pensioners by the ANC.
    Keep up the good work Dr Jeffery.

  7. Whilst I agree that public and private pension funds should not be allowed to be raided in order to find the promised monies the President has committed to.
    However private pension/provident fund legislations needs to be amended for the purposes of the State of Emergency. All the relief funding schemes that have been mooted come with an overhang of debt at the end of the crises which leaves an unnecessary burden on those staff members who have availed themselves of such relief funding, in order to make up for their loss of salaries.
    Surely it makes economic and moral sense to allow contributors to their own funds to access their own monies to tide themselves over the crisis – with limitations in order to maintain the integrity of the “pension” – but provide a livelihood in the short term.
    Surely this option would free up other relief monies to those who don’t have pension/provident funds and those who have such schemes, then be allowed to access their own funds (on a temporary basis). They would be able to either make up these funds when back at work or have slightly reduced pensions on retirement.
    But at least this provides access to desperately needed income which could be accessed free of necessary “red tape’ and more importantly interest and debt free.
    The pension/provident companies to their shame should be actively lobbying government to ease legislation to allow this.

  8. A 55-year history of local business leadership ‘raiding’ SA’s economy proving Anthea’s point

    In 1965, I joined the design office of the Ford Motor Company as a junior car design engineer. My American supervisor, ex US Air Force who flew Hellcats from aircraft carriers in the Pacific, came from the south side of Chicago, where Al Capone was in control. I was horrified to hear from him when he said that Anglo American and other mining houses were criminals far worse than Al Capone was. He explained the they were the world’s largest rapists and plunders of SA wealth by just mining the product and shipping it out, creating wealth only for themselves and not for the country by beneficiation raw product first and then exporting.

    Once I got over my negative emotional response, I realised he was right and that the mining houses were to me no better than criminals raiding, raping and plundering this land of ours.

    Around 1960 and advised by the chief engineers from Ford and GM, the local content manufacturing policy established SA as a world class country in the planning design development and manufacture of vehicles. By 68, SA had all the engineering knowhow to transform this country into a manufacturing giant. This did not happen because of local business leadership. Here are four examples where I was on the losing end of that rape and plunder that prevented this transformation.

    1. Early 70’s, the damage to the Black Forrest by Germany’s casting and forging industry: Focusing on the high volume producers, I approached a number of these factories and suggested moving their facilities to the Eastern Cape where power was cheap and labour plentiful. I wrote to Prime Minister John Vorster and explained. His office put me in touch with Dr Frans Kuschke, Chair of the IDC and their officials helped with the business plan for the German manufacturers interested. Close to signing, the IDC indicated that local business leadership objected as it threatened local industry, which it did not. Nevertheless this opportunity to expand SA from small volume manufacturing to large-scale manufacturing was stopped.
    2. 1984 I was commissioned by Ford to develop an industrial plan to lift KwaFord and other squatter camps out of poverty. By late 1985 Ford brought in GM and Goodyear to the funding table and by 1986 with CSIR confirmation; I had demonstrated how to lift squatter camps out of poverty. General Motors was the last of the three to leave SA and on leaving GM approached PW Botha to find local business to fund the proven plan through the commercialization stage. PW got Anglo to meet in GM’s MD’s office. The senior architect from Anglo indicated that he supported the plan whereas the director from Anglo stated that SA did not need this and left. When PW’s officials heard, they remarked that local business leaders don’t think like you Americans, (meaning US companies). A year later, the senior architect wrote and stated that he agreed with the plan on an Anglo letterhead.
    3. Leading up to the Presidential Job Summit Mr Rosholt –Chair Barlow and Mr Hans Smith chair of ISCOR recommended discussing the plan. Instead Business SA and the Business Trust excluded manufacturing from the Job Summit Agenda thereby excluding this plan.
    4. In 2008 after SACOB and Business Unity SA concluded that the plan worked, Business Leadership SA hired four business consultants to advise BLSA on the plan. All, including BLSA concluded the plan was useless and was not worth considering. I replied that BLSA had just concluded that Ford, GM, Goodyear, Siemens and the CSIR were incompetent in manufacturing development and that the engineering systems and procedures, the basis of this plan, was not worth considering. Simply stated they also concluded the way engineers deliver 80 million new cars annually also could not work. I forced the CEO and Chair of BLSA to eat their words and retract, and have their retraction of file.

    This is just a brief glimpse into my 55 years experience as a product and manufacturing design engineer revealing how local business leadership’s inability to function in an industrial world has led to this country’s economic decline and poverty rising after apartheid.

    From my experiences, I see Business Leadership SA as a criminal organisation in the fore-front of plundering and raiding this country, a country that has all the commercial ingredients to become an economic giant. Instead, we have the leadership who PW’s office stated 10 years before Sunter, cannot think like Americans. Making matters worse sociologist and economists in government for 25 years have also proved that Ford, GM, Goodyear and Siemens are incompetent without ever providing a factual basis. In 2004 in desperation to prove their point the Presidency got the Rector of Pretoria University to also prove that the Ford Motor company was in competent and I also have this rubbish in writing just as I have all the above.

    So what hope has SA got when government is surrounded by such stupidity and incompetence on both sides where big business is very good at raiding the larder and government officials major success is forcing millions into poverty.

LEAVE A REPLY

Please enter your comment!
Please enter your name here