Can retirement fund members achieve the financial returns needed to retire comfortably while also making a difference to the country they live in?
Retirement funds are primary pools of long-term capital. As such, they can play a significant role in funding illiquid real assets such as infrastructure investments, which are typically long-term projects. Infrastructure projects do, however, offer long dated, predictable investment cash flow, making it a good fit for a long-dated pension liability profile.
Traditionally, infrastructure has been funded by the public sector. But the size of the infrastructure deficit worldwide has become too large for governments alone to finance. As a result, the private sector is increasingly finding opportunities to invest in infrastructure programmes. In South Africa, for example, the Department of Energy’s Renewable Energy Independent Power Procurement Programme (REIPPP) has been a particularly successful example of a large scale private and public sector procurement programme to develop much-needed infrastructure. It is also pleasing to see large corporates willing to invest directly into infrastructure projects that will help them secure access to reliable power generation capacity, which will in turn enhance their productivity and output.
There is also a clear and positive correlation between infrastructure development and economic growth. Without the necessary infrastructure – from agriculture to transport systems, power grids and communication infrastructure – economies cannot meet their full growth potential.
Retirement funds that invest in infrastructure are thus playing a part in spurring South Africa’s economic growth. It is therefore encouraging to see the proposed amendments for Regulation 28’s definition of infrastructure to cover “installations, structures, facilities, systems, services or processes relating to the matters specified in Schedule 1 and which are part of the national infrastructure plan”.
This could possibly include:
National and international airports
Communication and information technology installations
Education institutions
Electricity transmission and distribution
Health care facilities
Human settlements and related infrastructure and facilities
Economic facilities
Mines
Oil or gas pipelines, refineries or other installations
Ports and harbours
Power stations or installations for harnessing any source of energy
Productive rural and agricultural infrastructure
Public roads public transport
Railways
Sewage works and sanitation
Waste infrastructure
Water works and water infrastructure
Some have commented that the definition is too broad, but we probably all agree that infrastructure investment is long overdue if we want to secure a better future for our children. However, the risk of investing in infrastructure must be balanced by the returns needed by members to achieve a certain level of income for retirement.
It is also clear that retirement fund trustees need to be educated about the characteristics of infrastructure investments, especially given the long-term commitment, often up to 20 years. Trustees need to consider the liquidity and cash flow requirements of the funds that they oversee, particularly if they are defined contribution funds. They also need to have the confidence that the projects will deliver its expected investment returns over the entire lifetime of the investment. This requires adequate and full diligence upfront. It is therefore critical that fund managers develop more innovative ways to enhance liquidity for these otherwise illiquid assets, as it is otherwise very difficult for a defined contribution fund to allocate heavily toward illiquid asset classes.
Financial vs social returns
While the financial returns of infrastructure investments are important, social returns can also play a significant role in South Africa’s growth.
The 17 Sustainable Development Goals (SDGs), adopted by the United Nations in 2015, are a universal call to action to end poverty, protect the planet and ensure that by 2030 all people enjoy peace and prosperity. South Africa’s National Development Plan (NDP) is aligned to the SDGs.
The SDGs and NDP are a useful blueprint for pension boards to consider how to invest responsibly to achieve social returns, such as job creation or improved living conditions.
In the past, it was thought you could earn either financial or social returns but not both simultaneously. Worldwide, we have now seen that you can indeed achieve both. For instance, Ashburton Investments and its fund investors are addressing a national challenge of sustainable job creation through its Ashburton Credit Enhanced Funds in collaboration with National Treasury’s Jobs Fund.
Ashburton Investments’ social impact funds have attracted a large sum of capital since inception in 2014, which has helped unlock investments in Small and Medium Enterprises that traditional capital funders considered too risky. While investors have been earning, good risk adjusted financial returns, they have also helped to create more than 17 000 permanent jobs over the past seven years, mainly for previously disadvantaged women in the underserviced provinces of Eastern Cape, Limpopo and North West.
A pension and provident fund can achieve both social and financial returns through its investments in a number of infrastructure projects including renewables, health care and education. A challenge for this type of investment is to measure the positive ripple effect that is has in a specific community. A trustee from a highly regarded provident fund recently commented on how their investment in a clinic in Makhado, for example, had several spin-offs including creating work for taxi operators dropping off people at the clinic and the vendors supplying food to them. It would be great if one could accurately measure and report on this in more detail.
We need to consider all the tools of capital available to unlock the desperately needed growth in South Africa. Investing in infrastructure plays an important role in and should not necessarily be seen as more risky than other asset classes, as investments can be structured in a way to balance the risk versus the investment and social returns.
ENDS
