Prescribed assets: by hook or by crook
Can Gigaba halt the plan? Does he want to?
Whisper the thought, hoping perhaps in vain that finance minister Malusi Gigaba isn’t already contemplating it, that he does have a means to evade the jam of unaffordable government guarantees colliding with underfunded state-owned enterprises (SOEs). By hook or by crook, Gigaba must find a way.
Introduction of prescribed assets will be by crook. Be ready to resist.
From his perspective, the route of prescribed assets will be easier than hooking the Public Investment Corp (PIC) into loading up on stock in badly run SOEs. It won’t cause consternation among members of the Government Employees Pension Fund (GEPF), the PIC’s largest client, who’ve been threatening withdrawals. They’d have nowhere else to go.
It won’t fall into the category of "capture", overriding the trusteeship duties of the GEPF board or the asset-management mandates of the PIC’s government-appointed directors. They’d have no choice.
It will, however, fall neatly into the socialistic empathies of ANC-speak. A regimen of prescribed assets — forcing financial institutions, particularly those focused on retirement funds, to invest in stock that government specifies — continues to show on the radar. One of its champions has historically been economic development minister Ebrahim Patel, a member of Gigaba’s newly appointed committee of cabinet ministers to advise President Jacob Zuma on expenditure priorities and sales of state assets.
Terminology of the "developmental state" to support bailouts, and "solidarity" to underpin such plans as the national social security fund and national health scheme that the fiscus cannot finance, carry tones of aspiration and acceptability. People reluctant to support these concepts, on the bedrock of sustainability, might be tarnished for opposition to transformation.
The threat of prescribed assets is brought on not only by an ideological antipathy to privatisation, on which Gigaba has been forced to compromise at SA Airways, but also by hard market pressures. In public auctions, both Eskom and Transnet have fallen well short of their 2017 borrowing targets.
Recently, too, it was the banks still exposed to SA Airways which insisted that Gigaba restructure its board as a condition for the debts to be rolled over. They both rolled over, for the banks to approve a new board without chair Dudu Myeni and for Gigaba to have his tummy tickled. Thus there emerged a clear demonstration, which he can explain to Zuma, that potency of "the markets" trumps the perpetuation of patronage.
Lenders have as much right as shareholders to perform activist roles in protection and advancement of fiduciary responsibilities to those whose money they manage. More than this, asset managers are guided by the UN Principles for Responsible Investment to which they’re signatories. In fact, a founding signatory is the GEPF, whose mandate instructs the PIC.
Further underpin derives from the voluntary Code for Responsible Investing in SA. It’s now linked to the King 4 governance code. Not to be forgotten either is regulation 28 under the Pension Funds Act. It stipulates the criteria for prudential investment.
Hauling out and dusting off the old regime — in the most desperate days of the National Party administration it required that over 50% of retirement funds’ assets be invested in government-prescribed stock — drives a coach and horses through all this. Stripped of a call for national interest, what does one find? There’s nothing other than a blunt instrument for taking from those who can save, and have, for giving to those who can’t, or haven’t.
The paradox is that it would undermine a government objective to encourage retirement savings. By definition, it would reduce investment returns and hence fund members’ benefits. Prescribed assets are a form of subsidy. Were they competitive against market returns, there’d be no cause to replace carrots with sticks. And because of enforced subsidisation, they additionally diminish the market disciplines over government and SOE borrowings.
Effectively also, they’re a selective tax by stealth. Being discriminatory, in not applying across the taxpayer spectrum, they’re implicitly inequitable. That’s hardly a stimulant to enhanced tax morality.
Inequity is exacerbated by the difference between defined-benefit (DB) and defined-contribution (DC) retirement funds. DB funds are mainly in the public sector. Reductions in returns can affect members’ annual discretionary increments but not their ultimate relationship to final salary. Promised benefits are underwritten by the employer; for instance, in the case of the GEPF, by government which means the taxpayer.
By contrast, trade unions and private-sector employees are overwhelmingly in DC funds. Members themselves carry the entire investment risk. They enjoy no similar cushion.
Past experience with prescribed assets showed a brutal impact on retirement funds’ investment returns. Future probability is that it will be no different, simultaneously screaming the most negative of investment messages.
At the ANC’s 2017 national policy conference, it was proposed that the introduction of prescribed assets be investigated. Who’s to kill it? Gigaba, if he has the guts.
•Allan Greenblo is editorial director of Today’s Trustee, a quarterly magazine mainly for principal officers and trustees of retirement funds.