Prescription vs Impact Investments
The issue of prescribed assets has been raised several times as a potential source of funding in relation to both State Owned Entity (SOE) debt, as well as in respect of investment to support developmental imperatives for South Africa. A great deal of focus in this debate has been on retirement funds, and this is therefore where this paper will focus. The paper sets out who are the potential losers in a prescribed assets programme, and sets out support for the alternative of an impact investment programme where there are opportunities for wins across the board.
Background to the Prescribed Assets Issue
The current discussions around prescription date arose out of the ANC’s 2019 manifesto which listed “the investigation of the introduction of prescribed assets to mobilise funds from financial institutions for socially productive assets” as one of its priorities. Prescribed assets are referenced under the following two sections in the manifesto:
Investing in the Economy for inclusive growth
Investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development
Transform and Diversify the Financial Sector
Investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities
No detail has been provided in terms of the form that the prescription could take, but it would be expected that it would involve a required minimum investment by investors into specified assets. Whilst the references to investments into “social and economic development”, “socially productive investments” and “job creation” are encouraging, there is concern that this could be applied to mean investment into SOEs and municipalities that have social and economic development as a part of their mandates (such as Eskom), with a potential lower investment return versus that sought by investors.
Previous Prescribed Assets (“PIGs”) Programme
South Africa previously had a prescribed assets programme that affected retirement funds, insurance companies and the Public Investment Commissioners (now Public Investment Corporation - PIC) from 1956 to 1989. The Prudential Investment Guidelines (PIGs) required that 53% of retirement fund assets, 33% of assets of Long Term Insurance Companies and 75% of the PIC’s managed assets be invested into government and SOE bonds. What is stark is the opportunity cost that these investors suffered versus the equity returns that they could have achieved due to investment into these prescribed assets as is illustrated in the table below.
1960s: Inflation averaged 3.0%; whilst prescribed assets earned positive real returns, they earned -6.4% p.a. versus equities over the decade
1970s: Inflation averaged 11.3%, prescribed assets earned 7.3%, equities returned 24.5%; the opportunity cost of investing in prescribed assets versus equities was -17.2% p.a.
1980s: Inflation averaged 14.5%, the opportunity cost of investing in prescribed assets versus equities was -6.7% p.a.
Defined Benefit versus Defined Contribution Funds
The retirement funds that were affected by prescription during the PIGs period were mainly defined benefit funds. This means that it was the employers who had to pay the “balance of cost” of these funds who suffered from this opportunity cost, rather than the fund members who continued to receive the defined benefits as promised to them in terms of fund rules. There has been a significant shift in the intervening period away from defined benefit and toward defined contribution funds. If prescription were to be applied today, it would generally be the members of funds that are now mainly defined contribution in nature that would suffer, and not the employers. Every member of a defined contribution fund that earns poorer returns due to prescription will retire or leave their funds with less money than they would have had in the absence of prescription.