Alexander Forbes Investments says the proposed introduction of a prescription requiring investors to invest into specified assets is inefficient and will not result in efficient allocation of capital, but will rather lead to suboptimal investment outcomes.
This was the key message expounded at the company’s media briefing on prescribed assets, held in Johannesburg, on Tuesday.
There has been concern about the potential impact of the possible introduction of prescribed investments for investors, with the African National Congress’ 2019 manifesto referring to investigating prescribed assets.
These are defined as the proportion of financial institutions’ resources that would be assigned to socially productive assets as a key priority.
Alexander Forbes principal investment consultant Janina Slawski explained that prescribed assets were mentioned under two sections in the ruling party’s 2019 manifesto.
She stressed that both mentions refer to investigations and that no detail has been provided about the form that the prescription could take.
“The references to investments in social and economic development, socially productive investments and job creation are encouraging, but there is concern that this could be applied to mean investment in State-owned enterprises (SOEs) and municipalities that have social and economic development as part of their mandates, for example Eskom, Transnet, Sanral and so on,” noted Slawski.
Alexander Forbes executive chief economist Isaah Mhlanga indicated that the country had experienced a low gross domestic product growth rate since 2009, as evidenced by low investment. He posited that the private sector was the driver of economic growth, and until that was encouraged, growth would remain constrained.
However, prescription was not a feasible, sustainable long-term solution to limited private sector investment, he added.
Therefore, the company called for the introduction of positive incentives that were more likely to lead to positive investment outcomes for both investors and the communities that the developmental initiatives aimed to assist.
Prescribed assets were first introduced in South Africa in 1956, when pension funds were required to invest more than half of their assets into government and SOE bonds.
The Prudential Investment Guidelines required that 53% of retirement fund assets, 33% of assets of long-term insurance companies and 75% of the Public Investment Commissioners’ (now the Public Investment Corporation (PIC)) managed assets be invested into government and SOE bonds.
The Jacobs Committee of 1988 was appointed to investigate prescribed assets and the distortions introduced by this prescription; the committee recommended that the policy be abolished.
Although prescribed assets in this format were abolished in the National Budget of 1989, Slawski indicated that “prescription for maximums per asset classes and exposures continue in terms of Regulation 28”.
“The introduction of prescription and the potential reduction in investment returns would leave members poorer, contrary to the positive changes achieved to date through the retirement reform initiatives,” said Slawski.
“It would be introduced in a period of expected low returns, when it is critical that all focus should be on maximising returns.”
Slawski emphasised that trustees of retirement funds had a fiduciary duty to act in the best interests of members and that prescribed assets would limit the extent to which trustees could fulfil those duties.
“Prescribed assets would go against the intention of prevailing legislation and the requirements of trustees.”
Slawski highlighted that investment into appropriate developmental assets was vital to ignite social and economic development and job creation.
She noted that attractive developmental investment opportunities would attract investments with no prescription required.
“If a process were to be formally initiated for prescribed assets, there should be extensive consultation before the requirements for prescribed assets could be implemented in terms of the law.
“Alexander Forbes is opposed to any regulation, including prescription, that could lead to suboptimal investment outcomes for investors, in particular members of retirement funds where fiduciary duty requires that members’ benefits be safeguarded and grown,” emphasised Slawski.
Also speaking at the briefing, Alexander Forbes alternative investments head David Moore emphasised that, given the right incentives and/or investment structures, there was potential to achieve considerable investment into the types of assets that government wanted to target.
He cited a number of examples where this had already occurred and had proven its success. One such area was the Renewable Energy Independent Power Producer Procurement Programme, which has had a considerable impact on the economy, job creation, community upliftment, economic transformation and climate change.
Moore indicated that this was a good example of how to properly garner private sector capital, with it being a competitive tender process that is fair and transparent, and designed to facilitate private sector investment.