Patel eyes pensions billions for state fund

Economic Development Minister Ebrahim Patel is to explore ways of investing some of the R1,5-trillion of public and private retirement funds in development projects, including the possibility of issuing a development bond.

The use of retirement funds for development is one objective of the Department of Economic Development’s strategic plan tabled in Parliament this week.

The private retirement fund industry with an estimated R800bn in assets under management said it supported socially responsible investments.

However, there were fears that the strategy document envisaged the reintroduction of prescribed assets — the mandatory apportionment of a fixed percentage of assets to identified investments regardless of the return — but department officials stressed that this was not the case.

The Congress of South African Trade Unions has expressed support for prescribed assets, an idea strongly opposed by industry.

The department’s strategic plan proposes a shift in Public Investment Corporation (PIC) investment policy to ensure more of its R700bn assets under management is used for development.

The state-owned PIC manages the pension savings of public servants and funds of public institutions such as the Unemployment Insurance Fund.

“Private sector retirement funds control a vast asset base and investments in all sectors of the economy. There is scope to improve the level of development funding that is attracted from this asset and investment base,” the plan stated.

“During the 2003 growth summit, it was agreed to target investment of 5% of investible funds into developmental areas and activities. Various options are available to ensure that such investment is promoted while improving security of members’ funds particularly in a period where the value of investments has fallen. “Options available include a government development bond; and other mechanisms that result in a portion of investments being directed to development. The department will identify appropriate mechanisms for responsibly leveraging such investments, and ensuring greater security for members of retirement funds.”

Association of Savings and Investments deputy CEO Peter Dempsey said the use of retirement funds for development projects through public private partnerships was discussed intensely at the National Economic Development and Labour Council in the past few months. But there was no proposal on the table for a fixed percentage or prescribed assets.

Dempsey said the industry backed prudential investment principles that took into account social and environmental needs.

Investments had to be governed properly, secured and accounted for, and offer fair returns.

The aim was to find a solution that did not disrupt the market as prescribed asset requirements did.

The compulsion to invest in a particular asset class with a lower return created unintended consequences and eroded pensions.

“If government were to issue a sovereign-rated bond with a market-related return it would be a very attractive investment and there would be no need to prescribe investing in it,” he said.

Dempsey said that Finance Minister Pravin Gordhan had not raised the issue of prescribed assets in his budget vote speech, which set the direction for policy.

“We certainly don’t believe that there is any government policy shift which is inclining towards the concept of prescribed assets.”

Old Mutual MD of actuaries and retirement fund consultants Craig Aitchison said “the proposal to create viable development funding investment options for private retirement funds is a welcome move, which can deliver value for members and the country as a whole, provided that they are implemented in a way that protects the long-term interests of retirement fund members”.

“Development investments tend to behave in a different way to traditional asset classes, such as equities and bonds, and can help reduce the overall risk of a retirement fund’s investment portfolio. “In order to protect the real value of members’ savings, it will (be) important that the long-term returns from developmental investments exceed inflation.”

Aitchison estimated that the allocation of 5% of funds to developmental investment could unlock as much as R70bn.

“The proposal of a government development bond could go some way to dealing with the potential pricing and liquidity issues of development investments, and would give members and trustees the additional security of government backing,” he said.

But Sanlam head of policy analysis Elias Masilela did not see the need for such a bond as it assumed viable projects could not secure funding through normal market mechanisms.

The strategy document said the department would work with the Treasury to direct more of PIC’s investments towards development.
Productive, green-field and job creating investments by the private sector would also be promoted.

Director-general Richard Levin said in his overview the department would gradually employ 252 people over the next three years as its functions expanded.

An independent economic development institute was planned to undertake research and economic modelling, and bring leading economic researchers and economic development practitioners together.

An economic development advisory panel for Patel would be set up.The department is now responsible for the Industrial Development Corporation, Khula Enterprise Finance and the South African Micro-Finance Apex Fund.

“Key state development finance institutions and investment bodies between them control assets and investments worth hundreds of billions of rands. These resources need to be harnessed as part of an overall development strategy, rather than operating in an uncoordinated way, or simply as commercial operations.”

The department envisaged a “major scaling up” of Khula in the promotion of small and medium-sized businesses.

Source: www.businessday.co.za 20100305

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