The government's return to a bad old day that raids retirement savings and reduces its ability to retire financially does not appear to be a serious threat.
However, I agree that the government and the savings and investment industry should focus more on socially responsible investment (SRI) to support infrastructure development and support economic growth.
The issue of prescribed investment was raised at a recent conference of the Savings & Investment Association (ASISA), a financial services industry association.
Assisa's chairman and Sanlam's chief executive Johan Van Zyl rejected the concept of a government forced borrowing retirement savings by stating how much interest the government must lend to the government.
The spectre of the prescribed investment was recently raised when Minister of Economic Development Ebrahim Patel suggested that 5% of the assets of the Occupational Retirement Fund should be invested in the official development plan.
Speaking at the ASISA conference, Ismail Momoniat, deputy director of the National Treasury, who is responsible for tax and financial sector policies, says no one in the government has suggested reintroducing provisional investments in retirement funds.
However, he states: “If you live in South Africa and don't focus on SRI, you need to think again about South Africa's long-term survivability.”
Finance Minister Pravin Gordan told the industry what will happen over the next decade is important for South Africa's future. The economic foundation laid on will affect whether the country will flourish.
He says the government wants you to save more, and the financial services industry to properly care for your savings, investing in your best interests and national savings.
ASISA's 54 member companies, which manage assets of over R2.6 trillion, must ask themselves whether the way they invest their savings provides a safe future for both individuals and the country, Gordhan said.
The meltdown in financial markets and the resulting global recession provided the world with an opportunity to see how it works, he says. We need a safer, more regulated global financial system, but we also have to rework the system to deal with poverty.
Gordan says South Africa is facing a difficult decision. For example, an economy grows by 6-6.5% per year, but it doesn't create enough employment. And with these growth rates, you need to find money to build electricity capacity, roads, hospitals. This means that more must be done to encourage South Africans to save for fiscal development, but “it requires more discussion about how good it is to utilize those savings.”
Gordan says there needs to be a balance between the benefits of savers and the long-term structural needs of the country.
Government bonds have proven to be a safe place for investors' savings, he says.
He says a shift from short-term to long-term investment vision is necessary to ensure more efficient use of capital.
“There's no need to interfere.”
Van Zyl warns that the idea that governments must interfere with savings and investment practices in the investment industry to promote “productive” investment is based on a false understanding of how financial markets work.
“Creating a favorable investment environment creates profitable investment opportunities.
“Capacity is first raised and it goes out to create unique investment opportunities.
“If certain projects remain unstorted, that's because they provided fewer returns and the only way to deal with them is to expand the savings pool and lower the hurdle rate.”
Van Zyl says that the defined asset requirements, whether inherently stiff or soft, simply imply a reallocation of capital in the best possible way.
Competitive pressure in the savings and investment industry, providing the highest possible return at acceptable levels of risk, plays a key role in the efficient allocation of capital, says Van Zyl. In addition to this, the savings and investment industry, along with other financial sectors, has been a major creator of employment in recent years. He says he increased employment even amid the 2009 recession.
It is important to remember that the savings and investment industry is investing your money according to an agreed mission, he says. It is an illusion that an asset manager has the complete freedom to decide where to invest. Respond to your needs, including SRI, says Van Zyl.
Responsible investments can provide “good returns” to retirement funds and society
Heather Jackson, Head of SRI at Cadiz Asset Management, is able to provide that Socially Responsible Investment (SRI) can provide sound returns to retirement funds.
Speaking during a discussion of the recent closure session on SRI at the Savings Association SA Conference Association, Jackson says there is no doubt that targeted funding is needed to build infrastructure, create jobs and provide a foundation for vibrant and healthy socioeconomic growth.
“The next move by the state could provide carrots to the investment community by strengthening the regulatory environment that encourages investment in development,” she says.
Adopting a normative approach to SRI assumes there are no other viable ways to fund development, Jackson says.
SRI is encouraged by including responsible and sustainable investments as a viable option within renewed pension fund regulations, she says, by developing a fostering and supportive environment for such investments. States can play a role in encouraging disclosure and removing barriers to SRI.
Jackson says they recognize that both life guarantors and retirement funds do not meet long-term debt even if they focus on narrow returns in the short term. Investment must provide sustainable benefits while mitigating social and environmental risks. And, generally, recent research shows that the correlation between incorporating environmental, social and corporate governance (ESG) factors into investment decision-making is positive.
She rejects skepticism about risks associated with SRI as “lessly baseless.”
Shocking responsible investments, including urban rejuvenation projects, school and hospital construction, housing development projects, and affordable credits for the poor, can provide competitive financial benefits and widespread social benefits, Jackson says.
“We need to find ways to bring available capital for social development to people who can make the most of it: whether these are social businesses, pioneering nonprofits, or social entrepreneurs.
“By creating and adopting a rich diversity strategy, everything is coming together in the SRI field – in the market and business field, capital and commerce can be used not only for the creation of individual wealth, but also for the creation of wealth, prosperity and value,” Jackson says.
Why the government wants to invest in regulations
Provisional investments for retirement funds may be inherently specific or fund government borrowings if the government instructs the retirement fund to invest a percentage of assets in government projects.
All governments borrow money primarily to fund infrastructure development. Future generations will pay share for infrastructure use as loans are repaid from taxes raised by the government.
South Africa's retirement funds manage more than R1.5 trillion and invest widely in government bonds, which are considered very low-risk investments.
With regard to Pension Fund Act regulations 28, retirement funds are limited to investing less than 75% of their assets in the stock market. The reason is to reduce the risk of savings.
When the government issues bonds and borrows money, it must compete with all other institutions that also need to borrow money. This means the government must pay attractive interest rates.
This year, the government will need to rent on a large scale. This is because the recession reduced the amount of money it received from taxes. Last year, almost 1 million people lost their jobs, resulting in more income taxes than expected, lower consumer spending, and unexpected VAT take.
The pool of savings in South Africa is relatively small, so interest rates can rise as individuals borrow too much and save too little, as the economy begins to recover or other borrowers, such as large companies that need money to enter the capital markets, increase. This means that the government must pay a higher interest rate on the money it borrows.
Simply put, the government chooses to raise taxes to pay additional interest or introduce a prescribed investment.
Prescription investments can be implemented in a variety of ways, called soft or hard.
For example, retirement funds may force you to invest in certain bonds, such as development bonds that pay market-related interests. This is a soft option.
The difficult option is to force your investment at a much lower interest rate than is paid if funded in the capital market.
For and against
Advocates of prescribed investments argue that, although interest rates for such investments may be low, developments that occur will stimulate the economy in the long term, generating more employment, consumer demand, higher economic growth and better profits from other investments.
Opponents argue that one sector of the population (i.e. those saving for retirement) will be punished. Furthermore, prescribed investments create inefficient markets using scarce funds to fund projects that do not necessarily contribute to economic growth.
“Disclaimer – the views and opinions expressed in this article are the views of the author and are not necessarily those of the Bee Room.”
