Between 2005 and 2009, South Africa spent less than it earned and racked up a small, but wonderful surplus. Since then the country has accumulated a debt of more than R2.5 trillion. To put this into perspective, imagine if you can five-hundred-thousand brand new top of the range Ferrari’s parked one next to the other. Well, you’re looking at the equivalent value of our national debt.
To break it down some more, R150 billion is needed to fund the interest of the debt alone. In Ferrari terms, that’s thirty-thousand brand new shiny sports cars paid by government – and you – towards the national debt each year. The R150 billion government pays to settle the interest is more than what it spends on hospitals, tertiary education and housing.
In South Africa, retirement funds have assets approximating R4.5 trillion (or nine-hundred-thousand brand new shiny Ferraris) which comes to four-hundred-thousand more Ferraris than what the government owes to settle its growing debt. That’s a large fleet of Ferraris – and it’s attracted some attention.
The Pension Funds Act already prescribes investment alternatives and weightings in order to protect against insufficient diversification and poor investment risk management. This prescription can be broadly outlined into asset classes as follows: equity 75%, listed property 25%, offshore assets 30% and hedge funds 10%.
Last year, the ANC indicated their intent to “investigate the introduction of further prescribed asset allocation on financial institutions funds in order to mobilise funds within a regulatory framework.” This suggests that pension funds together with other fund managers could be required to invest in government approved instruments and debt. The prescribed asset allocation is only a proposal at this stage, but implementation requires only the passing of regulation and not a cumbersome Act of Parliament.
The problem:
The prescribed allocation suggests that pension funds together with other fund managers could be required to invest in government approved instruments and debt. The problem is government approved instruments such as bonds yield far lower returns than traditional investment products. This will more than likely result in a reduction of direct foreign investment, a decrease in offshore investments and lower retirement fund savings for employees.
Worryingly, there is a precedent in this regard in South Africa. Between 1960 and 1990 prescribed asset allocation of the apartheid government insisted on significant government bond investments. This led to a significant drop in the retirement savings of employees at the time.
The Solution:
“We want to flag this with employers,” says Tyrone Farinha, Executive Director of risk management board at KHUSA Consulting. “Even though it’s only a possibility at this stage, if the proposed asset allocations are indeed implemented it will spell danger for your employees’ retirement savings.”
According to Farinha, a further concern is the labour union Cosatu’s surprising call for government to access and allocate R250 billion of retirement fund money towards Eskom’s R4 billion debt. Now that’s a lot of Ferraris coming out of the pockets of hard-working citizens to help a failing state-owned enterprise.
“Our advice to employers is to push back in the strongest possible terms if and when these proposals are passed,” says Farinha. “A public outcry would go a long way preventing such an outcome.”
Farinha added that since retirement investment is only about getting the biggest returns possible, KHUSA may even consider advising employers to not invest retirement funds in traditional investment products, should (or when) the above scenario plays out, but to look for alternatives instead.
Who are we?
KHUSA constantly strives to provide innovative benefit solutions to corporate South Africa. We have a positive approach to all things risk management and specialise in the delivery of commercial risk, healthcare and retirement funding services. Our name carries our philosophy: tomorrow’s growth. A goal we maintain is achievable by finding solutions to today’s problems.
For more details visit www.khusa.co.za