State pension funds once revolutionised the investment industry, and can do so again

SA is in a deep, structural economic crisis, and it is highly likely that it will fall further into the abyss, with untold sociopolitical consequences, if drastic measures are not taken. This calls for a business unusual approach and a sense of urgency similar to the way global economies responded to the 2008 financial crisis.

The measures to boost economic growth announced by president Cyril Ramaphosa in his state of the nation address (Sona) were encouraging, but there was one glaring omission — the role of pension funds and, more broadly, the savings industry — in a new deal to jolt our slumbering economy into the dynamism necessary for sustainable growth and development.

“At the second SA Investment Conference last year, more than 70 companies made investment commitments of R364bn in industries as diverse as advanced manufacturing, agroprocessing, infrastructure, mining, services, tourism and hospitality. In the first two years of our ambitious investment drive we have raised a total of R664bn in investment commitments, which is more than half of our five-year target of R1.2-trillion,” Ramaphosa announced to the nation.

While Ramaphosa must be commended for his global investment drive, the reality is we have more than R6-trillion in retirement fund savings here at home. The focus should be on encouraging retirement funds to pursue developmental investment opportunities.

Large pension funds such as the Government Employees Pension Fund (GEPF), with R1.8-trillion, and the Eskom Pension and Provident Fund (EPPF), with R147bn, have both launched developmental investment frameworks with a focus on infrastructure investments, private equity and real assets broadly. In addition to the policies launched by GEPF and EPPF, a number of progressive pension funds such as Sentinel, Telkom, Transnet, Transport Sector and Sala, have been increasing their exposure to alternatives. These funds recognise that their fortunes are interlinked with that of the overall SA economy.

Despite their progressive developmental investment policies both funds remain underinvested in real assets due to a lack of bankable projects. This is the same for most pension funds under Regulation 28, a framework set by the regulator in terms of broad asset allocation. Thus the president’s focus should be on unlocking pension funds and making it easy for them to invest directly in developmental investment opportunities such as infrastructure.

The three areas of focus should be, first, agreeing on a framework for public-private partnerships — for example, the renewable energy independent power producer procurement (REIPPP) programme is a great framework that could be replicated across other sectors. Second, developing a bankable deal pipeline — a menu of investable projects — and third, amending Regulation 28, to widen and raise the current regulation bands of 0%- 15% for alternative investments, to a minimum of 5% and an upper limit of 25%. Increased allocation to alternatives would lead to better risk-adjusted returns for pension funds.

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Opinion piece by John Oliphant published on 18 February 2020 – 15:38 (Source: Business Day)