With their steadily rising value, it’s no wonder South Africa’s more than 5 000 active pension funds are being eyed by the government.
Prescribed assets – once used by the National Party government under apartheid to channel funds into economic sectors of its choosing – is firmly back on the agenda under the African National Congress (ANC).
The governing party said in its election manifesto earlier this year that it would consider using prescribed assets to ‘mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities’.
This basically means that the ANC government is thinking about forcing pension fund managers to invest in state-mandated sectors or companies. That could mean ailing and debt-ridden Eskom, for example.
Earlier this month, the focus on South Africa’s considerable pension savings sharpened with minister of trade and industry Ebrahim Patel’s comments about the role of retirement funds in boosting economic growth, and the ‘responsibility’ of fund managers ‘to help lift the long-term rate of growth of the South African economy’.
Here are five things you need to know about pensions and retirement funds in South Africa and why the government might be coming for yours.
The retirement funds industry in South Africa is big
About 16 million South Africans are members of the country’s more than 5 000 active pension funds. Some ten million of them are still contributing to their pensions, while the remainder have retired and rely on the funds for income. The total collective sum of these savings is very large, at over R4 trillion. This is nearly equal to South Africa’s total GDP, so it is a substantial piggy bank.
South Africa’s retirement funds are growing – unlike the economy
While South Africa’s economy remains moribund, the value of the country’s retirement funds (both in terms of contributions and total assets) has been on the rise. Consider that between 2014 and 2016, the economy grew by 1.5% (the total economic growth between those two years, not an average). By contrast, retirement fund contributions grew by nearly 13%, and assets by 16%, while total membership of funds grew by just under five percent. South Africans are often scolded for not saving enough (which is true), but those who do save have been diligent about building up a nest egg for retirement.
The idea of prescribed assets is not a new one
The ANC’s suggestion in its manifesto is not a new one. It was also raised at two party conferences held in 2017 and is now once again on the agenda.
Prescribed assets are not a new concept in South Africa. The apartheid government also used prescribed assets to help fund certain sectors and companies.
At its peak in the late 1970s, funds had to invest more than three-quarters of their assets in a combination of state-owned companies and government bonds. By the 1990s, prescribed assets had been frozen out, but the ANC seems very keen on resurrecting the policy.
Prescribed assets will make you poorer
It is unlikely that assets such as state-owned enterprises will give you the same returns as a company which is bound by the dictates of the free market. And you will not have the option of moving your money from an underperforming state company to one that would give you a better return.
As Albert Botha of Ashburton Investments points out, prescribed assets will probably mean a lower return on your retirement investment. If one gets a return of three percent above inflation, rather than four percent, because of the lower returns you can probably expect from prescribed assets, you will have less money when you decide to retire, or you will have to work longer.
Over thirty years this lower return would either mean your pension will be 16% smaller at 65 than it would ordinarily have been, or you’ll have to work for nearly three years longer to make up the shortfall.
Why is the ANC eyeing your pension?
The ANC is looking to new ways of funding state-owned entities, because the government is running out of money. It continues to sink money into loss-making companies such as Eskom and South African Airways (SAA), with little will to fix what’s wrong. In addition, the government’s wage bill is very big, and growing.
The government continues to spend more than it receives in revenue – the national budget has not been in surplus for over a decade, and the government continues to run large deficits.
Government debt as a proportion of GDP is nearly 60%, the highest it has ever been in democratic South Africa. And in 2018/19 it is estimated that the government will need about R587 billion to pay its employees, who regularly receive increases above inflation and above what those in the private sector earn.
The government is fast running out of fiscal road – the fact that it is now looking to the assets of private citizens to fund itself should not surprise anyone.
Marius Roodt is head of campaigns at the Institute of Race Relations
First published on Daily Friend