By Vernon Wessels
South Africa’s R7.8-trillion investment and pension industry must contribute more to the country’s development – and drop the idea that they’ll forego higher returns – or face the risk of being compelled to do so.
The African National Congress (ANC) has long advocated for prescribed assets, which would force financial institutions to invest in state-led projects. But the party’s ability to implement this as policy is uncertain, after losing its majority and forming a Government of National Unity (GNU) with 10 other parties, including the Democratic Alliance (DA), which opposes this plan.
“Remove those people who’re standing between you and the development of this country,” said Jan Mahlangu, pension and provident fund coordinator for the Congress of South Africa Trade Unions (Cosatu), the largest labour federation, which is in an alliance with the ANC. “We can do more. We can do better.”
South Africa’s infrastructure, from roads and ports to energy and water systems, is in dire need of investment, and the government is increasingly looking to retirement funds and the private sector to fund developments it can no longer afford. According to the African Development Bank, the country requires $13bn (R235bn) annually to fund structural reforms and boost economic growth.
If pension funds don’t allocate more money towards infrastructure investments, “people are going to come and impose prescribed assets, whether you like it or not”, Mahlangu told pension-fund trustees at Batseta’s 10th Winter Conference 2024 at Sun City, “and we’ll start scrambling”.
Since 2023, pension funds have been allowed to invest up to 45% of their assets in infrastructure, but many are hesitant, due to the lack of viable projects that offer attractive returns. Critics argue that mandatory investments could reduce retirement savings and place taxpayers at risk of covering shortfalls in the Government Employees Pension Fund (GEPF).
Even so, Mahlangu emphasised the need for trustees to consider the future environment their members will retire into, highlighting the importance of creating local jobs and functioning public services.
Speaking on the same panel, Meta Mhlarhi, founder of Mahlako Financial Services, urged trustees to prioritise domestic investments over foreign ones, focusing on projects that boost the local economy. “There is no point in us saying ‘we’re going to take our money and put it into Facebook’,” she said.
Her firm raised R2bn for energy security, creating 1,800 jobs. She argued that financial returns and social impact should go hand-in-hand, warning that, without social impact, economic investments may falter.
“The vicious cycle of not making a social impact is very dire,” Mhlarhi said, explaining that the government can’t afford to pay a basic income grant of R350 a month.
She said there’s no point in pension funds investing in something if “no one is there to consume it because people aren’t working”.
Asanda Notshe, chief investment officer of Mazi Asset Management, which manages R46bn in assets, pointed out that youth unemployment is nearly 52% in households with pension-fund members. Those are the very same people who command “what is largely accepted to be the biggest pool of capital in the economy”, he said, which highlighted the importance of local investment.
Andile Khumalo of KhumaloCo added that trustees should consider small and medium-sized enterprises (SMEs) as viable investment opportunities that can drive job creation and economic growth, challenging the assumption that only listed companies are secure investments.
“Just like you think that listed companies are secure, stop thinking that unlisted companies are not,” Khumalo said. “There are very successful businesses that started as ideas that have become conglomerates, that operate below the radar and are very successful.”
This comes at a time when many funds are rethinking their investment priorities, with private equity now much in vogue.
The KZN Municipal Pension Fund, for example, wants to hike its exposure to alternative assets, such as private equity, because investing in stocks hasn’t yielded any benefits for the community, said Thomas Mketelwa, the fund’s principal officer.
“We have been in the stock exchange for so many years. Yes, we’ve made money, but when I walk in Sandton, I’ve seen reinvestment in the same place; the buildings became classier,” he said. “But when I look at my city, Durban, and the inner city of Johannesburg, it’s all going down.”
On another panel, Khaya Gobodo, managing director of Old Mutual Investment Group, emphasised the role of private equity in smoothing returns.
While South African retirement funds allocate only about 2% of their assets to alternative investments, international funds often have five to 10 times that exposure. Local funds can invest up to 15% of their assets in private equity.
Responding to a question on whether the government erred by allowing retirement funds to take as much as 45% of their assets abroad, Gobodo said many countries have no limits, and the problem may have been around the timing.
After delivering knock-out returns, South African shares have been disappointing over the past decade, mainly due to a moribund economy, spurring investors to chase higher returns elsewhere.
“Increasing your opportunity set is, in general, positive for investors,” he said. “At the same time, allowing substantially more capital to leave the shores of South Africa, when that capital could’ve been reinvested to catalyse economic activity, which in itself would lead to better future returns, is very difficult to stomach.”
For Elias Masilela, chairman of DNA Economics and former CEO of the state-owned money manager Public Investment Corporation, the issue has never been a shortage of money to fund development. Rather, it’s been the governance within the state and the entities associated with it.
Changes to Regulation 28 that allowed for more offshore exposure resulted in outflows “that no longer characterise diversification”, Masilela said. “They characterise capital flight, which is a fundamental problem.”
