Prescribed Assets: What the Latest Speculations Really Mean for Investors

South Africa is facing an ominous debt trap, which creates a lot of anxiety about a potential ‘raid’ on formal savings to keep government going.  In response, there has been much speculation in the press and social media platforms about prescribed assets – and in particular – the possibility of amending Regulation 28 of the Pension Funds Act to include provision for investment in infrastructure.  

This has widely been interpreted as pouring money into underperforming SOE’s.

Let’s take a closer look:

  • Government knows that they will cause serious self-harm if they introduce prescribed assets as long as the bond market remains functional. 
  • The ANC and big business both included the funding of infrastructure by the private sector (mostly retirement funds) in their economic reconstruction plans. Detailed proposals have not yet been released but the idea is to change Reg. 28 to make it more explicit so that retirement funds can (not must) invest in infrastructure.
  • Business likes the infrastructure idea, as it is a way to invest in productive capacity but under private sector oversight.  
  • If introduced well, this could over time, develop into an attractive asset class next to listed property and SA Government Bonds.

Ultimately, we live in a constitutional democracy so any new legislation would be subject to due process (see below) which is rather long: 

  • A bill is introduced by the relevant minister (in this case Finance) and published in the Government Gazette for public comment.
  • It is then placed on the agenda of the relevant portfolio committee, which also oversees the consultation process (in this case the Finance Committee, where the Minister of Finance has a veto) from where it proceeds to discussion in the National Assembly.  At both these stages, it can be amended and re-debated.
  • Before a Bill can become law, it must be considered by both Houses of Parliament (National Assembly and National Council of Provinces).
  • Once a Bill is passed through both houses, it goes to the President for assent before it becomes law.
  • At this stage, if the new Act is still problematic, ultimate recourse to the Constitutional Court remains.

Given the above, it would be prudent to avoid making rash decisions around retirement savings based purely on speculation and media ‘noise.’

Source: Glacier Financial Solutions, Coronation Fund Managers