Prescribed Assets: unideal, undesirable and unlikely

 In Blogs

“A Fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets…” ~ preamble to Regulation 28.

Currently, there’s concern with regard to the Government’s investigation into interference in the touchy business of investment funds. The topic of ‘prescribed assets’ has created anxiety among investors – much of it unnecessary because the likelihood of implementation is small.

‘Prescribed Assets’ means that a portion of your savings and investments, such as retirement funds, can be forced by the Government into specific investment arenas that would not be your –  or your financial advisor’s – best or most intelligent choice.

It has created the discomforting thought that the precious stockpile you’ve been nurturing for years, may be compelled into buying Government stock, as well as bonds issued by State Owned Enterprises (SOE’s) such as Eskom, SAA, PRASA, SABC, etc. And if you have any knowledge of the financial situation of these entities, you would be right to be worried, if not up in arms.

An old trick that didn’t work

This concept is not new. It was first introduced by the former nationalist government and has been raised by several political parties as a solution for the current cash-strapped Government to bolster financial support for investment in social and economic development within township and village economies, as well as job creation. Did it work in the past? Apparently not well.

Between 1956 and 1989, the government forced pension funds to invest more than half their savings in local government and parastatal bonds. But in essence, the result of this initiative provided investors with negative returns during a time when the equity markets were strong and investors should have enjoyed good returns.

And that was when the country might have been more stable. If introduced now when the economy is weakened, there is a strong view that it will have further substantial negative effects on the country. Thus there is a fair amount of confidence that it is unlikely to happen – and that the current air of panic is driven by the media, which has a tendency to favour hype rather than hard facts.

The narrow track of challenge and collaboration

ASISA, the Association for Savings and Investment South Africa, manages some R6.2 trillion of the nation’s savings and investments, and while recognised as a significant and relevant partner at the Government’s negotiating table, the Association is not inspired by the policy of ‘prescribed assets’. The problem remains the critical financial conditions of state-owned entities and the fact that there are not enough viable projects to encourage investment.

Granted, there is urgent attention being paid to address this situation; ASISA believes that these challenges can be overcome through effective public private partnerships, and there has already been direct investment of R200 billion into: Renewable Energy; Township Development; Affordable Housing; Urban Regeneration; Student Accommodation; Water & Roads; Agriculture, etc. In fact, ASISA members have already deployed more than R1.3 trillion in support of Government, Local Authorities, and SOE’s.

But, unfortunately, trust remains the key issue. Local asset managers would be willing to invest in infrastructure and growth-focused projects, provided they could be convinced that these projects would be managed with proper governance and sound financial controls. Among the many sceptics of the viability of this venture are both Cosatu and the PIC, which is further confirmation that the introduction of ‘prescribed assets’ is unlikely.

Concern revolves around 3 highly negative effects:

  • Firstly, people might opt out of their pension funds where they could, and those over 55 could withdraw the maximum amount allowable out of their Retirement Annuities.
  • There would be a significant reduction in foreign direct investment, which is exactly the opposite effect that the country is hoping to achieve.
  • And then, wherever people can, there would be a sharp increase of capital leaving the country. Many investors with the available money to do so, would look to invest offshore.

Further reasons why the concept of ‘prescribed assets’ is unlikely

  • While all this effort is being made, there is still deep concern about forcing private and public pensions and savings into investment in entities that have been mired in State Capture and lack of delivery, and which are yet to show real progress and secure return.
  • Stocks of savings are accumulated over a long time period. Any changes in asset allocation which impacts on stocks has potential risks, and the sale of equities would affect the entire savings industry.
  • When retirement funds become an instrument of state policy, they avoid the discipline of financial markets and the fiduciary responsibility of asset managers and trustees, and therefore are most likely to impose lower-than-market returns.
  • The bulk of the assets that could be prescribed are owned by retirement fund members, and roughly half of these are owned by public servants. As the owners of these assets, ordinary South Africans are entitled to elect and appoint trustees to make asset allocation decisions that are in their best interest. Prescription would jeopardise this fiduciary duty.
  • Deserving projects could be deprived of funding. These projects that would otherwise have driven growth and created sustainable employment, would now not happen anymore.
  • Prescription could have a negative impact on the country’s credit rating. If South Africa loses its investment grade rating, foreign investors, many of whom are pension funds, would be forced to withdraw their money from South Africa – something the country cannot afford.

Empfin Solutions – the team that keeps your team happy

We’re an Old Mutual franchise with our primary focus on advising on and servicing umbrella pension and provident funds. Always striving to be a trusted partner in facilitating financial solutions for organisations and individuals, our dedicated team of fully accredited, experienced professionals have a passion for satisfying customer needs and providing a truly client-centric service.

Find out how you can benefit at:



Recent Posts

Start typing and press Enter to search