PRESCRIBED ASSETS – THE BAD, NOT SO BAD AND THE GREAT
The ANC’s 2019 manifesto refers to investigating prescribed assets, which are defined as the proportion of financial institutions’ resources that would be assigned to socially productive assets as a key priority.
Janina Slawski, principal investment consultant at Alexander Forbes Investments, explains that prescribed assets are mentioned under the two sections in the 2019 manifesto. She stresses that both mentions refer to investigation and that no detail has been provided about the form that the prescription could take. “The references to investments in ‘social and economic development’, ‘socially productive investments’ and ‘job creation’ are encouraging, but there is concern that this could be applied to mean investment in state-owned enterprises (SOEs) and municipalities that have social and economic development as part of their mandates, for example Eskom, Transnet, Sanral and so on.”
Slawski explains that prescription suggests that investors invest in specified assets, which will generally lead to sub-optimal investment outcomes. However, “positive incentives and structures generally lead to positive investment outcomes for both investors and communities,” Slawski adds.
Prescribed assets were first introduced in South Africa in 1956, when pension funds were required to invest more than half of their assets into government and SOE bonds. The Prudential Investment Guidelines (PIGs) required that 53% of retirement fund assets, 33% of assets of long-term insurance companies and 75% of the Public Investment Commissioners’ (now Public Investment Corporation (PIC)) managed assets be invested into government and SOE bonds. The Jacobs Committee of 1988 was appointed to investigate prescribed assets and the distortions introduced by this prescription; the committee recommended that the policy be abolished. Although prescribed assets in this format were abolished in the National Budget of 1989, Slawski adds “prescription for maximums per asset classes and exposures continue in terms of Regulation 28”.
“The introduction of prescription and the potential reduction in investment returns would leave members poorer, contrary to the positive changes achieved to date through the retirement reform initiatives,” says Slawski. “It would be introduced in a period of expected low returns, when it is critical that all focus should be on maximising returns.”
“Trustees of retirement funds have a fiduciary duty to act in the best interests of members and prescribed assets will limit the extent to which trustees can fulfil these duties,” explains Slawski.
She continues, “Prescribed assets would go against the intention of prevailing legislation and the requirements of trustees.”
The enforced nature of the investment is problematic, as investors do not have the opportunity to negotiate better terms for the investment or to walk away from unfavourable terms.
Slawski stresses that investment into appropriate developmental assets is critical to ignite social and economic development and job creation.
She notes that attractive developmental investment opportunities will attract investments with no prescription required. “If a process were to be formally initiated for prescribed assets, there should be extensive consultation before the requirements for prescribed assets could be implemented in terms of the law.”
“Alexander Forbes is opposed to any regulation, including prescription, that could lead to sub-optimal investment outcomes for investors, in particular members of retirement funds where fiduciary duty requires that members’ benefits be safeguarded and grown,” she concludes.
Alexander Forbes Investments
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