Prescribed asset requirements and what it could mean for your hard-earned pension fund
South Africa has been sitting on gold for years – and it’s about to be mined. At the end of 2016, the total value of retirement funds in South Africa was over R4 trillion, which was close to the GDP of that same year, and the government has seized an opportunity to access this gold mine.
Experts say South Africa has the highest amount of pension assets in emerging markets over China, Russia and Brazil. As a reflection of South Africans conscious choice to prepare for retirement and put their hard-earned salaries to good use, this mountain of a collective fund is something to be proud of.
But a recent proposal to investigate prescribe asset requirements could mean that it could become government policy to invest pension funds, not where you will get the highest returns, but where the government sees it fit.
What’s this talk about prescribed assets?
South African pension funds are already subject to some prescription under Regulation 28 of the Pension Fund Act which limits the extent to which retirement funds may be invested in particular categories of assets. The most important limits to date are:
Listed Property 25%
Offshore Assets 30%
Hedge funds 10%
But more recently, the ANC started the buzz around prescribed asset requirements after a proposal in their 2019 election manifesto. The ANC stated that they will “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework.”
In other words, prescribe asset requirements would force all fund managers to invest in government-approved instruments, regardless of the underlying economic circumstances of these institutions.
What could it mean for investors?
Magnus L. Heystek, a certified financial planner and the Head of Brenthurst Wealth Management’s Johannesburg office, says that there’s still a lot of uncertainty around prescribed assets but they are, in essence, risky. “The risks to investors in pension funds, would be that they would have to increase their contributions and possibly work and contribute longer due to the poor performance of their investments,” Heystek explains.
The ANC stated in their manifesto that they hope to mobilise funds through prescribed assets for socially productive investments and job creation while considering the risk profiles of the affected entities. But the debilitating performance of South Africa’s most notable SOE’s is no state secret and therefore it’s normal for investors to feel alarmed by the notion of governmentally guided investments.
So, what are your options going forward?
As it stands now, the plan for prescribed assets have been proposed - but not yet formalised. It will, however, only be a regulation and not an Act of Parliament so it could be realised sooner than later.
“Prescribed assets will unfortunately place even further financial pressure on an already overburdened population, and the government should rather work on restructuring the management and current debt levels from SOE’s,” Heystek suggests. It’s therefore important for investors to get a full understanding of the implications that prescribed assets might have on their pension funds.
Seeking advice and guidance from a financial advisor or planner will help you find the best ways to buffer your pension from low returns, by diversify your portfolio, offshore investing and other options.
This post is sponsored by Brenthurst Wealth Management produced by Brandstudio24 for Fin24.