In its election manifesto, the governing party outlined a plan to “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development and township and village economy) and job creation while considering the risk profiles of the affected entities”.
 

This proposal does not yet reflect the position of the government of the Republic of South Africa and it has not gone through the necessary legislative processes. However, these utterances have garnered sufficient attention and concerns from EPPF stakeholders to necessitate an official position to be expressed by the Fund.
 

The Fund’s investment strategy is detailed in its Investment Policy Statement as stipulated in the Pension Fund Act and required by the Financial Sector Conduct Authority. This investment strategy is known as the strategic asset allocation and must be informed by an actuarially sound asset-liability management (“ALM”) process for a defined benefit pension fund.
 

Where the Fund’s ALM exercises have necessitated the inclusion of real assets – infrastructure and direct property – the Fund has actively explored investments in these areas.
 

The drive to increase the investment of institutional investors in real assets needs to recognise the existing impediments and challenges. Therefore, it would seem that the best way to get more pension funds to invest in real assets (that encompasses both social and economic infrastructure and direct property) would be to, amongst other interventions:

• Encourage Boards of Funds to educate themselves about the nature of these assets and their appropriateness for backing the long-dated liabilities of a pension funds;
• Improve risk management capabilities of the various pension funds;
• Foster the development of liquid real assets (listed on the JSE) that would allow defined contribution pension funds to invest easily in infrastructure assets without jeopardising their liquidity profiles;
• Follow a look-through principle that recognises that there are property funds (both listed and unlisted) that are already investing in the township and the village economies by developing shopping centres and telecommunication networks in these places;
• Speed up the establishment of the taxation framework of unlisted real estate investment trusts (REITs) instead of circumscribing this tax dispensation within only JSE-listed property funds;
• Consider market-based incentives that will shift behaviour towards the desired direction;
• Identity a set of viable projects in the areas of infrastructure and direct property; and lastly
• Consider a review of the decisions coming out of two NEDLAC processes, namely the Jobs Summit (1998) and the Financial Sector Summit (2002). This is to establish why these have not been fully implemented and will make the investment policy process, sufficiently accretive.

Having noted the above, it is instructive to caution against shifting investment decision-making from the private sector into official hands. This may have unintended negative consequences on availability of the much-needed long-term capital. In this regard, the EPPF would prefer to lean towards deepening the interventions already afoot in the market to complement the good intentions of prescribed assets, without compromising the quality of investments.
 

The initiatives launched on the side lines of the presidential South Africa Investment Conference, 25 October 2018, on “Impact Investing in South Africa”, need to be supported. This route, may be one of the solutions for avoiding any unintended consequences of asset prescription.
 

This is an abridged version of a more detailed position paper by the Eskom Pension and Provident Fund. The full paper can be obtained from the Chief Investment Officer, Mr. Ndabezinhle Mkhize, on ndabe@eppf.co.za.