Prescribed Assets

A Retirement Horror Story?

by Trevor Taylor, MD Chartered Employee Benefits

Trevor Taylor is the Managing Director at Chartered Employee Benefits and he is also in charge of the New Business side. He has been with the company since 2006.

Trevor has a B.Comm Legal from the University of the Witwatersrand and qualified as a Certified Financial Planner® professional from the University of the Free State in 2004.

He worked at an international benefits consulting organisation and an institutional and retail investment consulting business over a period of 12 years before joining the Chartered family.

This exposure to the many facets of the employee benefits industry has enabled Trevor to provide the clients of Chartered Employee Benefits with valuable insights on how to structure their benefits.

He has consulted to multinational organisations on how to design and implement international retirement fund and healthcare solutions. In doing so, Trevor has had the opportunity to meet his peers who operate out of international jurisdictions and provide trust, investment and insurance expertise.

Trevor is an entrepreneur who continually strives to provide his clients with the “ultimate” solution that allows members to retire with sufficient means. He is a regular participant in the Comrades Marathon and draws on the discipline and preparation for this event and applies it in his approach to his profession.

You can contact Trevor on 011 502 2800 or via email trevor@charteredeb.co.za

Just when you thought it was off the agenda, the controversial issue of prescribed assets rears its ugly head again!

Over the past two weeks, the media has been in a frenzy, reporting views (largely negative) from various experts in the financial services industry on comments from Trade and Industry Minister, Ebrahim Patel. Patel is encouraging retirement funds to invest to promote growth.

According to a report in Business Day (25 June 2019), Patel said pension funds “have a role to play in the development of South Africa through investment in real assets”, and those assets would include Eskom, SAA and the SABC.

The public is acutely aware of the significant debt burdens these state-owned enterprises (SOEs) hold. It is said that the SABC requires a R3.2 billion bailout to keep it afloat; SAA recently begged for a R4 billion bail-out, in addition to the R39 billion in bailouts received since 1999; Eskom’s current debt is in the region of R500 billion!

What are prescribed assets?

Prescribed assets, with specific reference to retirement funds, are the percentage of retirement funds’ assets that, by law, have to be allocated to certain government-approved instruments.

Prescribed assets are not a new phenomenon; they were first introduced in the 1950s, when South Africa was sanctioned and was cut off from global financial markets as a result.

It is important to note that, in this period, members' savings were significantly eroded - statistics revealed that prescribed assets' real returns were significantly outperformed by the equity market. The prescribed assets policy was abandoned in 1989.

Now, based on these statistics, members of retirement funds are understandably worried that they will fall short at retirement, should prescribed assets become law.

This is because prescribed assets were put back on the agenda at the ANC National Conference in 2017 and were included in the ANC’s pre-election Manifesto in January 2019

What are the potential consequences of prescribed assets?

The Helen Suzman Foundation lists the following negative outcomes:

Lower than market returns for investment funds and an erosion of investment value.
Asset / liability mismatches for pension funds, banks, and insurance companies.
Defined contribution pension funds not being able to meet their pension payment requirements.
Taxpayers having to fund a shortfall at the Government Employees’ Pension Fund (GEPF).
Reduced incentives to save for retirement.
A negative impact on the stock-market and the country’s overall financial stability.
Decreased foreign investment in South African government bonds and SOE debt.
A crowding out of growth inducing private sector investment.

Conclusion

There are many strategies that government can explore to encourage investment into developmental initiatives, without any requirement for prescription, but these should involve consultation with the relevant role players.

Whilst government makes the argument that prescribed assets will help grow the economy, there is general consensus in the private sector that prescribed assets will have the opposite effect!

Whilst it is not yet government policy, it is important that stakeholders (members of retirement funds, pensioners, financial institutions and the public at large), continue to voice their vehement disapproval of a strategy that has been proven to be flawed.