Prescribed Assets

Written by Kobus Sadie, Senior Economist and Head of Sales at Efficient Private Clients

Prescribed assets have been on the government’s agenda since it appeared on their election manifesto in 2019. The concept of prescribed assets is not new. Under the apartheid-government, it was driven to an extreme where pension funds were forced to invest up to 77% of all their assets between government bonds and state-owned enterprises (SOEs). In 1989, prescribed assets were scrapped.

Since the noises around prescribed assets started again in 2019, we have not seen any clear indication of what specific assets government wants pension funds to invest in:

Will it be government bonds? Pension funds will lend money to the government, who must then repay that debt over a specific time at a specific rate; or

Will it be a loan to bail out SOEs?

If it is indeed option 2, in our opinion, this will be a serious concern.

Pension funds are currently allowed to invest in alternatives, but they have a choice in which alternatives to invest in. They can do research and proper due diligence before they invest. If regulation 28 is changed, this could potentially lead to funds not having full discretion where they invest their members’ money. This will have a tremendously negative impact on members’ investment risks.

The government’s proven track record of not spending money responsibly is the biggest fear surrounding this issue.

What exactly will the money be used for and by whom? Will the plundering of state assets continue, or will the money be spent wisely? If not, pension funds could be forced into investments that could potentially lose money for their members.

Until the government finalises their plan, and specify which instruments must be used, how the money will be used and by whom, it remains a concern for all South Africans who have money invested in pension funds.

We expect heavy resistance from the pension community, and do not foresee that prescribed assets will be implemented overnight. We will keep you up to date to ensure that you have all the necessary information to make informed decisions. For now, do not make hasty decisions and please do not act on rumours, rather check with your Efficient Financial Planner or Wealth Manager to get an informed opinion and professional advice. We receive regular updates from our partners at Allan Gray, Ninety One (previously Investec), ABSA and all the other big insurers and Fund Managers across South Africa.

For all our clients currently invested in living annuities, it is important to remember that the government will have to change regulation 28 to force pension funds to invest in certain asset classes. Living annuities will therefore not be affected because regulation 28 does not apply to living annuities.