Back to the precipice


Back to the precipice

Published Date: 2020-08-18 | Source: Stephen Gunnion | Author: Allan Greenblo

Back to the precipice

In the recovery-or-bust scenario that faces SA, both pension funds and the IMF have huge roles. Taken together, there must be a strong chance of positive outcomes.

Whenever this ANC government announces an initiative, it's quickly followed by incredulity. Not without good reason is the scepticism provoked by long experience of promises designed to deceive or policies destined to fail.

Why should this time of Covid-19 be any different? It's because potentially - the key word being 'potentially' - choices are confined by the anticipation of bankruptcy. As previously in SA, when the fiscus was blown, economic sovereignty and political fantasy become subservient to bond markets.

In 1989, the sanctions-induced deprivation of foreign exchange significantly tipped the SA government of F W de Klerk to commence the abandonment of apartheid. Right-wingers in the ruling party were defied.

Slightly over three decades later, as a consequence of the junk downgrades induced by a decade of endemic corruption, the urgency to attract foreign exchange has forced the SA government of Cyril Ramaphosa into contracting with the markets- orientated International Monetary Fund. Left-wingers in the ruling party, of statist inclination, had better be defied.

If they aren't, causing Ramaphosa to stagger and stumble under their weight, the populist consequences are eerily predictable: raids on peoples savings, tax increases that stimulate capital flight, exacerbated rand weakness and overworked Reserve Bank printing presses....Such is the uncertainty that it's guesswork whether the post-March clawback in JSE share prices foretells an imminence of recovery or an inevitability of inflation.

In the same way that February 1989 sparked an ideological shift of seismic reverberation, so too can the IMF sign-up in July 2020 do much the same to time- worn clichés that masquerade as weapons to attack poverty, unemployment and inequality.

There are positives, mainly in finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago - respectively representing National Treasury and the independent central bank - being the curators of orthodox fiscal and monetary policies. They're informed by prudence, not grandstanding. Their sobrieties are consistent with IMF principles of marketplace deregulation and competition, the precise antithesis of central command that continues to find favour in the ruling party.

That much is illustrated by power-drunk dictates of the national coronavirus command council. Its contradictory extremes are hostile to business with which government wants a social compact. They also diminish the tax base on which government relies, frighten the capital investment which government urges, and obliterate jobs capable of retention.

The $4,3bn IMF loan, at nominal interest and minimal conditionality, is an act of generosity to help SA through its most immediate Covid-19 setbacks. How it's disbursed will be watched before the next tranche, much bigger and more onerous, is inevitably requested within the next few years to assist SA though its foreseeable balance-of-payments quandaries.

Until then, Mboweni is fortified in his Budget promises. He'll be monitored for implementation of expenditure ceilings, and on whether he succumbs to life support for decrepit state-owned enterprises. The IMF, unlike VBS mutual bank with which certain politicians are more familiar, prefers an environment that will allow for repayment of its loans.

What does this have to do with pension funds? Pretty much everything because they're targeted money pots for the surge in new infrastructure projects intended to trigger economic recovery. It makes conceptual sense.

The long-term nature of pension-fund liabilities corresponds to the long-term nature of infrastructure returns, and there are loads of assets in pension funds misdirected from support for SA's real economy. But neat theory bangs against tough reality:

  • The fundamental purpose of pension funds is to provide for pensions. The better the investment returns, the better for members' retirements. Fund trustees who knowingly or negligently pursue sub-optimal returns are in breach of their fiduciary duty to fund members, and personally expose themselves to civil remedy;
  • Accordingly, infrastructure projects offered for pension-fund investment will need to compete on risk and return with other market opportunities. Introduction of prescribed assets would represent the opposite i.e. force a proportion of pension funds' assets into uncompetitive returns, the very rationale of prescribed assets being the supposed requirement of the 'developmental state' for interest-rate subsidisation by pension funds;
  • Prescribeds would also represent the failure by the state to attract investment on a market basis. This is hardly a signal of confidence for foreign investors. Moreover, there cannot now be a trade-off in lower returns that will result later in an exacerbated crisis for retirement funding;
  • For encouragement of contributions to pension funds, the state offers tax incentives. It'll be absurd, and self-defeating, to incentivise contributions on the one hand and cancel their effect by prescribed assets on the other;
  • In response to Covid-19, the Business for SA (styled B4SA) grouping of private-sector associations calculates that R3,4 trillion of baseline funding will be required over the next three years "to deliver an accelerated economic recovery strategy". This amount approaches the total assets in private-sector pension funds. So whatever amounts they invest will have to be bolstered from other domestic sources and particularly from institutions abroad. Few are likely to be impressed by returns predicated on prescribed assets;
  • In June, under auspices of the presidency, a symposium was held via Zoom on sustainable infrastructure development. After the symposium, a list of 55 mega-projects was produced. Subsequent to the symposium, nobody is any the wiser as to their respective costs, prioritisation and timeframes to completion;
  • Nobody is any the wiser, either, on whether prescribed assets will be introduced for the funding. Ramaphosa's silence is deafening;
  • His obsequious audience never sought to ask whether investments by pension funds might enjoy government guarantees, whether the state element in public-private partnerships had the necessary capacity to play the implementation roles envisaged for them, and whether transformation quotas could be impacted by heightened demand for technical skills;
  • Meanwhile, due to Covid-19 following years of lacklustre performance of the SA economy, pension funds are vexed. For the past five years, generally speaking, returns have been minimal and not beaten inflation. When savers aren't seeing real returns, they start to question whether they should be saving at all;
  • For employers, reduced to survival mode in their core businesses, many will be questioning whether they still want to offer a pension fund to employees. If they do, their next question will be whether they can sustain their present levels of contributions;
  • At the employee level, obviously, pension funds are hammered. With the devastation from lost jobs and salary cuts, individuals' pension pots stand between them and penury. It then becomes a race between recovery in the jobs market or their money running out. At least, for a while, they have a stopgap that alone demonstrates the value of having saved. But that's little consolation for National Treasury, as a pillar of the financial system is shaken, or for financial institutions, as their customer base shrinks.

The litany of woe deepens for the millions of unemployed who rely entirely on social grants, which cannot be indefinitely extended, to save them from starvation. It's economic recovery or bust. Two modest suggestions for Ramaphosa. One is to declare his position on prescribed assets so that it's clear whether portions of pension-fund assets are at risk of expropriation without compensation. Another is to crack down, really crack down without favouritism, on the corruption brazenly out of control. SA has never previously been as desperate for investment, both domestic and foreign. There's plenty of it, potentially, provided that SA is seen as a safe destination financially and physically. An inert Ramaphosa has done little to make it so. The IMF support has arrived in time to light a fire under his feet.

  • Allan Greenblo is editorial director of Today's Trustee (, a quarterly magazine mainly for the principal officers and trustees of retirement funds.

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