Caution over retirement fund changes for South Africa

In March 2021, the National Treasury published its draft amendments to Regulation 28 of the Pension Funds Act for public comment.

The proposed amendments aim to make it easier for retirement funds to increase investment in infrastructure in South Africa. However, there are still questions around whether funds will actually want to put their money into these projects, a new survey from Sanlam shows.

The 40th annual Sanlam benchmark 2021 survey found that standalone retirement funds anticipate investing 6.6% of their assets, on average, in infrastructure.

This figure was just 4.7% for umbrella funds. With the current infrastructure funding gap sitting at an estimated R1.7 trillion over the next 10 to 15 years, the question is, are these allocations enough to make a real impact?

“While 6.6% may appear to be a relatively small allocation, we must consider that retirement funds hold R4.5 trillion in assets, this translates to almost R300 billion in direct infrastructure investments which is fairly substantial – but unfortunately still well short of plugging the R1.7 trillion funding gap,” said Darryl Moodley, head of tailored investments at Sanlam Corporate Investments.

Moodley said that there are numerous reasons why funds might consider shifting to investments that can provide superior returns while addressing the social challenges and megatrends of the future.

One of the reasons is that the number of companies available on listed markets is shrinking, both locally and globally, and this means that the opportunity set for retirement funds to invest in listed assets continues to diminish.

Adding to this, the property sector – a favoured asset class for retirement funds – has come under significant pressure as a result of the global pandemic.

“Over the last 20 to 30 years South Africa has not invested enough in infrastructure to keep up with the demands of an emerging economy.

“And unlike investing in listed stocks or bonds, the amazing characteristic about infrastructure investments is the opportunity to build something tangible, it’s about procuring land, sourcing materials, and most importantly, job creation. Investing in infrastructure really is at the core of improving society’s productive capacity and espousing confidence.”

Historically, retirement funds have been reticent to invest in infrastructure mainly due to its seemingly complex nature.

The asset class is largely illiquid and unlisted. The large quantum and long-term nature of the contracts – with the government often a central role player – make these investments complicated to structure and they have limited flexibility post-investment.

But Moodley said that with the proposed changes to Regulation 28 of the Pension Funds Act, more visibility has been generated around this asset class and trustees need to engage deeply in incorporating infrastructure assets into fund portfolios.

“The general philosophy has been, ‘If you don’t understand it, don’t invest in it,’ and yes, investment in infrastructure requires higher levels of skill, due diligence and governance – but it can have significant rewards, especially to early investors in developmental projects, where brand new infrastructure is being developed.”

He said that government and regulators need to create a conducive regulatory environment with policy certainty to ensure that the millions being poured into infrastructure will be into productive assets in high impact sectors of the economy, and not simply white elephants.

Read: The projects your retirement money could help fund in South Africa

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