Does the government plan to ‘steal your pension money’?

prescribed assets

Does the government plan to ‘steal your pension money’?

Much has been written about the introduction of prescribed assets and as always ‘bad news sells’. The prescribed-assets discussion lends itself to sparking fear, but reduced to bare factual bones, what does it really mean?

The ANC’s 2019 election manifesto statement, which sparked much of the initial brouhaha, stated that the party would “investigate the introduction of prescribed assets … to mobilise funds … for socially productive investments”.

The financial services industry understands prescribed assets to mean the government requires the industry to use the savings of the industry’s clients, including pension funds, life insurance companies and individual investors, to buy government-backed assets like bonds and equities. This practice has a history in South Africa, having been used by the apartheid government to fund its projects and provide liquidity that it could not get from taxable income.

Knowing the fiscal difficulties of South Africa with regard to tax shortfalls, unemployment and the sad state of many state-owned enterprises, it’s easy to make an assumption that this spells bad news for investors. There are certainly concerns, but things may not be as bad as we are led to believe.

Enoch Godongwana, the ANC’s head of economic transformation, has said that the party is focusing on Regulation 28 of the Pensions Funds Act (which is there to protect investors and ensure a level of diversification within portfolios and limits the extent to which pension funds can invest in certain assets) and is in fact moving away from enforced prescription.

The idea currently tabled is to broaden the investable options to enable higher levels of investment in unlisted asset classes such as infrastructure or ‘green’ projects. So, the key word for us is ‘enable’ not ‘enforce’.

What does it mean for investors?

We can’t predict the future of how the legislation will unfold, but the following considerations are relevant:

  • It is still the early stages in the process, and no changes have been announced yet.
  • Pension fund assets in SA are well regulated and protected, and in our view any restrictions that would be detrimental to investors would be challenged through the courts by many stakeholders across the financial services industry.
  • Policymakers are well aware that if there are significant restrictions to investments, the pension fund industry could shrink, which would reduce the access to capital that they are looking for, as members would either contribute less to their pension funds or withdraw their savings.
  • Trustees have the duty to act in the best interests of members, and this means that they will look for the best risk-adjusted returns for their members.
  • There are significant tax benefits to using retirement funds (depending on one’s individual tax situation), and we believe that they certainly have a place in a financial plan. As always, a properly constructed financial plan should balance both retirement and discretionary investments. This must, however, be considered on a case-by-case basis, depending on the investor’s circumstances and goals.

How advantageous are the tax benefits with regard to retirement funds?

While we don’t like investment restrictions (such as the maximum of 30% offshore exposure within retirement funds), the tax benefit received from retirement fund contributions means you are effectively investing only slightly more than the tax break in ‘regulated’ investment strategies. The rest of the funds can be invested without any restriction.

To illustrate with an example:

An investor invests R100,000 in a retirement fund. The investment could, for example, have R30,000 offshore exposure of the R100,000 total investment (assuming the 30% maximum offshore exposure). If you then invest the tax refund of R45,000 offshore (assuming the investor is in the 45% tax bracket), an investor will have a R75,000 offshore investment and a R70,000 local investment.

Cameron McCallum CA(SA) CFP®

While we won’t to try predict the future and whether there are ulterior motives behind these changes, there is currently no reason to panic. We will continue to follow the prescribed-assets discussion closely, consult the relevant authorities and experts, and apply our minds on a case-by-case basis before giving you advice based on your particular circumstances.

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