The recovery of the SA economy post Covid-19 has become a talking point with the easing of lockdown restrictions underway. It has also raised questions on the financing of growth enhancing initiatives, particularly an infrastructure programme, using pension funds.

Earlier this week, a draft document from the ANC's economic transformation committee made waves as it included a submission on an amendment of Regulation 28 of the Pension Funds Act, notably to increase pension fund investments into "real assets" and fund infrastructure and capital projects.

Speaking to Fin24 about the submission, ANC head of economic transformation Enoch Godongwana said not all asset classes, including infrastructure, are "properly covered" by Regulation 28. "Therefore we need to tweak Regulation 28 for that purpose," he said. The ANC is yet to finalise a proposal document on economic reconstruction post Covid-19, Godongwana added.

Commenting on the draft document, Eskom Pension and Provident Fund (EPPF) CEO and Principal Officer Linda Mateza said that the ANC may be mulling over the prescription of assets given that apart from government pension funds or those of parastatals, the pension fund industry as a whole has not been investing nearly enough in development or impact investing - these are investments directed at environmental and socioeconomic upliftment.

The prescription of assets is a policy whereby the state obliges institutions such as pension funds and insurance companies to have a specific holding in certain assets. This policy was implemented by the National Party during the apartheid era, as the country faced sanctions which negatively impacted the economy.

'Trust deficit'

"Those were different circumstances, in that there were no other options.

"There were restrictions on how much could be invested from outside. There were sanctions and people did not necessarily want to invest in SA. That was a government with no options and they had to raise funding in other ways," Mateza said.

Mateza took the helm at the EPPF in September 2019. The fund has been intentional about investing millions in development in the country – in areas such as education, housing as well as the first two rounds of the renewable energy programme.

But some funds might be deterred from investing in development projects because of government's poor track record, which has contributed to a "trust deficit", Mateza highlighted. For example, Gauteng Freeway Improvement Programme might have seen like a good investment at the time, but people are not paying their e-tolls.

There are however some successful infrastructure projects, Mateza said, referencing the example of early investors in the renewable energy space who are now benefiting from returns.

'Stars must be aligned'

"It's almost like stars must be aligned for it to work successfully. The policy environment must be right. Investors must have protections … Of course it must be underpinned by a solid investment case, otherwise it is just not worth exploring," Mateza said.

If pension funds are indeed going to be forced to invest in particular types of assets, it would be detrimental to them if poor quality projects are invested in, she explained. But it does not necessarily have to be a bad thing – asset prescriptions could also allow pension funds to diversify their portfolios, and not be heavily weighted in the stock market as it is now, she added. Asset prescription could also allow pension funds to consider new asset classes that they may not have invested in previously.

"There could be positive prescription if it is going to direct funds into much needed infrastructure," Mateza said. Currently water and sanitation infrastructure is sorely needed. If the prescription is a "nudge" then it could be positive, but "draconian" prescriptions would not be received well, she said.

If government were to give more guidance on how the economy functions, as outlined in the ANC draft document, Mateza said investors would be keeping an eye on the credibility of institutions such as being able to rely on the  Reserve Bank being responsible in exercising monetary policy tools. "Whatever guidance they give, must be met with robust institutions," she said.

Success stories

Mateza said that perhaps to drive investment in the economy it would help if the EPPF and the Government Employees Pension Fund, who have experience in doing so, share their success stories, as well as the challenges they have experienced. "Those funds which have walked the path before have the responsibility to allay fears among our peers."

Especially in the aftermath of Covid-19, targeted investment in areas such as agriculture for food security will be needed, as well as healthcaare and water and sanitation.

The objective of retirement and or pension funds is to allow people to live with dignity, and enjoy a good quality life once they stop working, Mateza explained. But if people's needs like healthcare cannot be met, due to a lack of resources like a hospital, then there is a problem. "It does not matter if you have a nice car, but the roads you drive on have potholes," she said.

An investment strike would not bode well in a post Covid-19 world. But in order to instil investor confidence, government needs to rebuild trust with policy certainty and ensuring there are consequences for those implicated in state capture.

"For us to emerge from this crisis we will have to come with novel solutions. As South Africans we are going to need unity of purpose, we are going to need to be aligned in what think is good for our economy," Mateza said.

Collaboration between different stakeholders – such as government, institutional investors and even individuals - will be key as we work towards economic recovery. For example, it would not help supermarket chains to "sit on a pile of cash" instead of investing in the economy, while people are unemployed and unable to buy goods from their stores.

"It is a circular thing. Investing in the economy will reap benefits because everyone's standard of living is uplifted," Mateza said.