Prescribed assets: What government could do with your retirement savings

  • The ANC’s economic policy head said the party is investigating using prescribed assets to avoid an IMF bailout.
  • Prescribed assets will force SA asset managers and pension funds to invest in the country’s bonds and state-owned-enterprises.
  • The last time South Africa had prescribed assets, the apartheid regime forced retirement funds to invest half of all savings in government bonds.

ANC economic policy head Enoch Godongwana made headlines over the weekend when he said the party is investigating the use of prescribed assets for pension funds – as a way of avoiding getting an emergency loan from the International Monetary Fund (IMF).

Godongwana told the Sunday Times that the government could use this option to help fund, among others, embattled state-owned entities (SOEs).

The South African state is struggling with a growing debt problem, which now accounts to close to 60% of the country’s GDP.

Here’s what you need to know about prescribed assets:

What are prescribed assets?

It’s just a way of saying that percentage of your retirement savings will have to be invested in bonds issued by the South African government and state-owned enterprises like Eskom.

This will give them a reliable stream of money to fund their activities and help them repay their debts.

Old Mutual, one of the country’s largest asset managers, said assets are often prescribed where “there isn’t sufficient demand for them based on their investment merits”.

The ANC mentioned prescribed assets in its 2019 election manifesto in January, saying it will “unlock resources for investments in social and economic development”.

The ANC’s Godongwana estimates that there is over R6 trillion worth of assets held by assets managers in the country.

How will it work?

Current legislation already stipulates that 60% of retirement savings (retirement funds, pension schemes, provident and preservation funds) have to be invested in South African assets, 30% should be invested offshore and a further 10% elsewhere in Africa.

Only 75% of your savings may be invested in the shares of companies. The rest must be in “safer” investments like cash or bonds.

But there are no rules about which bonds or companies your asset manager has to choose. This will change with the return of prescribed assets.

The last time South Africa had prescribed assets, between 1956 and 1989, half of all retirement savings had to be invested in government and parastatal bonds.

How will you be affected?

Petri Redelinghuys, a trader and the founder of Herenya Capital Advisors, says prescribed assets will take a “small haircut” off the retirement savings of someone currently working. This means their retirement savings will be worth slightly less, and they may be able to recover.

“However, if you are already using your pension and get a small haircut on the R2 million you have in pension funds, it might mean that you don’t have enough money left to live from,” Redelinghuys said.

“And, if SOEs do default it will mean that your entire pension savings might disappear.”

An IMF bailout, of course, could also wreak havoc on your finances. It will have devastating effects for the country, including higher taxes, privatisation and widespread public retrenchments.

“For the investment community, prescribed assets, however, creates a lot of uneasiness which might reflect in reduced foreign direct investment and see capital leave the country.”

“An IMF bailout will be bad for South Africa, but prescribed assets will be equally as bad.”

Articel by James de Villiers , Business Insider SA