Credible savings for retirement

Where should retirement savings be invested?

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When it comes to retirement savings, what is important to you?

Retirement savings globally are under increasing pressure from cash-strapped governments. PIMCO, a global bond manager, has popularised the term ‘financial repression’ to describe the predicament in which savers in the developed world have found themselves after the global financial crisis. 

Financial repression refers to the erosion of investor rights. This occurred in Greece where private debt holders found out their rights fell below that of other regulatory agencies when Greek debt was restructured. 

It occurs in Europe and Australia each time a bank issues a covered bond. It most obviously takes place when savers are obliged to invest in government bonds at yields that do not compensate them for inflation. This is currently the situation in much of the developed world where central banks are keeping short-term interest rates abnormally low. 

Retirement savings are perceived as relatively soft targets for financial repression, as governments can prescribe a minimum allocation to government bonds, or fund government expenditure. Currently, there is a vocal debate in the United Kingdom around the Chancellor’s calls for UK pension funds to fund infrastructure development. 

And in street protests from Occupy Wall Street to St Paul’s Cathedral, citizens have questioned the ability of capitalism to deliver a sustainable future for all.

Where does South Africa stand in all this?

South Africans have never had complete discretion as to how to invest their retirement savings. Section 36(1) (B) of the Pensions Fund Act, No. 24 of 1956 (“the Act”) empowers the Minister of Finance to set prudential limits for pension funds investing in particular asset classes. These limits were most recently amended in 2011. 

Treasury has explicitly stated in an explanatory memo to the recent amendments, that the purpose of legislation around retirement savings is both to ensure the investor’s retirement is prudentially managed, and to promote economic growth and development.

Importantly, recent amendments to Regulation 28 of the Act oblige the trustees of your retirement fund both to protect their members’ interests and take into account environmental, social and governance (ESG) factors in making investments decisions. 

In the interim, many asset managers have signed up to the United Nations Principles for Responsible Investment and have adopted the Code for Responsible Investing by Institutional Investors in South Africa. These principle-based guidelines articulate a commitment to take into account ESG factors when making investment decisions.

It is still early days to assess the impact ESG factors will have on asset management processes. From a purely investment perspective, managers should take into account ESG factors only if they really make a difference to investment performance. If they do impact on investment performance, managers would take account of them anyway.

The issue gets murkier if you do not believe capitalism can internalise ESG factors into the pricing mechanism. Here, you are close to arguing that governments should explicitly prescribe where pension funds can invest in. And you are implicitly arguing that it is not all about returns.

As things stand, Treasury has not forced pension funds to purchase government bonds, nor fund infrastructure projects. 

Furthermore, it has resolutely protected investor interests by not allowing banks to subordinate existing investors by issuing covered bonds. 

Nevertheless, our economy continues to be devilled by pervasive unemployment, and faces significant structural challenges. There may come a time when retirement savings will be seen as an easy target.

Market capitalism is not a perfect system, but it remains the best we have. Any interventions that stand outside the price mechanism run the risk of being subject to abuse. 

It is therefore extremely important that your retirement fund has credible trustees to best protect your own interests, while at the same time striking the appropriate balance between allowing fund managers to exploit market opportunities and encouraging the social good of sustainable development.

David Crosoer, PPS Investments

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