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Forced pension fund investments in SOEs could lead to court challenge

15 Jan 2019

Article

Prescribed assets violate property rights, says Futuregrowth's Andrew Canter

PUBLICATION: BUSINESS DAY | WRITER: LISA STEYN | DATE: 15/01/2019 | ORIGINAL ARTICLE: CLICK HERE

Any attempt by the government to force pension funds to invest in bankrupt state-owned companies is likely to spark a Constitutional Court challenge, says one of SA’s largest fixed-income lenders.

In its election manifesto released at the weekend, the ANC said it would "investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development".

This could result in pension funds being forced to invest a portion of their funds in state projects.

The proposals come at a time when state-owned companies such as Eskom are struggling to raise finance from the private sector after years of looting and mismanagement left them on the brink of collapse.

SA Airways has been left in such a dire position that finance minister Tito Mboweni has suggested the country would be better off closing the airline.

Prescribing to pension funds, which are responsible for managing the savings of millions of workers, would be destructive and panic-inducing, said Andrew Canter, chief investment officer at Futuregrowth Asset Management — which faced a backlash when it said in 2016 that it would no longer lend to some state-owned companies, citing poor governance.

Such a move, Canter said, would also amount to a violation of property rights, as enshrined in the bill of rights.

"It’s a property rights issue and probably would end up in the Constitutional Court."

Constitutional law expert Pierre de Vos said it was not as clear-cut as that because any such challenge would have to prove that there was an arbitrary deprivation of property.

"Even if you think the policy is catastrophically stupid, it may not be arbitrary," he said.

The idea of prescribed assets harks back to the tail end of the apartheid era when the government forced pension funds to invest in government bonds at a time when the state was cut off from global markets.

Canter, however, said there was no need to force pension funds to invest in state assets, because "domestic pension funds are already very meaningful investors in national development", and they should not be forced to throw money at unsustainable companies such as Eskom, which is struggling to finance debts of more than R400bn.

"Eskom is currently a financially unsustainable enterprise. If a company is unsustainable it should not be able to raise money," he said.

"But there is a whole range of perfectly creditworthy SOEs [state-owned enterprises] which we lend to," Canter said.

"Prescribed assets is a stick to swing which serves no purpose except to scare investors."

Leon Campher, CEO of the Association for Savings and Investment SA, said that prescription would also have a negative effect on the country’s credit rating.

"If SA loses its investment grade rating, foreign investors, many of whom are pension funds, would be forced to withdraw their money from SA," Campher said. "This is something the country can ill afford."

Click here to read a more detailed overview of Futuregrowth's opinion on the impact of introducing prescribed assets.