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By Mike Adsetts, Deputy Chief Investment Officer of Momentum Investments, discusses retirement fund signals from the budget.

Reviewing South Africa’s latest budget documentation after the budget speech on 23 February 2022, some valuable insights were gained into how retirement funds and their investments will evolve in the future.

Herewith some points to take heed of:

Exchange control

This budget continued the trend towards relaxing exchange control, with institutional investors allowed up to 45% offshore exposure (including exposure in Africa). There may be some back-pedaling due to unintended consequences, but National Treasury is on a journey of relaxing exchange control.

With the current permissible exposure, the role of offshore exposure will become far more central to and integrated with the local components of portfolios. The days of a bolt-on approach are behind us, and the role of global partners, as well as deeper involvement of local investment teams with global asset classes, will continue to increase.

Infrastructure and public-private partnerships

The dire need for infrastructure in South Africa and, more generally, around the world, is evident. Decades of underinvestment and a lack of comprehensive maintenance have left the infrastructure stock in poor shape. Apart from energy infrastructure, which we have become acutely aware of thanks to challenges at Eskom, critical investment is also required in, among others, water, sanitation, transport, and logistics infrastructure.

Government’s mix of revenue and expenditure, with the lion’s share of expenditure on items such as staff expenses and debt-servicing costs, leaves the government with an acute lack of resources to undertake capital projects on its own. As such, the role of public private partnerships (with the private sector building, running, and maintaining infrastructure) and the crowding in of private capital from retirement funds, are critical for the success of government’s infrastructure programme. A lot of trust must be built between the public and private sector, but the trend is clear: the role that the private sector and markets plays in infrastructure will increase amidst the navigation of many potholes.

The green revolution

A clear directive generally, and even a co-incidental factor in the infrastructure programme, is the desire to incorporate climate action far more centrally in investment processes.
From a government perspective, commitments to climate action (for example, COP26 and net zero by 2050) continue to drive this as a key consideration on the agenda. From a South African perspective, the balance between climate action and a just transition (not further entrenching social issues through decommissioning and stranding assets) is a delicate balancing act that will have real-world consequences for investments and the communities affected by them.

Crypto investments

There is a commitment to regularise the investing framework for crypto investments, as this area has been covered extensively in the media, albeit with a heightened focus on cryptocurrencies.
Perhaps the fundamental difficulty with any approach to regulate cryptocurrencies is that they were specifically designed to operate outside of a regulated or national environment.

The technologies underpinning crypto investments will change the digital financial world. It is, however, not known whether crypto investments will be the winners in the long run. As such, it is fully anticipated that the approach to crypto investments will be very measured and cautious, with permissible exposures being relatively low when they are allowed.

Regulatory burden

The institutional investment arena continues to be a highly regulated space, and this trend is set to continue. A myriad planned regulatory changes is on the horizon, such as auto-enrolment (all employees over time needing to be part of a retirement fund), changes to Regulation 28 of the Pension Funds Act to allow more infrastructure investment and governance of umbrella funds.

The regulatory burden on the different components of the retirement and institutional investment landscape comes with a hefty price tag. One of the unintended consequences of this is likely further consolidation across the industry. It is simply too expensive for small businesses to operate profitably and the need for scale is also a key driver that will shape the landscape in future. This pressure is amplified by pressure from investors and regulators to provide cost-effective investments.

In summary

The retirement landscape is a fascinating environment, with powerful national and global forces shaping it. Some of the changes listed will have long-term implications for the retirement and institutional investment industry, which will make this a dynamic and evolving field.
Ultimately, the industry stands in service to investors and members of the retirement sector, and it is worthwhile to know, as well as keep a measure on, the key factors and drivers affecting it.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider, and rated B-BBEE level 1.

www.momentum.co.za/investments

Source: M.Adsetts; Today’s Trustee March/May 2022