Money and Markets

45% of your pension may soon be invested in SA infrastructure, under new draft rules

Business Insider SA
A construction site of the Rea Vaya route in Johannesburg. (Photo by Sharon Seretlo/Gallo Images via Getty Images)
  • Government has published proposed changes to pension fund rules, which would allow these funds to invest a large chunk of money into projects like new roads, dams and sustainable energy.    
  • They won't be forced to invest in infrastructure. 
  • But funds may more seriously consider it, given that the property sector – a longtime favourite of the retirement sector – may not recover for years.
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Your pension fund savings may soon be invested in green energy, dams, and roads after government published proposed changes to pension fund regulations that will make it easier for funds to invest in infrastructure. In fact, up to 45% of a pension fund may be invested in these projects.

Australian, Canadian, and Dutch pension funds have long invested in infrastructure – either via companies (or private equity funds) that run large projects, or even by directly investing into these projects themselves. For example, they would buy stakes in solar power plants, and earn returns from the electricity sold to customers. Or they would help to fund the building of roads, and earn toll fees as part of agreements with governments. In addition, governments may sign long lease agreement for big assets funded by these investors, who earn their returns that way.

International pension funds have also bought stakes in large infrastructure assets. More than a decade ago, for example, the Californian civil servant pension fund bought a 10% stake in Gatwick Airport in England. That turned out to be a very lucrative move.

Now the South African government wants to change Regulation 28 of the Pension Fund Act to encourage retirement funds to do the same here.

Regulation 28 puts limits on where pooled retirement money can be invested. For example, a pension fund cannot invest more than 75% of the fund in shares, and there are also limits to how much can be invested overseas, in listed property, and in other assets.

Some retirement funds already invest in infrastructure via “alternative investments”, including hedge funds, and private equity funds. But pensions funds are not allowed to invest more than 15% of their savings in these kinds of funds.

The new proposal will allow retirement funds to invest 45% of the money they manage in South African infrastructure, though there will be a limit (25%) on how much can be invested with a single entity. Funds can invest another 10% in African infrastructure outside of South Africa, which could bring the total maximum infrastructure exposure to 55%.

Importantly, pension funds are not obliged to invest any money in infrastructure - but they can if they want to. 

The new draft proposal has a separate new investment limit in private equity (15%), along with a maximum of 10% for hedge funds, and 2.5% for other alternative assets. Pension funds can also invest in infrastructure via shares in companies that are involved in the sector. Or they can buy bonds that fund specific projects, or are issued by large infrastructure investors like the Industrial Development Corporation and the Development Bank of Southern Africa.

Handily, government already has a list of almost 300 infrastructure projects that it urgently wants to get off the ground, including roads, affordable housing, water provision, and energy. Approvals for more than 50 of these infrastructure projects have been fast-tracked, and they are now in need of money.

READ | Here are SA’s new, fast-tracked infrastructure projects worth R340bn

What returns can be expected from infrastructure?

There is already a track record of investment infrastructure in South Africa.

Futuregrowth, which is part of Old Mutual, has invested billions in all kinds of infrastructure – including in 29 independent power producers - over the past 25 years. Its Futuregrowth Infrastructure and Development Bond Composite fund has more than R15 billion in assets under management, delivering an average annual return of 12% since 2000 by investing in government bonds and other vehicles that fund infrastructure projects.  

In an opinion piece, published in Business Day last year, Eskom Pension and Provident Fund chief investment officer Ndabe Mkhize said infrastructure equity investments should deliver about 12% to 16% a year. “But what’s especially attractive about such returns is that they tend to be dependable and predictable over the long term — annuity income that can be relied upon to materialise,” he added.

Until now, there hasn’t been much appetite for these kinds of investments, however, as some of South Africa’s largest infrastructure projects – Kusile and Medupi, for instance – were mired in mismanagement, and widespread government corruption has undermined investor confidence.  

But this time, pension funds may bite.

Covid-19 has wreaked havoc on one of the retirement industry’s favoured asset classes, property, which used to deliver solid returns and payouts.

Now South African offices and malls continue to bleed tenants as the pandemic fall-out continues. Rental rates are being slashed, and it could be years before the sector recovers. Suddenly, infrastructure investments may start to look more interesting.

Some pension funds could start seeing infrastructure as an alternative to property, one executive at a large fund manager told Business Insider SA. 

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