For a while now, we have been reading with great interest about how the government wants to be able to control how our retirement savings are invested. This is usually referred to by its short name, “prescribed assets”, and advocates on either side of the argument have been keeping us glued to our seats with their fierce opinions on the matter.
What are prescribed assets really, and what does it potentially mean for investors?
Although retirement savings are already subject to certain rules of the Pension Funds Act, there is a fear that those provisions will be amended to the detriment of investors. Specifically, that more of our hard-earned money will be invested into government-approved assets.
It appears that government is placing strong emphasis on investments in infrastructure, in support of the country’s development plans. This is the aspect that has most investors up in arms – there is a fear that our retirement savings will be used to try and save state-owned enterprises that are unlikely to be good investments.
In addition, with government debt mounting, there is a concern that they could require retirement funds to hold a minimum percentage in government bonds. This could potentially reduce the available returns in retirement assets.
Prescribed assets are not new
Prescribed assets is not a new development in the Pension Funds Act. Under the Apartheid government, prescribed assets were used to ensure that government could fund the budget deficit during sanctions – a period when overseas investors were not allowed to invest in South Africa. What is new is the proposed change to the current legislation.
How real is this threat, who is at risk, and what can we do about it?
Imposing a change to prescribed assets requires, legally speaking, nothing more than a change to section 28 of the Pension Funds Act. This could in practice, however, take a long time. On the presumption that the suggested provisions are written into law, what can one do to protect oneself?
Retirees
If you are already retired, you are unlikely to be affected. At this stage, there are no prescriptions on living annuities, or on normal discretionary investments and savings. It will be life as usual.
Prescribed assets may one day be imposed on living annuities too, but it would again be many years before legislation allowed for such an amendment.
Contributors to retirement savings, who are within 5 years of retirement
There is a good chance that the proposed change is not on the immediate horizon – the most recent comments by the ANC’s head of economic transformation suggest that the party is moving away from the idea. However, even if they do go that route, if you are within 5 years of retirement you would by now have accumulated the lion’s share of your retirement savings. This means that the imposition of prescribed assets wouldn’t have enough time to seriously impact your portfolio before you were able to retire from your funds.
Retirement annuities allow for retirement from the fund from the of age 55, but you don’t necessarily have to retire from work to retire from your retirement annuity.
Young professionals and those in mid-career
This group will be at risk. If you have 10 or more years to go before retirement, it could be detrimental to your portfolio. The risk is that your investments are not likely to generate the growth that you need to fund your post-retirement income requirements. Not in that time frame.
Should you continue to add funds to your retirement savings? Yes, contributions to a retirement product is still a tax-smart move. Stopping your contributions will take away a tax-deductible expense, resulting in an increase in your income tax.
You can, however, estimate what the maximum amount is to contribute towards your retirement savings in order to qualify for tax relief. If you have a surplus you can invest it into a discretionary investment, such as a flexible investment, or an endowment policy.
The crux for this group is having a balanced retirement portfolio. You need to have both retirement as well as discretionary savings. Save just enough in retirement structures to remain tax-savvy but invest the rest in discretionary portfolios (including sizable global investments that are appropriate for your circumstances).
What do we do right now?
We cool our heels.
We believe that it is too early to take radical action on your retirement funds. It may be a costly pre-emptive strike with long-term implications for your wealth.
In an earlier article, we calculated the potential loss of return from prescribed assets (you can read the article here).
For now, the situation remains speculative. It would not be prudent to take financial decisions and make drastic changes to hard-earned retirement savings until we know for certain that we’ve been backed into a corner. It will be far more detrimental to stop saving than to save with potentially lower future returns.
Equally important is to understand that prescribed assets will not necessarily limit investment returns. Infrastructure projects driven by public private partnerships could result in suitable returns for investors if well managed. Allan Gray recently released some insights on infrastructure investments and prescribed assets, read the article here.
It seems that government now wants to focus on identifying viable developmental investment opportunities for pension funds and retirement assets within the existing framework. Of course, we remain sceptical about the nature and potential returns of such projects. However, it’s a more preferable outcome than was previously envisaged.
Revise your financial planning now
First and foremost, this requires careful deliberation about your vision for your retirement. How will you fund that vision? Is your portfolio suitably diversified to hedge against the risk of prescribed assets, and ensure that the life-after-the-office you are dreaming of becomes a reality?
At Foundation, our team is highly skilled in constructing retirement portfolios and can address your concerns in a practical manner. Speak to us if you want to revise your financial planning.