The case for responsible investment of pension savings in infrastructure
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The idea of tapping into pension funds to finance infrastructure development with a view to increasing the productive capacity of the economy and create jobs is neither new nor unique to SA.
However, amid a recent resurgence in the debate locally over whether large retirement funds should invest more in infrastructure, it’s worth remembering that the first duty of funds and their trustees has always been to their members, whose money they are tasked to protect and grow.
On this point there are sound investment reasons for retirement funds to allocate money to infrastructure. The long-term and inflation-hedging nature of the investments can be an appropriate match for the liability structures of pension funds while, most importantly, development projects are capable of generating competitive risk-adjusted returns for members.
At the same time, the theory goes, retirement funds are able to contribute to national development through growth and employment, and everybody wins. However, one problem is that SA’s track record in terms of managing large projects and state-driven enterprises is notoriously bad, due mainly to questionable viability, poor management and corruption.
As a result, there’s a disconnect between what many investments have delivered in the past and what retirement funds need from the assets they invest in for the future. This is accompanied by what some refer to as a “trust deficit” between those looking for money and the providers of funding.
It is important in overcoming this problem not to view workers’ savings as an opportunity to access cheap finance for investment in projects that don’t meet required feasibility, investment and governance criteria.
Fund managers have a responsibility to undertake comprehensive due diligence, including an appraisal of all prospective investments to establish their commercial potential, and to examine their financial records, assets and liabilities, and oversight structures. This process facilitates informed decisions by helping us understand the risks involved and whether the investment is appropriate in the context of the client’s portfolio and strategy.
Alternative sources
With the government’s debt burden having spiralled over recent years, there has been a tendency to look more broadly at capital markets for alternative sources of finance.
That is not surprising given finance minister Tito Mboweni’s warning that SA could face a sovereign debt crisis within three years if government debt is not reined in. Our inability to pay the interest or the capital on amounts borrowed would have serious economic consequences.
At the ...
However, amid a recent resurgence in the debate locally over whether large retirement funds should invest more in infrastructure, it’s worth remembering that the first duty of funds and their trustees has always been to their members, whose money they are tasked to protect and grow.
On this point there are sound investment reasons for retirement funds to allocate money to infrastructure. The long-term and inflation-hedging nature of the investments can be an appropriate match for the liability structures of pension funds while, most importantly, development projects are capable of generating competitive risk-adjusted returns for members.
At the same time, the theory goes, retirement funds are able to contribute to national development through growth and employment, and everybody wins. However, one problem is that SA’s track record in terms of managing large projects and state-driven enterprises is notoriously bad, due mainly to questionable viability, poor management and corruption.
As a result, there’s a disconnect between what many investments have delivered in the past and what retirement funds need from the assets they invest in for the future. This is accompanied by what some refer to as a “trust deficit” between those looking for money and the providers of funding.
It is important in overcoming this problem not to view workers’ savings as an opportunity to access cheap finance for investment in projects that don’t meet required feasibility, investment and governance criteria.
Fund managers have a responsibility to undertake comprehensive due diligence, including an appraisal of all prospective investments to establish their commercial potential, and to examine their financial records, assets and liabilities, and oversight structures. This process facilitates informed decisions by helping us understand the risks involved and whether the investment is appropriate in the context of the client’s portfolio and strategy.
Alternative sources
With the government’s debt burden having spiralled over recent years, there has been a tendency to look more broadly at capital markets for alternative sources of finance.
That is not surprising given finance minister Tito Mboweni’s warning that SA could face a sovereign debt crisis within three years if government debt is not reined in. Our inability to pay the interest or the capital on amounts borrowed would have serious economic consequences.
At the ...
