Monday, March 15, 2010

Patel Pursues Pensions 2

by Galen Sher

In our first blog post on this issue, Julian provides a great introduction, his view and the full bibliography. I chose to create a second blog post, rather than comment directly, because my response is too long for a comment. I strongly encourage the reader to view this short post and some of its bibliography before reading my instalment.

I am close to pensions and this issue is therefore compelling to me. I hope to provide a middle ground between the various commentators here and an actuarial perspective.

Patel is mooting that 5% of pension funds' assets be invested in government debt, potentially a special kind of 'developmental' government debt, with the intention that this policy would provide government with additional capital to finance public infrastructure.

The Pension Funds Act of 1956 and the FSB's Regulation 28 already encourage retirement savings vehicles to invest in government bonds. Government bonds also provide a good match for level pensions liabilities and provide diversification. For these three reasons, pension funds already invest, sometimes extensively, in government bonds.

If the 5% is viewed as a minimum allocation to government bonds, its impact would be negligible as the vast majority of funds already achieve this. Funds could also use structured products to circumvent this requirement.

If the 5% is viewed as an additional allocation to Dion George's "parallel system of government debt", then this policy could be viewed as Dawie Roodt's "nothing more than an additional tax" strictly when pension funds would otherwise not have invested in such debt. It would amount to an additional tax when markets are performing well, and a subsidy otherwise.

Mike Schussler points out that the real (pun intended) risk is that long-term inflation erodes the fixed returns earned on government bonds. Contrary to Dawie Roodt's skepticism, this problem could be overcome by issuing more inflation-linked government bonds, the demand for which is large in SA.

It is impossible to be decisive on this issue without more information. The proposal is both "workable" (Mike Schussler) and "flaky" (Dion George).

I have purposely ignored the moral issue of whether this level of government intervention is acceptable, or the philosophical-legal issue of whether it infringes on individuals' property rights, but these certainly merit discussion for another blog post.

The management of retirement savings is a sensitive subject because retirement savings constitute a substantial portion of an individual's wealth at retirement.


  1. This is a very interesting post!

  2. Thanks Dave :)

    Incidentally, Regulation 28 is up for review. A draft proposal of the proposed new Regulation 28 is available at the FSB's website ( and comments from the public are due by April 6.

    [The Actuarial Society of South Africa will be hosting a members' seminar to present and discuss the new Regulation 28 next week Thursday.]

    Because I have devoted some time to reviewing this proposed regulation, I should probably devote a short post on the extent to which government already controls retirement fund investment. Perhaps even a perspective on the new regulation!

  3. Average amount allocated by SA pension funds to SA bonds as at 31 December 2009: 12.68%

    I.e. a 5% minimum investment requirement wouldn't be necessary in the current market environment.

    Alexander Forbes Retirement Fund Survery 2009: