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South Africa’s state pension fund reluctant to use new powers to boost offshore investments

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The Government Employees Pension Fund can increase a portion of its R2-trillion assets into offshore-based asset classes such as company shares and bonds. It refuses to do so, saying it is backing SA’s economy. But not all its investments in the domestic economy have worked out.

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The Government Employees’ Pension Fund (GEPF), which is responsible for the pension savings of 1.2 million public servants, has new powers to shift more of its investments from SA into offshore markets to generate rand-hedge returns, but it is not yet prepared to do so. 

Africa’s largest pension fund firmly believes in SA’s economy and investment opportunities, saying it still generates decent returns from the country and any moves to offshore markets would have to be carefully considered.  

The GEPF has revived a long-standing plan to reduce its dependency on the SA economy and the JSE for financial returns by reviewing its asset allocation strategy, which mandates the way it invests its assets worth R2-trillion.

The GEPF is the biggest investor on the JSE, and if it shifts more investments into offshore markets — even by 2% — it would spark a major outflow of funds from the local exchange, given the pension fund’s enormous scale. It would cause more disruptions at the JSE at a time when it faces a smaller universe of companies that have the appetite to list on the exchange.  

Musa Mabesa, the GEPF’s boss, said the pension fund had concluded discussions with the National Treasury about making changes to its investment mandate, the first step in making more investments into offshore markets possible. But the GEPF board is still in talks with the Public Investment Corporation (PIC) about whether this is necessary and how to effect more allocations into foreign-asset classes such as company shares, fixed income instruments (government debt, bonds of state-owned entities and companies) and property. The PIC manages the GEPF’s investments.  

There are already changes in the GEPF’s investment mandate as its allowable exposure to investments outside SA has been increased from 10% of the pension fund’s assets to 15%. This increased threshold is relatively small compared with the allocations of other private-sector pension funds, which can invest up to 30% of their portfolios into offshore markets. 

But the GEPF is still conservative in its offshore investment approach as it is not even taking advantage of the 15% allowable threshold. The GEPF’s offshore investment portfolio (mainly foreign and rest-of-Africa shares, and bonds) made up about 8% of its total assets, according to the pension fund’s 2020/21 annual report. 

See the GEPF’s actual allocations into local and foreign asset classes, and allowable threshold into the asset classes:

© Provided by Daily Maverick Source: GEPF 2020/21 annual report.

 Since it was founded in 1996, the GEPF has largely invested in SA’s economy, opting to invest a large portion of its assets (54% — see graphic above) into JSE shares including Naspers, MTN, Vodacom, FirstRand, Sasol, and many others.  

“The extent of the GEPF’s influence on the SA economy is huge. If we were to move the bulk of investments out of SA, it would have a devastating impact on the economy because of the sheer size of the GEPF. We are sensitively managing how we go about this transition,” Mabesa said in a briefing with journalists about the pension fund’s annual report. 

The bias towards SA [in terms of its investments in the country] has worked well for us. Our results are a testament to this.” 

The local equity (or shares) market, as measured by the JSE all-share index, generated annual returns of 48.4% for the GEPF’s investment portfolio during its financial year ending 31 March 2021. Although it has generated positive returns in SA, not all companies that the GEPF is invested in —  through loans extended — worked in its favour.  

Entities associated with politically connected individuals, including Iqbal Survé and others, were again responsible for impairments in the GEPF’s investment portfolio, resulting in billions of rands being written off. Investments into these entities have soured because they are financially distressed and cannot pay back loans extended by the PIC on behalf of the GEPF.

The GEPF wrote off bad loans to more than 30 entities totalling R7.4-billion during its 2021 financial year, down from R11.9-billion in 2020. The GEPF’s impairments made up 15% of its total loan book of R49.7-billion.  

The biggest write-off is a loan linked to the Land Bank (a state-owned lender that has defaulted on debt payments), with the GEPF writing off R3.5-billion. Other big loan write-offs include Independent News and Media SA (linked to Survé), amounting to a further R187.8-million (R112.5-million in 2020); Belelani Capital (write-off of R1.2-billion); S&S Refinery (R133.7-million); and Smile Telecoms (R122-million).  

Asked how the GEPF plans to reduce the level of “concerning” impairments, Mabesa said: “We have urged the PIC to get involved in the investee companies themselves and try and understand the root cause of challenges that lead to impairments and see how they can be assisted with a turnaround plan.” DM/BM