Blue Chip Issue 96

BLUECHIPFINANCIAL

BLUECHIPFINANCIAL PLANNING | Retirementmechanisms to ensure that robust PPP legislation is properlyinterpreted and implemented contributes to the inconsistency.There is often a gap between legislation and its practicalapplication, leading to a variety of partnerships that may notconform strictly to legal requirements.Infrastructure investmentsoften come with significant risks.Accountability issues. There are also concerns regardingaccountability and oversight in the implementation of PPPs.The absence of external auditing and limited publicconsultation can exacerbate the challenges posed byconflicting legislation, making it difficult to ensure complianceand transparency.Overall, South Africa’s legislative landscape is markedby conflicts and inconsistencies that can hinder effectivegovernance and the successful implementation of public-privatepartnerships. Addressing these issues requires a concertedeffort to harmonise legislation, improve clarity in regulatoryframeworks and enhance accountability mechanisms.Infrastructure specificThere is a notable conflict between legislation governingpension funds and infrastructure investment in South Africa,primarily due to the complexities surrounding Regulation 28of the Pension Funds Act and its implications for infrastructureinvestments. The key points of conflict are:Investment limits. The January 2023 amendments toRegulation 28 allow retirement funds to invest up to 45% oftheir assets in infrastructure projects. While this is a significantincrease aimed at promoting infrastructure investment, it alsoplaces the onus on trustees to ensure that these investmentsalign with their funds’ objectives and risk profiles. The regulationaims to protect members from excessive concentration inilliquid assets, which can create tension between the desirefor higher returns through infrastructure and the need forliquidity and risk management.Definition of infrastructure. “Infrastructure” has evolvedthrough the amendments but still poses challenges.Initially, the definition was limited to projects within theNational Infrastructure Plan, excluding private sectorand offshore investments. The updated definition nowencompasses a broader range of assets, but the complexityof identifying suitable infrastructure projects that meetregulatory criteria remains a challenge for asset managers.Administrative burdens. The new regulations introduceadditional reporting requirements for pension funds regardingtheir infrastructure investments. This includes classifying allinfrastructure investments and ensuring compliance with thenew definitions. The increased administrative burden can deterpension funds from engaging in infrastructure investments,as they may lack the necessary expertise or resources tonavigate the complexities of these new requirements.Risk management concerns. Infrastructure investmentsoften come with significant risks, including project delays,cost overruns and regulatory changes. Trustees are required tobalance the potential for stable, long-term returns againstthe inherent risks of infrastructure projects. This balancing actcan lead to hesitancy in committing to infrastructureinvestments, particularly if the regulatory frameworkdoes not provide adequate guidance on risk assessmentand management.Structure of trustee meetings and decision-making. Mostfund trustee boards or investment committees meetquarterly. When asset managers source funding, the decisionmakingprocess of trustees is lengthy. Frequently, by thetime the decision is made, the required funding has beensourced elsewhere or the opportunity has dissipated. Thiscan be resolved by funds investing into multi-managed/fund-of-funds structures or products, but it needs to fit into theoperating methodology and philosophy of the fund.Complexity of investing in private markets. Infrastructureinvestments are far more complex for trustees to understandthan listed investments such as equities and bonds thattrustees are familiar with. There are not only investmentmatters that need to be understood, but also complex legalmatters relating to partnerships and private equity-typestructures. Infrastructure investments will also frequentlyexperience a “J” curve, and trustees grapple with thefairness of members experiencing the initial decline of the“J” and not necessarily experiencing the growth thereafterdue to their retirement or withdrawing from the fund. Thelifestage structure addresses some of these concerns – such asonly investing accumulation phase portfolio assets intoilliquid infrastructure.There is a notable conflictbetween legislation governingpension funds and infrastructureinvestment in South Africa.However, the existence of savings and retirement pots underthe Two-Pot System creates further complexity. It will bechallenging to invest illiquid investments in the savingspot. To prevent this from happening, one therefore needsdifferent investment strategies between the retirement pot(where illiquid investments belong) and savings pots (whereilliquid investments could be problematic). This is a complexmatter. The above can lead to trustees not having the appetite topursue such investments.54 www.bluechipdigital.co.za

Summary and possible way forwardEvidence and experience indicate that the retirement fundindustry is not lacking in interest when it comes to investingin infrastructure. However, the reality is that these investmentsare challenging to source, package and even more difficultfor trustees to commit to. By nature, infrastructureinvestments are complex, and many trustees feelunderprepared to commit their funds and members to theselong-term investments.Identifying suitableinfrastructure projects that meetregulatory criteria remains achallenge for asset managers.An increase in infrastructure exposure within multi-managerportfolios is likely (where expert managers make investmentdecisions), reducing the decision-making burden on trustees.However, these managers must also remain mindful of theirclients’ liquidity needs, especially in light of the recentintroduction of the Two-Pot System. The challenge ofmanaging illiquid investments within a savings pot willneed to be addressed. Over time, as we better understandmembers’ withdrawal behaviour, this concern may diminish.Alternatively, it may require separate investment strategiesfor savings and retirement pots. However, we must considerwhether we want to add further complexity to an alreadyintricate environment.Regardless of the complexities, South Africa is at a pointwhere infrastructure projects urgently need funding. It isincumbent upon us in the retirement fund industry to facilitateinvestment into viable, bankable projects. With thanks to Mike Adsetts (Momentum Investments) for sharinghis source documents from hispresentation to the IRFA, 2024.[1] We refer specifically to “bankable”projects that yield appropriate riskadjusted returns. Regulation 28states that a fund has “a fiduciaryduty to act in the best interest of itsmembers whose benefits depend onthe responsible management of fundassets. This duty supports the adoptionof a responsible investment approachto deploying capital into markets thatwill earn adequate risk adjusted returnssuitable for the fund’s specific memberprofile, liquidity needs and liabilities”.