Pension funds should support developmental investments

16th April 2010 By: Seeraj Mohamed

Economic Development Minister Ebrahim Patel recently told Parliament that government would draw on pension fund investments to support economic development projects.

He referred to a Growth Summit resolution of 2003 for 5% of investable funds to be invested in development projects. He also mentioned that he would work with the Treasury to direct funds from the Public Investment Corporation towards development projects.

Patel’s plans have been criticised in the media as irresponsible. His critics have said that tapping funds from pension savings would detrimentally affect South Africa’s financial stability and economic growth. They argue that government would force people to invest in low-yielding investments, which is tantamount to an additional tax on people saving in pension funds. My view is that we should be glad that government is going to direct some of our pension funds towards developmental aims. As people who save in pension funds, we should be aware that the potential benefits of these investments may far outweigh the costs.

From 2003 to 2007, there was increased investment in the South African economy. However, there is broad agreement that much of the investment was driven by the rapid growth in debt-driven consumption and financial and real-estate speculation. Investments went towards economic sectors associated with increased speculation and consumption, such as retail, transport and storage, the financial sector and construction. However, economic growth based on consumption and speculation that does not build and diversify the productive sectors and create sustainable jobs is economically unsustainable.

There is a need to shift the economy onto a more sustainable economic growth path. This shift requires a reallocation of finance from debt for consumption and short-term returns earned in financial and real estate speculation. Financial institutions, including pension funds, do not seem to be able to make this shift. This process of shifting the economic growth path should be a project undertaken by government and the private sector.

An effective way to begin this process is through directing a part of our pension savings towards State developmental projects. Finance has to be directed towards long-term investment in productive activities and required infrastructure with more stable, if lower, rates of return.

Pension funds in South Africa had relatively volatile rates of return over the past decade because of the speculative trends in the economy that caused bubbles and declines in financial markets. A shift towards a long-term perspective where our pensions are directed towards investments that will have solid long-term returns because they support the sustainability of the economy is important.

My view is that it should not be just 5% of pension fund investment directed towards development. Pension fund managers should change their mindsets and short-term perspectives towards thinking about long-term economic growth and sustainability in the South African economy. They should be investing our retirement savings in a way that promotes a new, sustainable economic growth path for the economy. They should not be supporting bubbles and crashes that increase our social and economic hardships.

My support for Patel’s policy is based on my belief that investing a small share of retirement fund money in developmental projects has potentially large benefits for society. Using parts of their funds to shift to the new growth path has long-term benefits for their investors and society as a whole. Further, the additional investments in developmental projects, such as infrastructure, would potentially have broad societal benefits that would outweigh the relatively minor costs of the possibly reduced return on investment for the people putting their money into pension funds.

The economic benefits to society and individuals of improved roads, better health and education and skills, less poverty and crime, and less social tensions are something we should all be willing to invest in.