SA pension funds’ greatest opportunity: maximising retirement wealth and leading the South African economic landscape transformation

by Ben Kodisang | 28,Feb,2024 | ALT Capital Partners, Articles, Q1 2024, Special Feature

Imagine a South Africa where income inequality has diminished, unemployment rates have dropped and poverty levels have decreased considerably. More South African businesses have allocated capital strategically and the ripple effect has extended to job seekers, entrepreneurs and the broader social fabric. This South Africa promises not just financial growth and stability for those who have worked their whole lives to afford to retire but has also acted as a catalyst for socio economic equality, creating a sustainable economy that truly thrives.

Reality check

Sadly, South Africa currently faces profound challenges. We’re grappling with the highest levels of income inequality, staggering youth unemployment rates, pervasive poverty and only 6% of South Africans on track to retire comfortably. Of the approximately 51% with retirement plans in place, 61% cannot make ends meet (Sanlam Benchmark Survey, 2020). With the rising cost of living, the number of those unable to retire comfortably is predicted to increase significantly, leaving most South Africans working for the rest of their lives.

Opportunities in private markets

Traditionally, retirement funds in South Africa have navigated the financial landscape through conventional investment avenues. However, we cannot grow and affect change by doing what has already been done. We must embrace new strategies. According to an article by the World Economic Forum (2022), studies conducted in Denmark show pension fund investments in unlisted businesses positively impact productivity and innovation. Seeing the positive results in private companies focusing on long term investment suggests that diversifying into private markets contributes to enhanced risk adjusted returns for pension funds.

Are private market and infrastructure investment the way forward?

A paradigm shift is underway as institutions explore private market and infrastructure opportunities. Despite concerns, the untapped potential should not be ignored. Private markets and infrastructure as an asset class has grown significantly in scope over the years and now includes private equity, venture capital, private credit, unlisted commercial property (retail, industrial and offices), economic infrastructure (energy, water, transport, logistics and telecommunication), social infrastructure (student accommodation, affordable housing, hospitals and retirement villages) as well as agri-investments.

Overcoming challenges

 Unfortunately, due to outdated perceptions, a broad range of private market options that requires specialised knowledge and missed opportunities in educating trustees hinder the realisation of private market potential. The concerns around illiquidity and pricing uncertainty can be mitigated through strategic planning and prudent fund management and private market investments, with their long investment horizons, offer an effective counterbalance to the short term volatility often experienced in public markets. Addressing the risk of corruption and greenwashing requires a commitment to due diligence within the industry. By engaging in thorough research and partnering with reputable businesses, retirement funds can align their investments with ethical and sustainable practices, ensuring positive returns without compromising integrity and preventing the growth of “construction mafia” practices.

Advantages of private market investment

Diversification is a primary reason to consider private markets, offering the breadth lacking in traditional investments. Diversifying into private equity, venture capital and real assets not only mitigates risk but also opens the door to potentially higher long term returns. With lower correlation to public markets, private markets act as a hedge against volatility. A SAVCA report (referenced in the Journal of Economic and Financial Sciences (vol 14, no1 (2021)) shows that, on average, the returns from private equity were 7% higher than investments made in public markets over a 10-year period ending 2018. This is due to several factors, including the ability to invest in companies with high growth potential. Trustees and consultants also have greater control over their investments, choosing the companies they invest in and have a say in how those companies are managed. This level of influence is impossible with public market investments.

The advantages of infrastructure investment

While infrastructure assets may seem less attractive due to illiquidity, they provide a hedge against inflation and with the long term investment, offer the potential for higher, more predictable and stable returns than their liquid counterparts. Additionally, these investments have a positive social impact by providing essential services to communities, such as renewable energy infrastructure, whilst contributing to carbon reduction and combating climate change, provides much needed consistent energy supply to the South African grid.

 

Alignment with NDP

To propel the nation forward, economic reforms are imperative, focusing on GDP growth through job creation. The National Development Plan (NDP) has set ambitious targets, aiming for 30% of GDP to be invested in infrastructure by 2030. However, the current trajectory falls short, with public and private sector investments below the NDP targets, hindering the nation’s growth and development. The cost of delivering infrastructure to meet the NDP development objective is estimated to exceed R6 trillion between 2016 and 2040, with energy and transport accounting for 72% of this spend.

Investing in private markets and infrastructure projects aligns seamlessly with the NDP. Directing retirement funds towards infrastructure development not only yields financial returns, but pension managers also contribute significantly to nation building and create a positive tangible impact on local communities by creating job opportunities (every billion rand invested in infrastructure can generate thousands of jobs according to the National Treasury) and fostering social development.

Building a brighter future

 As a member of an investment firm committed to fostering prosperity with purpose, I see tangible changes achievable through private market and infrastructure investments. The advantages are compelling: private market investments offer higher returns suitable for long term investors like retirement funds. Unlisted assets provide uncorrelated, real long term returns, enhancing portfolio risk and return profiles. Infrastructure and real asset investments, backed by contractual off-take arrangements, deliver reliable and growing income streams. Private markets align with environmental, social and governance (ESG) goals, offering easier monitoring of ESG implications. Infrastructure investments boast long term inflation linked returns, providing resilience in volatile economic climates.

Consultants and trustees play a pivotal role in navigating these opportunities. With careful due diligence, governance improvements and strategic partnerships, retirement funds can contribute to the South African turnaround. Benefitting retirees and advancing the nation. As we embrace the challenges, we pave the way for a brighter, more prosperous future.

Ben Kodisang
Founder and CEO at ALT Capital Partners | + posts