The South African state pension fund is reluctant to use …

The Government Employees’ Pension Fund (GEPF), which is responsible for the retirement savings of 1.2 million civil servants, has new powers to shift more of its SA investments to offshore markets in order to generate hedge returns, but it’s not yet ready to do that.

Africa’s largest pension fund is a firm believer in South Africa’s economy and investment opportunities, saying it always generates decent returns from the country and any move to offshore markets should be carefully considered. examined.

GEPF has relaunched a long-standing plan to reduce its reliance on the South African economy and the JSE for financial returns by revising its asset allocation strategy, which prescribes how it invests its assets worth 2 trillion rand.

GEPF is the biggest investor in JSE, and if it moved more investment to offshore markets – even by 2% – it would trigger a large outflow from the local stock exchange, given the huge scale of the fund. pension. This would cause more disruption to JSE at a time when it faces a smaller universe of companies eager to go public.

Musa Mabesa, the boss of GEPF, said the pension fund has entered into discussions with the National Treasury on changing its investment mandate, the first step to allowing more investment in offshore markets. But the GEPF board of directors is still in talks with the Public Investment Corporation (PIC) on whether this is necessary and how to make more allocations in foreign asset classes such as company shares, financial instruments. fixed income (public debt, bonds of public entities and companies) and real estate. The PIC manages the investments of the GEPF.

There are already changes in GEPF’s investment mandate as its eligible exposure investments outside SA was increased from 10% of the assets of the pension fund to 15%. This raised threshold is relatively low compared to the allocations of other private sector pension funds, which may invest up to 30% of their portfolios in offshore markets.

But the GEPF remains cautious in its approach to offshore investment because it does not even benefit from the authorized threshold of 15%. GEPF’s offshore investment portfolio (mainly foreign and rest of Africa equities, and bonds) accounted for around 8% of its total assets, according to the pension fund’s 2020/21 annual report.

See the actual GEPF allocations in local and foreign asset classes, and the admissible threshold in asset classes:

Source: GEPF 2020/21 annual report.

Since its creation in 1996, GEPF has invested heavily in the economy of South Africa, choosing to invest a large part of its assets (54% – see graph above) in JSE stocks, notably Naspers, MTN, Vodacom, FirstRand, Sasol and many more. .

“The extent of GEPF’s influence on the South African economy is enormous. If we were to withdraw the bulk of investment from South Africa, it would have a devastating impact on the economy due to the size of the GEPF. We are sensitive to the way we make this transition ”, Mabesa said during a briefing with reporters on the pension fund’s annual report.

The bias in favor of SA [in terms of its investments in the country] worked well for us. Our results bear witness to this. ”

The local equity (or equity) market, as measured by the JSE All Equity Index, generated annual returns of 48.4% for the GEPF investment portfolio during its fiscal year ended March 31, 2021. Although it has generated positive returns in South Africa, all the companies in which GEPF is invested – through loans granted – have worked in its favor.

Entities associated with politically related individuals, including Iqbal Survé and others, were once again responsible for write-downs of GEPF’s investment portfolio, resulting in the write-off of billions of rand. Investments in these entities have deteriorated because they are in financial difficulty and cannot repay loans granted by the PIC on behalf of GEPF.

GEPF wrote off bad debts on more than 30 entities totaling R 7.4 billion in its 2021 fiscal year, up from R 11.9 billion in 2020. GEPF’s write-downs accounted for 15% of its total portfolio. of loans of 49.7-R. billion.

The the biggest cancellation is a loan linked to the Land Bank (a state-owned lender that has defaulted on its debt), with GEPF canceling R3.5 billion. Other major loan cancellations include Independent News and Media SA (linked to Survé), amounting to an additional 187.8 million rand (112.5 million rand in 2020); Belelani Capital (depreciation of 1.2 billion rand); S&S Refinery (R133.7 million); and Smile Telecoms (122 million rand).

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

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