State pension fund revives plan for offshore diversification

First appeared in DM168

The Government Employees’ Pension Fund (GEPF), which manages the pension savings of 1.7 million retired and current public servants, might pose a big risk to South Africa’s economic growth prospects and the JSE.

The local stock exchange not only has to deal with the spate of company delistings and ructions in financial markets caused by the Covid-19 pandemic, but also the GEPF looking to diversify its investments in offshore markets.

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 R1.87-trillion in assets. This review might prompt the GEPF to move some of its assets from the JSE to offshore markets.

Africa’s largest pension fund told DM168 that it has concluded talks with Finance Minister Tito Mboweni, who oversees its governance issues, on the review, paving the way for the GEPF to start making changes to how it invests. It is now up to the GEPF board to determine how it can invest funds in local and offshore assets.

“Therefore, [the] GEPF will over a period begin to align its strategic asset allocation to match its liability profile [risks to its trillion-rand assets].”

The GEPF didn’t elaborate on the exact changes that would be made to its asset allocation strategy – especially when it comes to taking more funds offshore and timelines for this decision.

Small offshore exposure

The GEPF is the largest investor on the JSE, with investments in corporate giants such as MTN, Naspers, Sasol and Shoprite that are managed by the Public Investment Corporation (PIC). The PIC uses the pension savings of public servants to invest in these companies to generate financial returns, helping the GEPF to pay out pension and living benefits to retired public servants and their families.

Since it was founded in 1996, the GEPF has largely invested in SA’s economy through assets including company shares, fixed income instruments (government debt, bonds of state-owned entities and companies) and property.  

Only 10% of the GEPF’s assets is allowed for offshore investments, disadvantaging public servants from exposure to rand hedge returns. By the end of March 2020, the GEPF had an 8% exposure to offshore investments in company shares and bonds – a relatively small amount compared with the allocations of other private sector retirement funds, which can invest up to 30% of their portfolios offshore.

If the GEPF retreats from the JSE to increase its offshore investment allocations – even by 2% – it will spark a major outflow of funds on the local exchange, given the pension fund’s enormous scale. (Its investment in JSE-listed companies is worth R763-billion.)

JSE and SA Inc impact

SA’s perennial poor economic climate, which has eroded investment returns on the JSE, has prompted the GEPF to embrace offshore markets. Over the past five years, the JSE all share index has recorded annualised returns of about 1.7%. The Covid-19 pandemic has worsened JSE returns, which fell by more than 12% in March alone, but have since recovered, as returns are down 0.3% so far this year.

Underscoring the impact of Covid-19 on financial markets is that the GEPF saw the value of its assets fall by R243-billion to R1.64-trillion at the end of March 2020. The subsequent recovery of markets saw the GEPF’s asset value increase to R1.89-trillion by June.

The government’s proposal of a three-year wage freeze for public servants and possible workforce reductions to reduce the wage bill might push the GEPF to expedite its offshore diversification. The GEPF said it saw the wage freeze and possible workforce reductions as a risk; it means fewer public servants would make monthly contributions to its pension scheme and put pressure on it to pay out early pension claims to future jobless public servants.

It is already facing a bit of pressure because, since 2013, the value of pension payouts to public servants (running into billions of rands) has exceeded the inflow of contributions into the GEPF. DM168/BM