PRETORIA, South Africa -- Restructuring at South Africa's largest pension plan could put 24.1 billion rand ($3.6 billion) up for grabs by international money managers.
In May, National Benefit Consultants actuaries completed an asset-liability study that proposed revamping the Government Employees Pension Fund's investments, according to sources close to government.
The 161 billion rand defined benefit plan's mandates are highly sought after, said Neil Cochrane chief executive officer for Nedcor Investment Bank Asset Management, Cape Town.
Only 1% of the fund's assets now are invested outside South Africa, said Neil Maree, portfolio manager for the Public Investment Commissioners, which is responsible for managing the GEPF's investments. Local regulations allow domestic institutions to put up to 15% of their assets in non-domestic securities.
Mr. Maree would not comment on the most recent asset-liability study, but said it is possible there would be an increase in equity investments and non-domestic securities in order to diversify the scheme's investment strategy.
Industry sources said they expect to see the fund sharply increase its holdings of domestic equities to around 60%. At the end of March, domestic equities accounted for 46 billion rand, or 28.5% of the plan.
The scheme is heavily exposed to domestic bonds, which accounted for about 57% of the assets, or 92.3 billion rand at the end of March. The bond portfolio is run in-house by the Public Investment Commissioners.
If domestic equities are increased, the proportion of bonds will fall. Observers speculated bonds could go as low as 30% of assets, but officials at the fund and National Benefit Consultants would not comment.
"Bonds are not necessarily a bad thing to invest in. Pension funds should not be aggressive in their investments, they are a long-term business," said Peet Maritz, chief director of the GEPF.
The fund is now busy increasing its equity exposure to 35% of assets in line with the existing asset allocation strategy, which was adopted in 1996, Mr. Maree said.
The scheme was not allowed to invest in equities until 1996, when it was restructured to incorporate employees who had been excluded from participating under the old apartheid regime. Before its restructuring, the government pension fund was one of the biggest sources of finance for the South African government.
"I would be very surprised if there was not a recommendation saying there should be further diversification of the investments," said Francois Le Roux, deputy director-general in the department of finance.
He would not comment on the possibility of increasing international holdings. Increasing offshore investments is something of a political hot potato among South Africa's unionized labor force, which would prefer to see the assets invested locally.
Mr. Le Roux said the recommendations of the asset-liability study still have to be debated and have not yet been released. Sources said it could take at least a year before the recommendations are implemented.
The size of the fund means that a restructuring would have to take place gradually to prevent distortions in the market. Future equity increases likely will be funded from existing cash flows, rather than by unwinding bond holdings. Annual cash flows from investment returns and contributions are between 20 million rand and 25 million rand, Mr. Maree said. And a restructuring of the current governance of the fund also would be necessary.
The fund has only one trustee, Trevor Manuel, the minister of finance. But South African pension plans must have 50% of each trustee board made up of employee representatives. In the case of the GEPF, employees can appoint six trustees, but the various public sector unions representing plan members have not agreed who will sit on the board.
Until they appoint employee representatives, the trustee board cannot be convened.
The fund's current non-domestic managers are: Prudential-Bache International, Amsterdam; Insinger Asset Management N.V., Amsterdam; and Credit Suisse First Boston Corp., London.
These positions are held as asset swaps that match offshore investments by domestic institutions with local investments by international institutions. Considered to be expensive and laborious, asset swaps are the only vehicle local institutions can use now to invest offshore.
Domestic equities were outsourced to: Old Mutual Asset Managers, Gensec Asset Management and Futuregrowth Asset Management, all of Cape Town; and RMB Asset Management (Pty.) Ltd. and Liberty Asset Management, both of Johannesburg.
Each manager runs an active equity mandate of 10 billion rand in line with the same benchmark, which is made up of a combination of the Johannesburg Stock Exchange All Share index and the JSE Financial and Industrial index weighted 70% and 30%, respectively.
The rest of the fund is invested in property, which accounts for 0.5% of the fund assets, and short-term cash, 14%. Structured investment products, private equity and guaranteed funds make up the balance of the fund.