CAPE TOWN - South African pension plans have been given the green light to begin investing offshore again after international investment was effectively stopped two years ago.
But an immediate rush of funds into international mandates isn't likely, local observers said.
South African pension plans are allowed to put 15% of total assets in non-domestic investments. Up until two years ago, they could only do so through an asset swap, in which the South African institutional had to match its international investments with an investment in South African markets by an offshore institution.
Two years ago, Finance Minister Trevor Manuel abolished the asset swap rule, but mandated only 10% of the previous year's net inflows to a fund could be invested internationally, (Pensions & Investments, March 5, 2001). That restriction was lifted in February.
About that limit
Although most pension plans already have reached their offshore investment limits, Giselle Gould, executive director of the South African Institute of Retirement Funds, estimated around 9 billion rand ($1.1 billion) still could be invested internationally by local pension plans.
And that figure could rocket to as much as 50 billion rand if the country's largest pension plan - the 280 billion rand Government Employees Pension Fund, Pretoria - were to decide to invest offshore.
But Ms. Gould warns that the Reserve Bank, the country's central bank, which monitors institutional fund flows - and must approve funds' offshore investment plans, might decide to strictly enforce the regulation and could require plans with international investments higher than the 15% ceiling to repatriate any excess money.
The situation will only become clear in May, when the Reserve Bank is expected to publish guidelines on how it will implement the investment rules.
Kevin Lings, group economist for Stanlib Asset Management, Johannesburg, said the Reserve Bank might decide to stagger offshore investment flows in order to limit the impact they might have on the value of the rand. "The Reserve Bank will want to closely monitor this, and they won't want a knock on the currency," he said.
Pension plans and their money managers can start applying to the Reserve Bank in May for approval.
This may not be the time
A handful of large public sector pension plans - including the GEPF and the pension plan for employees of Transnet, the state-owned transport group - have yet to invest offshore to the 15% limit.
But now might not be the time to invest offshore, said Lumkile Mondi, a trustee of the Transnet pension plan, Johannesburg. The recent performance of the South African market, along with concerns that the war in Iraq will slow economic growth in both the United States and United Kingdom, do not make a compelling case for increasing international exposure, he said.
"From the investment point of view, it does not make sense to invest internationally in the short to medium term. Perhaps in three years the situation may be different," he added.
As yet, trustees of the 35 billion rand Transnet fund have not discussed the implications of the change to South Africa's offshore investment rules. The fund has just less than 10% of total assets invested internationally.
A number of large pension plans are known to have exceeded the 15% limit because of strong investment returns during the late 1990s, said Antony Lester, managing director, Fifth Quadrant Actuaries and Consultants Ltd., Cape Town.
And instead of sending more money offshore, many of these plans are busy reviewing their current international managers, according to local money managers.
Thabo Khojane, director, Investec Asset Management, Cape Town, said many plans were conducting fundamental reassessments of what their offshore strategies should be. In the past, many plans had favored putting assets with firms offering a manager-of-managers arrangement, but some pension plans had decided to take a more specialist approach to selecting managers, he said.
Considering a specialist
Trustees of the 4 billion rand Cape Municipal Pension Fund, Cape Town, are deciding whether to continue using manager-of-managers SEI Investments, Johannesburg, to run the plan's 72 million rand international bond and equity exposure.
The fund appointed SEI in 2000 when it first invested offshore, but is now considering using specialist money managers for this portfolio, said Junaid Ehrenreich, acting principal officer for the fund. The manager-of-managers approach was appropriate for the fund's first attempt to invest offshore, he added.
A decision is due at the end of the month.
Toy Otto, principal officer for the 2.5 billion rand Murray and Roberts Retirement Fund, Johannesburg, thinks his fund will not be forced to repatriate its excess international assets. Even though the fund invested 15% of total assets in international investments in the mid-1990s, the allocation now represents almost 20% of plan assets.