South Africa has an ongoing problem with unclaimed pension benefits, and now there is a tussle between the fund management industry and the National Treasury about how to manage it.
The sheer number of people involved is huge, about 4.3-million, and some of these unclaimed benefits have been sitting there for decades. The problem vests in history: South Africa’s labour history was not designed for elegant pension administration. Mineworkers came from Lesotho, Mozambique and the Eastern Cape, worked for companies that subsequently disappeared or merged, and went home. Records were incomplete, names misspelt, identity numbers absent. Funds closed, administrators changed and people died.
Still, R51bn is an impressive amount of money to misplace. The Treasury is now proposing centralising the administration of unclaimed assets, improving tracing and ultimately moving the money out of existing funds into a central structure. Under the proposal, these assets would be invested through the Reserve Bank’s Corporation for Public Deposits (CPD).
The retirement industry, one presumes, loves this pot of boodle because it earns fees from it, and it just goes on forever. There is also an awkward conflict of interest. Administrators, asset managers, trustees, auditors and tracing agents can continue earning fees from assets while they remain unclaimed. The Financial Sector Conduct Authority itself has pointed to the uncomfortable incentive involved: find the owner and, commercially speaking, the asset disappears.
For the fund management industry as a whole, R51bn is not particularly material; South African retirement assets run into several trillion rand. But for particular managers and administrators with large unclaimed-benefit books, this is useful business.
But the industry does have one legitimate objection: centralising the search for beneficiaries and centralising the investment of their money are two entirely different issues.
There is an excellent case for the first. One national database, linked where legally possible to home affairs and other government records, is obviously preferable to people having to work out which pension fund administered the factory where dad worked in 1984. But why does it follow that the money should then be invested by the CPD?
The CPD is essentially a short-term public sector cash management institution. That is perfectly sensible for money that may be needed next week. An unclaimed pension whose owner has not appeared since PW Botha was president is different.
If much of the money is likely to remain invested for 10, 20 or 30 years, putting it largely into short-term instruments risks sacrificing enormous amounts of compound return.
So here is my genius idea: do something more ambitious. Why not use this as the foundation of a South African sovereign wealth fund? Obviously, there is a problem with that formulation — the R51bn does not belong to the sovereign, it belongs to the 4.3-million people the sovereign is trying to find. But it could create a statutory national investment fund, with the R51bn ring-fenced as a liability to its beneficiaries, independently governed and professionally invested. Beneficiaries would retain their claims. The fund would simply manage the assets collectively and cheaply.
Then — and obviously I am dreaming here — the government could start adding to the fund, and it could start by adding dividends tax. South Africa collects about R46bn a year in dividends tax. Suppose, purely for illustration, that this revenue were paid into the fund each year instead of disappearing into the general budget: it’s only 2.3% of total income. Assume a long-term return of 7% annually, which is hardly heroic; even the Public Investment Corporation manages that.
At 7%, after 25 years the fund would be worth roughly R3.2-trillion. If the portfolio then produced a dividend yield of around 3.6%, close to the JSE’s average over the past decade, it would generate about R115bn a year in current money, without touching the capital.
Now suppose that income were distributed to the poorest 10% of South African adults. Using today’s population simply to illustrate the scale, it would amount to around R2,000 a month per beneficiary; it would effectively be a basic income grant for the poor.
Actually, it would be something better. A conventional basic income grant requires next year’s taxpayers to pay next year’s beneficiaries. Then the exercise begins again. A sovereign fund spends a generation accumulating assets and eventually pays from the income those assets generate.
Obviously, you would have to leave the money alone. The idea collapses if, five years in, somebody discovers R300bn sitting temptingly in an account and decides it would be useful for another state-owned entity rescue or a new National Strategic Development Something or Other.
The fund would require an independent board, statutory protection, transparent accounts, published investment benchmarks and a prohibition on ministers directing investments. And ideally, for the first couple of decades, it would pay out nothing.
One argument against the idea is that South Africa already has an exceptionally good investment opportunity: paying down government debt. If the state can avoid borrowing at 9% by using a spare R46bn to reduce debt, that may be considerably smarter than investing the same R46bn in the hope of earning 7% or 8%.
Norway built a sovereign wealth fund because it had enormous oil surpluses. South Africa has enormous debts. But there is something nevertheless appealing about linking a tax on dividends to the creation of future dividends.
Instead of disappearing into the fiscal soup, some portion of dividends tax would buy assets and provide the investment community with a kind of compensation for what they lose in the process of the government taking over the unpaid pension pot. Those assets would produce income. Eventually that income could be paid to South Africans who own almost no assets themselves.
It would amount to using taxation of capital to create ownership of capital.
Perhaps R51bn of lost pensions is an odd place to begin. But South Africa has begun larger economic experiments for considerably worse reasons.
