Intellidex makes recommendations on the future of the Public Investment Corporation to the PIC Inquiry

PRESS RELEASE 3 September 2019

Intellidex has drawn up a report on the future of the Public Investment Corporation to assist the PIC Inquiry in its deliberations on the public sector fund manager.

In it, we argue that the PIC must serve both the interests of the members of pension funds that it manages as well as the public at large. We argue that these objectives are in tension: pension fund members are best served by maximising financial returns within an appropriate risk framework, but the public is best served by prioritising public interest at the expense of financial returns if necessary.

The public’s right to be considered by the PIC in its investment strategy is earned because the public underwrites the risk of the government employees’ pension fund and incurs a cost in funding pension fund liabilities up front. The Government Employees’ Pension Fund (GEPF) is a defined benefit scheme, therefore members are not exposed to the investment performance of the fund. From a national point of view, obligations to civil servant pensioners are one of the government’s liabilities, among many. This liability is treated differently, however, by setting aside savings for it up front. This need not be the case: other public sector pensions around the world (and indeed, South Africa’s old age grant) are paid out of current revenues. The special treatment of pension fund liabilities is appropriate because it provides for financial discipline in that benefits have to be costed up front, and provides a notional benefit to pension fund members in limiting bankruptcy risk. However, in covering this liability, the public incurs a cost in not funding more urgent priorities and in accepting investment market risk.

In return for these costs, the PIC’s investment mandate should include social impact objectives to compensate the public. Such objectives may include black economic empowerment, climate change mitigation, job creation, industrial development, infrastructure and so on, the achievement of which would deliver public benefits that are not captured in the financial returns to the fund.

This point, however, does not mean that anything other than world class investment decision making and investment monitoring should take place at the PIC. There are several examples of public sector funds around the world that apply excellent practices that the PIC can emulate. In this regard we call for:

  • Radical transparency regarding the PIC’s investment portfolios and returns
  • A board that is mandated to pursue investment and social returns in the public interest, but to do so independently of government
  • A separate and independent investment decision-making process
  • Policies should be formulated and made explicit for ESG and impact investing and evaluated by external professionals
  • Full disclosure must be made on internal costs too

Full details are provided in our report, which can be downloaded here.