Liberate South African public pension from stock market

SA investors’ addiction to equity has come at the price of growing unemployment and income inequality

27 March 2020 by Dominic Brown

Globally, stock markets are reported to have lost more than $13-trillion dollars over the past month. South Africa was not spared. On March 12 and 13 the Johannesburg Stock Exchange (JSE) dropped by 10%, the biggest single fall in the JSE since 1997.

The all share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. index (the largest 164 listed companies on the JSE, accounting for almost the entire market cap and liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. of the market) has fallen by more than Rand 2.3-trillion since February 17, and by R4-trillion since the beginning of the year, a loss of more than 30% of its value.

The savings of poor and working people have been permanently damaged, thanks to the wonders of institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. (private pension and provident funds.)

Unlike many who attribute the economic collapse to the coronavirus itself, Éric Toussaint convincingly points out ( see why the global economy (the South African economy being no different) is built on a petrol-soaked, house of cards and that the outbreak of Covid-19 is therefore not the cause, but merely a spark that caused the inevitable fire that’s burning the house down, this time.

Even though it may seem that the cause of the current financial crisis is the decline in labour supply due to the social-distancing required to slow the spread of the virus, this financial crisis, like the 2008/2009 global financial crisis, and many of the national crises since the 1990s have occurred as a result of increased financialisation of the global economy.

With this, an increased emphasis on investing in equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. with quick and easy returns became the name of the game. This is, in fact, investment in “financial capital”, a form of capital without any links to the real economy and production, which has given us speculative bubbles, which, when they burst, wreak economic havoc.

This is what happened in the 1997 East Asian crisis, the dot com crisis of 2002, and the 2007/2008 financial crisis. Financial speculation absorbs capital, which could have and should have been invested in fixed long-term capital, which can create real value and, consequently, many more jobs.

For the past four decades, investing in financial capital has been very profitable for corporations, more so than in productive or real capital. This incentivised greater and greater levels of investment in financial capital, globally and in South Africa.

It is estimated that since the 1980s the total share of the financial economy has grown four-times the size of the world’s GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. This has resulted in the development of a whole range of exotic financial instruments Financial instruments Financial instruments include financial securities and financial contracts. such as derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). , asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). backed securities, credit default swaps CDS
Credit Default Swaps
Credit Default Swaps are an insurance that a financial company may purchase to protect itself against non payments.
, and so on.

This has given rise to the practice of non-financial companies deriving more of their profits from financial speculation, including many corporations actively buying back their own shares, increasing their share price, instead of using surpluses to invest in their productive capacity. Sometimes, corporations even borrow to purchase their own company shares. This results in the over-value of stock markets (and rising corporate debt), that continue to grow, despite declining productive capacity, growing unemployment and inequality.

The South African stock market is similarly overvalued. A stock market that’s valued at more than 115% to GDP is overvalued according to the Buffett indicator — a measure of the size of a country’s stock market as a percentage of the country’s GDP — named after multi-billionaire Warren Buffett. In December 2019, the JSE was valued at 343%-to-GDP, making it one of the most overvalued stock markets in the world. In spite of the JSEs recent collapse, the Buffett indicator remains extremely high at more than 200% to GDP.

The Public Investment Corporation (PIC) is one of the biggest contributors to the massive overvaluation of the JSE. More than half the Rand 2.1-trillion in assets under the PIC’s management is invested in the JSE. The majority, almost 95% of these assets, belong to the Government Employees Pension Fund Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
(GEPF) (Rand 1813bn) and the Unemployment Insurance Fund (UIF) (Rand 160bn) [1].

Addiction to equity

The high concentration of investment in the JSE is not only overly risky; it also has very little benefits for the 460 000 pensioners and the 1 265 000 workers currently contributing to the GEPF [2]. The fall in the JSE has resulted in the GEPF losing more than Rand 200bn.

An alternative would be for the PIC to redirect that investment to much-needed productive capital aimed at improving people’s lives. This would have meant that much less than Rand 200bn would have been lost as a result of the massive decline of the JSE. While the GEPF pensioners, public-sector workers and the more than 10-million unemployed South Africans enjoy minimal benefits from this investment strategy, they will be the ones who suffer the costs as the bubble bursts.

Besides the massive losses on the stock market, SA investors’ addiction to equity, has come at the price of growing unemployment and income inequality, due to the lack of investment in an industrialising, job-creating strategy coupled with declining real wages. To make up for income shortfalls, many households have become increasingly indebted with household debt estimated to be as high as 70% of gross income.

While the losses of the JSE cannot be reversed, to mitigate these investment risks the GEPF and the UIF should demand that the PIC review its investment policy, reducing the level of investment in equity and redirecting these investments to government bonds. Furthermore, this crash in the JSE and the consequent impact it has on the GEPF underscores the importance of shifting the pension fund back to a pay-as-you-go scheme.

Doing this would mean that significant amounts of accumulated reserves could be liberated for a pro-poor fiscal stimulus, that first seeks to ensure there’s sufficient resources to effectively deal with the pandemic; and secondly, once there is stability, to introduce greater measures aimed at kickstarting the economy.

This would dramatically reduce the level of risk associated with the PIC’s investment and effectively guarantee a return of investment between R15bn to R20bn each year at an average return on investment of 5%. This move would require a change in the Government Employees Pension Law as well as a break from the government’s draconian budget that proposes more than Rand 260bn in cuts (including Rand 160bn to the public-sector wage bill) over the next three years.


[2GEPF Annual Report 2018/2019 downloadable at

Dominic Brown

Dominic Brown is an activist and leads the economic justice programme at the Alternative Information & Development Centre, Cape Town, South Africa .



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