NBFIRA stirs up hornet's nest with pension funds

MBONGENI MGUNI
Staff Writer | Friday November 5, 2010 00:00

 

In a move that potentially involves P23.5 billion, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) has stirred up a hornet's nest in proposals that will require pension funds to return and invest home offshore assets by 2030.

The proposals entail amending the Pensions and Provident Act to require a maximum of 70 percent of pension fund assets to be invested locally and the balance offshore by 2030. At present, the Act requires fund managers to invest a maximum of 30 percent of their pension fund portfolios domestically and the balance offshore.

While pension funds and their asset managers are crying foul over the move, NBFIRA hopes that by early next year, it will have secured the necessary board, ministerial and parliamentary approval to begin increasing the local percentage for pension funds by 10 percent every five years.

According to NBFIRA's plans, between 2010 and 2030, fund managers will be required to gradually increase the local component of pension funds, achieving the 70 percent by 2030.

This week, NBFIRA executives explained that the legislative changes were borne out of several concerns for the current state of the pension fund industry, which by August 2010 held P33.6 billion in assets. They added that players in the pension fund industry had been consulted during the formative stages of the proposals and would continue being involved.

'In the provident rules, we have suggested changes to the 30/70 rule, and this is a controversial topic,' said NBFIRA Insurance and Pensions Director, Marcelina Gaoses.

'We put our proposal to the industry, received very good feedback and even extended the deadline for responses to September 30. The feedback and proposals are with NBFIRA for consideration, and if there are other issues, we will discuss this with the industry next year.'

Gaoses, who was speaking at a Botswana Pension Fund conference on Wednesday, said the chief reason behind the changes was to 'better protect pension fund members' because details of offshore investments were sketchy.

'The major reason we are proposing these new limits is for better protection of investments,' he said. 'We cannot even say exactly where pension funds' offshore equity investments are, yet these account for 46 percent of all assets. Some of these equities could be in economies that have failed or are failing. How can we better protect the members' investments?' Other reasons include savings on the costs associated with investments, contribution by pension fund assets to capital market development, greater liquidity and the funds' contribution towards local and regional economic growth. The latter, NBFIRA believes, will be through private equity, venture capital projects and borrowings.

'One aim is to help the government,' said Gaoses. 'In terms of job creation, if you don't invest where you are, how are you helping Government create jobs? You want foreign direct investment, but you take money out and invest in countries where this foreign direct investment is coming from!'

Wary of criticism about the proposals, Gaoses said fund managers would have to be innovative in identifying domestic investment vehicles and opportunities for returns.

'We need to start investing in our own economies,' he said. 'The problem is us shying away and being afraid of being innovative and funding vehicles we can invest in. Some are saying where will this money go. But there are ways to do it; we must find these innovative ways to invest.'

Pension fund players blasted the proposals, saying the asset vehicles and opportunities available in the domestic market were simply incapable of providing satisfactory returns to pension fund members.

Others questioned why the proposals did not include allocation for investment in SADC when NBFIRA said the changes were to benefit local and regional development. Primarily, the P33.6 billion in pension fund assets is invested in equities, currencies, bonds and property.

The Managing Director of Coronation Fund Managers, Kumbulani Munamati, said the proposals were fraught with challenges. 'The biggest problem is the investment opportunities that are out there,' Munamati said. 'The pension funds are P33 billion and the free float on the stock exchange is P12 billion, the rest being in the hands of listed companies.

'As for bonds, government policy is to borrow locally to about 20 percent of GDP. This is presently about P20 billion, of which P6 billion has already been borrowed. Only P15 billion is available for government borrowing, and this is also influenced by government cash flow. The government could actually borrow quite less than that.'He questioned the wisdom of pension funds investing in infrastructure and other development-oriented projects, saying this was not within the mandate bestowed on them by trustees and members.

'All these pension funds are defined contribution and the members' rights to returns must be taken into account,' Munamati continued. 'Defined benefits at least are guaranteed by the government, but the ones in Botswana are not.

'Infrastructure and other development investment also have liquidity issues. You need to be able to gauge the value of the investment at every point, such as on the stock exchange, and you also need to be able to exit quickly.

'In addition, who is responsible for coming up with the investment strategy for infrastructure development? Is it the government, fund managers or the trustees? I agree with the concept that we must increase the levels of capital coming back to Botswana. But how do we do this? How soon and who is responsible for creating the opportunities?'

Gaoses said the proposals were 'not cast in stone' but were guidelines for what NBFIRA believes should be the adequate levels of exposure for pension funds. She said the fledgling agency is benchmarking with regional and international institutions in developing various market regulations and guidelines.