Caution urged as pension fund overhaul nears

Paul Masie
Paul Masie

Financial markets veteran, Paul Masie, says the impending overhaul of the pension fund investment regime needs to be managed carefully.

This, he said, is to ensure that returns to members do not fall while capital lies idle due to a lack of investment vehicles.

Supervised by the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), Pension Fund Rule 2 or PFR 2 at the moment requires pension funds to invest at least 30% of their assets locally. Under changes to the Retirement Funds Act passed by Parliament last year, local pension funds will soon be required to invest a minimum of 50% domestically. By Wednesday, that figure meant the return of P14.5 billion in pensioners’ assets back home from offshore markets. By January, 38.2% of pension funds, which amounted to about P123 billion, were invested locally.

Government has said the transition will be done on an incremental basis and take no less than five years.

Masie told BusinessWeek that the shift in the pension fund rules had been attempted before, with poor results.

“It’s happened before,” he said on the sidelines of a Africa53 Provident Fund briefing. “In the 1990s the limit was reduced to, I think, 65% and then it went back to 70% because the money came and sat here and the managers could not find enough suitable assets timeously. “They had to do the prudent thing by putting the money in banks.”

According to Masie, at the time Bank of Botswana Certificates (BOBC), were providing returns of about 13%, meaning the asset managers were earning competitive yields compared to where the funds were coming from. Today, the yield on the one-month BOBC is 2.94 percent.

“We need to ask ourselves why the money has been out there,” Masie said. “The simple answer is that there are not enough investible assets in the country. “The danger with something like that if it’s not properly implemented, is that all this money might come back here and not find a place to invest.”

He continued: “Asset managers are guided by mandates and if they have been guided by trustees not to invest more than a certain percentage in cash, or whatever asset, all that they will do is put the money in banks. “Banks will put the money with the central bank and interest will have to be paid on that money by the central bank to the commercial banks and the majority of them, as we know are owned outside the country. “So some guy sitting in a different part of the world owning shares in one of these banks that are owned outside the country will benefit from that.”

Masie said if implemented badly, the pension fund rule changes would negatively impact pension fund members, as the funds would drift back home to Botswana but would possibly not be generating adequate returns.

“The example that was given earlier was of a grandmother putting money in a trinket box somewhere and then giving it back to you. “That’s the easiest and simplified way of explaining it and that’s what could happen. “Maybe it’s time for the managers to become more creative and the more creative you become, the more risk you take on,” he said.

Masie, who is the Principal Officer for Africa53 Provident Fund, said one solution would be for government to issue bonds, which would make it easy for asset managers simply to put money in such instruments, effectively lending money to government.

He said the asset management industry was known for being “elastic” to change.

“Having witnessed the birth and rise of asset management in Botswana, I must say it is important for us as a fund to keep up with modern changes that come through legislation and regulation,” he said.

Government believes the changes to PFR2 could increase investment in local infrastructure and foster the development of the capital market through innovation. However, asset managers have generally said the proposals will dent pensioners’ returns and increase risks by reducing the portfolio diversification the funds enjoy.

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