Zimbabwe’s insurance and pensions industry want a broad re-consideration of the requirements in investing in prescribed assets in view of emerging risks from recent currency reforms and an inflationary operating environment.
Pension funds, in particular, are required by law to invest at least 10 percent of their portfolio in prescribed assets.
Life and funeral assurance companies are required to invest 7,5 percent of market value of the total adjusted assets in prescribed assets.
Short-term insurance companies are required to invest 5 percent of their funds in prescribed assets.
But what are prescribed assets?
Prescribed assets are bonds or securities issued by the Government, local Government, quasi-Government organisations or any other bond that may be accorded the prescribed asset status.
Players in the pensions and insurance sectors have suggested alternative portfolio investment strategies to preserve value for pensioners and the insured.
Said First Mutual Holdings CEO Douglas Hoto:
“I have since made a proposal that we should receive land from Government in place of Treasury Bills (TBs).
“I think it’s about $2 billion or $3 billion in TBs that we want. Instead if we get stands our members can then get those stands and develop properties.”
TBs are short-dated securities used by the Government when borrowing from the market and are issued by the Reserve Bank of Zimbabwe (RBZ) on behalf of the Government and their tenor is generally 91 days.
Through investing in TBs, clients earn fair returns at minimum risk since the securities are Government-backed.
However, there are concerns that the interest rate offered on this Government paper has been overridden by the consistently rising inflation.
Official data from the RBZ shows that the highest interest rate offered on this month’s auctioned TBs was 40 percent, while the lowest was 15 percent, with the average rate being 15,6 percent.
Market experts say the promulgation of Statutory Instrument 142 of 2019 (which re-introduced the Zimbabwe dollar) has exacerbated wealth management risks due to the resultant jump in the country’s inflation numbers.
“For the first half of this year, cumulative inflation is around 94,5 percent so unless we are going to have negative inflation between now and year-end I struggle to imagine how, even by October, we can be talking about figures around 20 percent according to figures that have come from the authorities,” said Association of Investment Managers chairman Jubelah Magutakuona.
“So it appears we are going to struggle as an economy with the issues of inflation. So even if you invested in ZSE portfolio assets, inflation has cleaned you out because the ZSE’s performance for the first six months of the year 40 percent and inflation has been 90 percent so you would have outperformed inflation if you were holding US dollars. So that’s the only asset so far in the legal market that could actually have protected investors’ value against inflation.”
Magutakuona has requested that the sector regulator – the Insurance and Pension Commission (IPEC) – to expand its qualifying requirements for “prescribed assets”.
“As investors, we are required to invest at least 20 percent of pension assets in prescribed assets. Prescribed assets are mostly fixed interest assets and so you can imagine when you try and reconcile a fixed interest instrument and very high inflation, it is a very difficult proposition to think about.
“It’s not like we (investment managers or the pension funds) do not want to participate in these assets, but we want to do so in a manner that preserves value.
“Our proposition is that through the Reserve Bank we can have some inflation protection, or perhaps for the regulator to expand their qualifying requirements for prescribed assets so that certain securities or a fund that is invested in various value preserving assets, for example, a property fund that is advancing the interests of humanity. Such a fund could be given prescribed asset status.”
IPEC is, however, not blind to the various risks inherent in the investments market.
“The Commission encourages players to be compliant with the prescribed asset and all regulatory requirements. The insurers are also encouraged to invest prudently in the wake of risks confronting the market.
“There are ten major risks confronting the industry namely liquidity risk, underwriting risk, market risk, operational risk, compliance risk, legal risk, corporate governance risk, claims risk, reinsurance risk and affiliated investment and venture risk. Insurance companies are therefore encouraged to take proactive measures to mitigate against such risks,” said the regulator in a recent sector report.