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Pension assets sink 88pcp; Heightened risks, low returns pose threat to retirees ;Assets now worth US$622m

06 Dec, 2019 - 00:12 0 Views
Pension assets sink 88pcp; Heightened risks, low returns pose threat to retirees ;Assets now worth US$622m

eBusiness Weekly

Kudzanai Sharara

The pension industry faces an increased risk that is threatening viability and future pay-outs to retirees as the value of its assets plummeted 88 percent to US$622 million between 2018 and 2019, according to latest update released by the regulator — the Insurance and Pensions Commission (IPEC) this week.

The pension industry’s total asset base that was valued at US$5,22 billion at the end of December 2018, is now valued at ZWL$9,45 billion (US$622 million using FX interbank rate of 15,19) as at 30 September 2019.

The latest report covering the three months to September 2019, revealed that the pension industry is facing increased operational risk, liquidity risk, credit risk as well as investment risk.

According to IPEC, operational risk is “inherently high” in the pensions industry on account of failure by players to separate shareholder and policy holder funds, separating assets between active members and pensioners as well as delaying transfer of properties bought from sponsoring employers.

IPEC said failure to separate assets will end up prejudicing active policy holders as their assets are transferred to either pensioners and to shareholders of life insurers.

“Failure to separate assets between active members and pensioners will result in the transfer of value from active members to pensioners, where fund investments returns are inadequate to pay the guaranteed pension,” IPEC said.

IPEC also noted that some pension funds bought properties from sponsoring employers, but have not attended to the legal transfer of the properties to the respective funds resulting in loss of assets.

The regulator said the delayed transfer of properties might result in pension fund assets being used to settle liabilities of the sponsoring employer, in the event that the employer is successfully sued for defaulting on debts.

According to the quarterly report, at least “one pension fund lost 80 percent of its assets, when the sponsoring employer went under liquidation”.

IPEC also cautioned that the industry is also exposed to relatively high liquidity risk on account of the concentration of the asset

As at 30 September 2019, the two real asset classes accounted for 76,48 percent of the industry’s total asset base.

IPEC said some players are unable to unwind from their positions to meet liabilities on time without incurring huge financial losses.

“The funds end up selling assets at discounted prices,” to meet their obligations. Liquidity risk is being reflected through arrears in benefit payments, which were at $87,10 million as at the reporting date up from $77,7 million as at June 30, 2019.

IPEC recommended that pension funds “actively manage their asset and liability profiles and consider unitising their investments in properties and equities.”

The investment environment where both the equities and money market are giving negative returns has also left pension funds prone to negative returns and value erosion.

It’s a situation that the regulator pointed out saying “inherent investment risk is high on account of the limited investment options and the inflationary environment resulting in negative real returns”.

“Under the circumstances, the industry is struggling to preserve value in the environment characterised by absence of high yielding assets, low occupancy levels in the properties market and inflationary pressure on fixed income securities,” reads the IPEC report.

According to IPEC, whilst listed equities are generally a hedge against inflation, the value of shares has not changed to cover for inflation.

As at end of September, the ZSE’s main Industrials Index had gained 50 percent year-to-date against an estimated September inflation of 353 percent.

Fixed income securities have also been paying interest rates below 16 percent resulting in negative returns for investors who have been shunning long term Treasury Bills.

The latest 272-Day issue to raise ZWL$300 million only received bids amounting to ZWL$30 million or 10 percent and was called off. Investment properties currently have very low yields despite the property portfolio increasing value in nominal terms in line with developments in inflation.

“However, rental yields are reportedly depressed on account of the recent inflation developments and low occupancy levels,” reads the report.

IPEC recommended industry players “to look beyond the traditional investments and consider alternative investment options with potentially high returns”.

Currency changes have also left the industry vulnerable as some of its investments in the money and equities market have been seriously eroded.

Zimbabwe floated its local dollar against other currencies in February this year, but the exchange rate has weakened from US$1 to ZWL$2,5 down to US$1 to ZWL$16,31 as of Wednesday this week.

The weakening currency has meant 40 percent of pension fund assets that are invested in the equities market have lost significant value as share prices have not reflected the change in currency.

The ZSE, which was valued at US$19 billion in January this year is now only valued at approximately US$1,8 billion at the going exchange rate. As a result, the pension industry’s total asset base which was valued at US$5,22 billion at the end of December 2018 is now valued at ZWL$9,45 billion (US$622 million using FX interbank rate of 15,19) as at 30 September 2019. Like equity investments, contribution arrears constituting 6,52 percent of the total asset base, money market and cash at bank with 4,59 percent are likely not going to see much in terms of value appreciation.

However, investment properties, which constitutes 36,16 percent of the total asset base can still be revalued in line with currency changes although low occupancy levels and low rental yields might still undermine valuations.

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