Zimbabwe is working on a new law that will allow cash rich pension funds to invest at least 20 percent of their assets outside the country to enable them to diversify investment risk some of their portfolios are exposed to, a senior official has revealed.
The Pension and Provident Funds Amendment Bill — which seeks to induce an efficient pension system in the country; improve welfare of pensioners, harness long term domestic savings, improve regulatory framework among others — is among the Bills expected to be presented in Parliament when the second session resumes.
Currently, pension funds are only allowed to invest locally, but waivers were granted in special cases where the funds wanted to participate in rights offers by foreign firms.
Offshore allowance has significant potential benefits of investment returns for pension funds, especially during times when the economy is not enabling investors to generate high returns. It does, however, come with costs and demands of enhanced skills set among investors and investment service providers.
It may also come with potential controversies as it may be taken as using local assets to benefit other economies at the expense of desperately needed local development.
Josphat Kakwere, IPEC pension director told Business Weekly that the draft Bill had a provision of permitting a portion of retirement savings invested outside the country.
“Currently, the law does not provide for offshore investment; however, the draft Pension and Provident Funds Bill has a provision of allowing pension funds to invest offshore subject to meeting certain conditions including that of prescribed assets,” he said.
By law, pension funds must use 10 percent of its net assets to purchase prescribed instruments.
The money raised is normally used to support State approved projects. These include projects implemented by the Government or private sector.
Zimbabwe’s total pension assets stood at $9,5 billion by the end of third quarter last year, having increased by 34,23 percent from $7,04 billion as at 30 June 2019.
The increase was mainly driven by a spike in the values of investment property and equities.
The two asset classes totalled $7,2 billion, accounting for 76,48 percent of total industry assets.
Consequently, these asset classes continued to be the major investment classes as the industry seeks to preserve long-term value by hedging against inflation.
The increase in investment property was mainly on account of revaluations of property values from United Sates dollars to Zimbabwe dollars following currency reforms, which saw the country abandoning multi-currency regime in June last year, commonly referred to as dollarisation. Zimbabwe had been using a basket of currencies, dominated by the US dollar since February 2009 when it dropped the domestic currency, which had been rendered worthless by spiralling inflation.
Analysts say pension funds’ investments are only concentrated in the domestic market and allowing them to invest abroad will provide them with better opportunities.
“A potential benefit of investing offshore is the geographic diversification of assets, which assists the pension fund to effectively diversify the investment risk that their portfolio is exposed to,” Xolisa Dhlamini, a South African-based and investment consultant to
pension funds told Business Weekly.
“Pension funds can also diversify their sources of investment returns. Investing abroad can expose the pension assets to lucrative industries or sectors that Zimbabwe may not have locally.
“It also enables investment in economies, which are growing more than Zimbabwe, which is a positive aspect for investment returns.”
He added that investing offshore exposed the pension assets to currency movements, which could, however, be beneficial or costly depending when investments are made and repatriated.
Dhlamini noted that the condition of adhering to prescribed assets before venturing offshore was a good idea, but might be limiting if there aren’t enough prescribed securities for the market to absorb or if the existing prescribed securities are yielding lower returns on a comparative basis.
This could be a great conflict for trustee boards with fiduciary responsibilities of allocating pension fund assets.
Investments in prescribed assets increased to $722 million during the third quarter ended September 2019, from $510,6 million in the previous quarter. This accounted for 7,64 percent of pension assets, which is below the 10 percent regulatory minimum.
Trustees would need to be sure their investment consultants have the necessary processes, capacity as well as skills to advise on offshore investment managers and products.
This is especially important if the pension funds venture into relatively larger investment markets with more investment managers and products compared to Zimbabwe.
Similarly, the trustees who select their own investment managers would need to be sure that their investment managers have the requisite processes, capacity as well as skills to research and select securities in larger, offshore markets, Dhlamini noted.
Zimbabwe had 1 094 registered occupational pension funds as at September 30, 2019, out of which, 1 056 were defined contribution schemes and 38 were defined benefit schemes.
Membership, excluding beneficiaries stood at 798 828 as at September 30, 2019 compared to 798 400 as at June 30, 2019.
This excludes members who are on National Social Security Authority compulsory scheme.