Investment property gains being recorded by property-owning pension funds may in fact be an “illusion” that poses a threat to their long term viability, Imara Asset Management has warned.
According to a quarterly report produced by the Insurance and Pensions Commission (IPEC), based on data as at September 2020, the value of investment property rose from US$225 million to US$671 million over one year, a gain of US$446 million.
At the same time, the value of equities held by consolidated private pension funds rose from US$244 million to US$366 million, a 50 percent gain in value.
Liquid assets back in September 2019 were just 5 percent at US$30 million and had fallen to 3 percent last September.
Overall, the contribution of investment properties to total pension assets rose to a whopping 50 percent compared with 36 percent a year earlier.
Imara has, however, questioned the upward adjustment to investment property valuations as they seem not to be backed by increased investments or improved yields.
“We very much doubt it is possible for investment property to nearly triple in US dollar over that period,” wrote Imara in a research note released this week.
The asset management firm argued that pension funds were not in a position to invest in new properties that can give that much growth, while old properties are struggling for tenants which affects their valuations.
The analysis by Imara suggests that pension funds might be overvaluing their assets something which might haunt them in the future.
According to the research firm, overvalued investments, whether property or alternative investments, can have serious consequences for a pension fund.
It said overvalued pension fund assets will serve to boost any fees that are determined by the value of the pension fund thereby increasing the expenses of the fund.
“More seriously, any pension payouts will also be overinflated leading to far greater cash calls than should be the case.
“This would benefit those receiving those cash calls now and be disadvantageous to those individuals remaining in the fund who may have to experience a write-down in such asset valuations at a later date,” Imara reckons.
Further negative consequence to consider is that investment properties are illiquid leaving equities as the only asset which can be easily sold to meet pension payouts.
Overtime equities will become a smaller portion of pension funds further compounding the situation for future payouts.
With a number of pension funds reportedly selling equities to fund large pension payouts as a result of early retirements and redundancies, equities as a proportion of pension funds is getting even smaller.
Without any significant improvement on the economy, the property investments and alternatives cannot be sold without taking a significant write-down given a lack of demand for such investments.
“At some point there could be a severe liquidity crunch for those pension funds who hold too great a proportion of their assets in illiquid assets and can no longer fund payouts.
“This situation could be even worse if the company behind the pension fund is not paying pension contributions on time or the contributions are less than the payouts.”