Lying at the heart of prescribed assets investing is the idea of unlocking resources for investments in social and economic development.
But sometimes, just sometimes, the path to “unlocking” these resources is blocked, or just complicated.
Given the extensive contribution of the insurance and pensions sector to an economy, governments have seen it prudent to ensure that a portion of monies from the sector go towards prescribed assets.
In Zimbabwe, 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.
And short-term insurance companies are required to invest 5 percent of their funds in prescribed assets.
Traditionally, Government has statutorily required players in the sector to buy government-backed assets such as bonds and equities using the savings of their clients and policyholders. But this hasn’t always gone down well with businesses.
For one thing, no business wants to be ‘forced’ to do anything. Second, particularly for local entities, prescribed assets such as bonds and equities have (in periods of hyperinflation) become sub-optimal, to say the least.
Insurers and pension funds have expressed concerned about such prescribed assets due to their potentially negative impact on client returns.
According to figures from the Insurance and Pensions Commission (IPEC), last year the average real return on a 30-day money market investment by insurers and
pension funds was negative 10, 1 percent, compared to negative
15 percent for industrial counters and negative 17 percent for the mining counters on the Zimbabwe Stock Exchange.
And, investments in Treasury Bills had a real return averaging negative 1 to negative 3 percent depending on tenor.
The issue of prescribed assets is such a hot topic that even in neighboring South Africa, financial companies are fighting that government over its prescribed assets policy.
So instead of having to go through underperforming ‘bonds’ or ‘equities’, can prescribed assets not directly address the social or developmental issue at hand?
Let’s say – hypothetically – for instance that Government wants to construct a dam in a certain area and instead of issuing a bond and prescribing pension funds and insurance companies to subscribe to that bond, it allows these entities to construct the dam on a Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) basis.
It would cut out the unnecessary need for these companies to invest in assets that do not perform well in an inflationary environment.
Zimbabwe’s prescribed assets (at least of late) seem to be heading in that direction.
“The industry has invested US$4,7 billion in prescribed assets and we all know that prescribed assets are those assets which are speaking to economic developmental goals,” said Insurance and Pensions Commission (IPEC) commissioner Dr Grace Muradzikwa recently.
“Of late, the Commission has been approving a prescribed assets paper in solar energy, winter wheat production and infrastructure development.
“We have expanded approvals into prescribed assets so that they not only speak to the Government developmental goals, but also to the value preserving criteria of pension funds.”
Relatedly, earlier in February Zimbabwe Insurance and Pensions Apex Council (ZIPAC) chairperson Tassius Chigariro suggested that pension funds would be interested in investing in parastatals if they are granted prescribed asset status.
“The Government is rich, it owns a number of assets that are not properly functioning. For example the National Railways of Zimbabwe (NRZ), Zimbabwe Electricity Supply Authority (ZESA) and the Zimbabwe United Passenger Company (ZUPCO).
“Why does the Government have to own them and why aren’t these given to pension funds to run them, not for a bond but for ownership, for the rates, the fees, the tolls, and Government can sit back and enjoy the taxes?
“And in such a case, where the pension funds are running NRZ, for example, that should count as a prescribed asset,” he said at the time.
But that is not to say that the traditional prescribed assets model is completely outmoded.
Mere distortions in the business operating environment, due to transient inflationary pressures, should not necessarily result in comprehensive changes to tried and tested investing principles.