Finance Ministry reviewing Pension Law
Appropriate regulatory approach to offshore investment currently under review
The adverse effects of COVID- 19 on retirement funds may potentially lead to reduced incomes in retirement.
It may also lead to decisions by some individuals to defer retirement where possible in an effort to make up their pension shortfall through additional years in the workforce.
Deputy Director in the Ministry of Finance and Economic Development, Batane Matekane said at the Botswana Pensions Society ( BPS) annual conference that immediate consequences of COVID- 19 on pension systems, include reduced contributions due to higher unemployment, wage and salary reductions for some employees or the flexibility granted by regulators to allow contribution holidays.
The retirement funds sector total assets stood at P93 billion, 47 percent of GDP as at December 2019, almost as large as the assets of the banking system. As at March 2020, there were 86 licensed entities in the retirement funds sector including standalone funds, umbrella funds and fund administrators.
Total membership stood at 264 591 as at December 2019. Matekane said the volatile performance of financial markets and investment assets such as property have also had an impact on investment returns.
“The COVID- 19 crisis impact on the industry has shed new light on the importance of encouraging a more diversified portfolio approach by pension funds that allows for investment in a range of asset classes as a means of enhancing risk management including during times of crisis and economic downturns”.
Matekane indicated that the negative effects of the pandemic may also lead to attempts by some fund members or managers to increase investment returns by raising the level of risk within their portfolio.
“Naturally, the impact of the pandemic on financial markets has led to pension fund trustees and fiduciaries to review their asset allocation and investment strategies,” Matekane said.
According to Matekane, who was speaking on behalf of Minister Dr. Thapelo Matsheka, two key developments have been observed globally. Firstly, there is some adjustment to asset selection, with increased portfolio diversification. He explained that this involves a greater emphasis on equities that have relatively less volatility as well as fixed income assets offering higher returns, including more liquid infrastructure investments.
This approach, according to Matekane is consistent with a more cautious and risk- aware approach that has been adopted around the world. In addition, it has been observed globally that there is a greater focus on liquidity, particularly in markets where there has been a significant reduction in investment income.
In this regard, some members are switching to conservative assets or a higher level of benefit payments. Matekane also believes that the pandemic underscores the importance of accelerated reforms agenda, further revealing that his ministry is reviewing the pension legislation.
He said COVID- 19 has highlighted the important role that risk manage
ment should play in the responsibilities of trustees and fiduciaries, adding that there are also longer- term issues relating to the Botswana pension fund sector that still need to be addressed, among them, policy and regulatory actions. “In a small economy, it is difficult to attain a sufficiently diversified range of investment assets to give pension fund members good returns at an acceptable level of risk,” Matekane said, adding that the appropriate regulatory approach to offshore investment is currently under review.
Matekane said there are investment needs locally, in both the private sector to finance diversification and in the public sector to finance higher government borrowing requirements with the expanded bond issuance programme.
“I am aware that some local investments have underperformed in recent years, with for example, the negative performance of the Botswana Stock Exchange domestic companies’ index.
“This discourages the repatriation of funds invested in external markets,” Matekane said, adding at the same time however, that he is confident that there are investment opportunities in the Botswana economy, especially with the reforms and public investments entailed in the government’s Economic Recovery and Transformation Programme ( ERTP).
He urged financial experts to develop funds and instruments that will help to channel pension fund assets into promising investments while maintaining a suitable level of risk and diversification to the benefit of fund members.
Matekane expressed disappointment at the response from pension and asset management sector to the increased government bond issuance programme. He said despite the fact that there have been calls for more bond issuance over the years it has proven difficult to sell the bonds on offer at recent auctions, even at higher yields. “There is clearly a need for dialogue between government, the Bank of Botswana, who handle bond auctions on behalf of government, pension funds and the asset managers to address this blockage and ensure that the assets of the pension fund sector are deployed to finance crucial public investments”.