Raise FX investment cap, too, on pension funds
NOW THAT Finance Minister Nigel Clarke has committed the Holness administration to lifting the ban on pension funds investing in risky start-ups, the obvious extension of the discussion is about his plan with regard to their holding of foreign-exchange assets.
Lifting the current five per cent cap on the portfolios has been on the national agenda for more than a dozen years and in the sights of the central bank for half a decade. But nearly two years after the Bank of Jamaica’s (BOJ) proposed phased transition to the 20 per cent limit, not only has the process not yet begun, there is no indication of if, or when, it might happen.
Policy clarity from Dr Clarke would, in the circumstance, be welcome.
There is a bit of a paradox here. Technically, based on the guidelines of their regulator, the Financial Services Commission, pension funds and insurance companies can hold up to 20 per cent of their portfolios in foreign assets. But that’s not enforceable. For the real honcho with regard to foreign exchange, and foreignexchange investment, is the BOJ, whose law lists a range of regulated financial entities who “shall not acquire assets, except in accordance with such directions as may, from time to time, be given to them ... by the minister”.
The minister’s direction, in this regard, has, for many years, been five per cent of their portfolio. In 2013, the BOJ signalled its willingness to change its policy and opened discussions with sector interests. It anticipated that a final position would be settled by 2016 and full implementation of the new cap by the following March.
On the face of it, allowing more foreign-exchange investment by pension funds and insurance companies would allow for a greater spread of risk, including outside Jamaica, on the approximately J$940 billion in assets under their control, nearly 60 per cent of which belongs to the pension industry. The central bank, however, had a concern. It feared that opening the spigot wider for foreign currency-denominated investments could, even if it broadened portfolio risks and enhanced returns, lead to capital flight, and a tightening of domestic liquidity as firms converted their Jamaican dollars to hard currency to facilitate their transactions. That, ultimately, might undermine the country’s reserves.
“The BOJ recognises that both quantitative and qualitative limits on investment in foreign assets can impede the attainment of economic benefits for pension funds and insurance companies as derived from global financial diversification,” the central bank noted in a 2015 discussion document on the issue. “However, serious negative externalities exist for the foreign-exchange market and the NIR (net international reserves), which could destabilise the macroeconomy if institutional investors are permitted to invest in foreign assets with wide-ranging discretion.”
ACHIEVING STABILITY
However, as the finance minister observed last week, when he announced his intention to allow pension funds to channel up to five per cent of their portfolio, around J$27 billion, into venture capital investments – from zero at present – Jamaica has achieved macroeconomic stability, the Government’s debt is on a downward trajectory, and, importantly, there is national consensus around fiscal prudence. Significantly, too, at more than US$2.9 billion, the NIR is substantially above the target established by Jamaica’s agreement with the International Monetary Fund.
In the circumstance, many people will insist that while regulators can’t totally free the levers on how financial companies invest, there is room to allow them greater leverage, knowing that they will have to assume prudential accountability for their actions. In other words, taxpayer bailouts, like the 1990s rescue of the financial sector, won’t be on the cards. In that regard, a major investor education campaign would have to accompany any relaxation of the rules.
It’s time, we believe, to hear from Dr Clarke.