‘Pension investments not reflecting true economy’
LOCAL pension funds’ monies may not be fully contributing to Zimbabwe’s economic development insofar as their investments may not be reflecting the true nature of the economy. There tends to be a general expectation that the allocation of pension savings can lead to economic growth. But observers say the sector could improve its overall investment efficiency.
Zimbabwe has largely remained agro-based, with agricultural activities providing employment and income for around 60-70 percent of the population, supplying 60 percent of the raw materials required by the industrial sector and contributing an estimated 40 percent of total export earnings.
Besides agriculture, other key sectors of the local economy include manufacturing, mining and tourism. Actuary Prosper Matiashe, has said to the extent that local pension funds are mostly invested in property and equities, they are not investing in these vital economic sectors.
“Pension investments should match the natural behaviour and interests of the economy. The Zimbabwean economy is centred on agriculture and mining; according to estimates agriculture contributes 17 percent to Gross Domestic Product (GDP), while mining contributes 16 percent to GDP, and tourism contributes 6,5 percent.
“But the Zimbabwe Stock Exchange doesn’t show the same profile; on the ZSE, agriculture contributes 9,34 percent to market capitalisation without Innscor or 12,18 percent if we take 40 percent of Innscor; mining contributes 2,69 percent to market cap, and tourism contributes 3,1 percent to market cap,” he told delegates at the just ended Zimbabwe Association of Pensions Funds (ZAPF) Virtual Annual Conference.
Latest official figures from the Insurance and Pensions Commission (IPEC) show that investment property and listed equities constitute 51 percent and 27 percent of pensions funds’ investments.
This reflects the traditional investing patterns for these entities.
But actuarial consultant Itai Mukadira said in the contemporary era this investment model is tantamount to inefficient use of capital.
“When we buy equities on the ZSE, we are not really creating new investments, we are just circulating money among a limited number of investors. Pension funds can create new value, new money by investing in alternative investments,” he said.
Other observers, however, maintain that pension savings have the capacity to directly increase monies in capital markets that can go towards private investment.
Nonetheless, concentration risk in the sector is borne out in analysis of the pensions sector’s asset performance over the last few years. In 2018 the value of pensions assets amounted to US$325 million, which declined to $4,7 billion (US$82,2 million) as at the second quarter of this year.
On the other hand, the sector’s prescribed assets (to be clear pension funds, have been cautious about investing in prescribed assets) weakened from US$5,2 billion in 2018 to $66,4 billion (US$1,1 billion) as at the end of June, 30, 2020.
Commercial real estate, which constitutes a huge segment of the sector’s investment portfolio, has underperformed this year, largely due to Covid-19 impacts.
Matiashe said pension funds need to look at what the economy currently needs.
“Alternative thinking can help pension funds’ investments match national economic behaviour and interests. Our typical member farms directly or indirectly, and is in desperate need of buying housing and require safe water and sanitation. There are extensive investment opportunities here.
“Besides tobacco production, crop production has significantly been low expectation, and herd sizes have reduced by 20 percent for beef, 83 percent for dairy, 25 percent for piggery, and 25 percent for small ruminants. Gold deliveries could miss the 30 tonne target again this year.”
The state-run National Social Security Authority (NSSA), for example, has indicated plans to invest into agricultural value chains.
But this out-of-the-box investment model requires pension fund managers to look outside the equities market.
Said National Independent Investments Company director for financial markets and investments Dr Khumbulani Mhlope:
“It’s important for pension funds to look at both listed and unlisted companies. The ZSE has good companies, but we are a small-to-medium enterprise dominated economy. Funds can help SMEs grow into entities that can significantly contribute to economic growth. It doesn’t matter that a company is not listed, what matter is that an entity should have solid systems.”
And although the investing expertise of Trustees of local pension funds has come into question in recent times, Mukadira said they should leave the investing job to the experts, but should focus on making sure that whatever investments are eventually made are prudent.
Because whether its underperforming traditional investment assets or untried alternatives, low investment returns have a negative effect on income adequacy in retirement, which goes against policyholders’ reasonable expectation that a pension fund can protect the value of their savings.