Prescribed assets policy, a double-edged sword

The recent proposal mandating pension and insurance companies in Zimbabwe to allocate a portion of their funds to national infrastructure projects as part of prescribed assets has ignited significant debate.

THIS initiative, aimed at fostering economic development and addressing critical social needs, demands a comprehensive analysis of its potential implications for both the financial sector and the broader national economy.

Zimbabwe, like many developing nations, grapples with challenges in financing essential infrastructure projects. Advocates for compelling pension and insurance companies to invest in national development assert that this strategy could bridge the funding gap while diversifying investment portfolios. However, achieving this balance is crucial to prevent adverse effects on the financial stability of these institutions.

Speaking in his 2024 National Budget, the Minister of Finance, Economic Development and Investment Promotion, Prof Mthuli Ncube ( pictured) said they have noted low compliance levels of prescribed assets by the pension industry and will seek to rectify it.

“Government, however, has noted that compliance levels of the pension industry have remained low, owing to the industry’s preference to invest in equity instruments and for on-lending purposes. These are risky investments that may result in loss of value to pensioners and members’ contributions.

“Henceforth, Prescribed Asset Status will be conferred to infrastructure projects that are aligned to NDS1 agenda, such as, university accommodation, roads, renewable energy, agriculture and health infrastructure development,” he said.

This new criterion was also extended to capitalisation empowerment initiatives by financial institutions such as Empower Bank, Zimbabwe Women’s Microfinance Bank and The Small and Medium Enterprises Development Corporation (SMEDCO).

The directed investment in national infrastructure projects has the potential to stimulate economic growth by creating jobs and boosting local industries. This can contribute to poverty reduction and elevate living standards for the populace.

Diversifying investments into tangible assets such as infrastructure serves as a prudent risk management strategy for pension and insurance companies. Unlike financial instruments, infrastructure projects often possess intrinsic value, acting as a hedge against market volatility.

The alignment of pension fund investments with national infrastructure projects corresponds with the long-term nature of these funds. These projects typically generate returns over an extended period, providing a stable income stream that complements the long-term liabilities associated with pension obligations.

However, entrusting pension and insurance funds with national infrastructure projects raises concerns about potential mismanagement and inefficiency. To ensure success, effective governance mechanisms must be in place to guarantee transparency, accountability, and optimal project execution.

The compelled investment in prescribed assets may impact the financial performance of pension and insurance companies. Striking the right balance between national development goals and financial prudence is essential to prevent adverse effects on returns for policyholders and pension beneficiaries.

The success of this proposal hinges on a robust regulatory framework and effective enforcement mechanisms. Striking the right balance between mandatory allocations and allowing companies flexibility in managing their portfolios is vital to avoid unintended consequences.

A potential concern is the distortion of market dynamics if a significant portion of funds is directed solely towards prescribed assets. This could impact the availability of capital for other sectors, potentially stifling innovation and competitiveness.

Ensuring the economic viability of national infrastructure projects is paramount. Comprehensive feasibility studies and rigorous project evaluation processes must be in place to guarantee that investments yield positive returns and contribute meaningfully to national development.

In conclusion, the proposition for pension and insurance companies to invest in national infrastructure projects as part of prescribed assets in Zimbabwe presents both promise and peril. While the potential benefits in terms of economic growth, risk diversification, and long-term stability are evident, careful consideration must be given to the associated risks and challenges.

Striking a delicate balance between national development goals and financial prudence, backed by robust regulatory oversight, is crucial to ensuring the success of this bold initiative. Only through a judicious and well-executed approach can Zimbabwe harness the potential of its financial sector to drive sustainable and inclusive development, ultimately shaping a more prosperous future for the nation.

With this, I would like to wish you the loyal reader of this column, a Merry Christmas and happy holidays!

◆