Pension funds need to evolve

Over time businesses and economies evolve; some thrive, while others die. But the best ones are always flexible enough to align themselves with a prevailing direction.

Although the Covid-19 pandemic has had immeasurable impact on business and economies across the globe, from another perspective it has only accelerated their expected evolution.

Pension funds cannot shift their fundamental role — managing employee savings and retirement — but they can certainly do better in making strategic investments.

Property is a common investment asset for the sector and while it may be unwise for pension funds to completely divest from property investments, they may need to broaden their horizons.

These funds have traditionally been invested in “safe investments” such as property, equities and bonds, but alternative investment avenues can be a good source of steady cash-flows.

For local pensions funds, the weakening of the property sector poses extensive risk insofar as they are already heavily invested.

Ironically, the sector’s property investment portfolio increased to $27,95 billion as at June 30, 2020 from $2,05 billion in the prior comparative period, according to the latest numbers from the Insurance and Pensions Commission (IPEC).

The asset class currently constitutes the bulk of the pensions sector’s total industry assets at 42,09 percent, followed by equities at 34,54 percent.

Experts in the property sector estimate a significant decline in values by year-end.

“In a nutshell, property values have taken a knock due to Covid-19. In real terms, the cumulative impact will be as high as 30 to 40 percent at the end of the year,” said Integrated Properties in its second quarter Property Market Report.

Zimbabwe Association of Pension Funds (ZAPF) director general Sandra Musevenzo, says under-performance of the property sector will affect funds’ incomes.

“Given that the pensions industry controls a significant portion of Zimbabwe’s commercial real estate, the impact of the lockdown on tenants’ businesses is set to have an adverse effect on rental income streams and spike the level of voids in properties in the short-to-medium term.

“Already tenants are seeking rent-free periods and major rent discounts,” she said.

This will doubly affect pension funds to the extent of weakening their capacity to meet obligations to members as well as their long-term investment capacities.

And because pension funds are important investors in the economy, the impact could be much wider and have longer term negative consequences.

But there are ways local pension funds can negate the effects of the pandemic.

“To ensure that the investments that pension funds invest in respond to the new norms resulting from Covid-19, that is, less demand for office spaces, we need to diversify from owning large office buildings and shopping malls and perhaps go more into warehouses as e-commerce, which is the new norm (there is more online shopping hence bigger demand for storage spaces),” said Musevenzo.

Although Covid-19 has opened pension funds’ eyes to alternative investments, this investment avenue has been an upcoming trend for the sector in recent years.

As early as 2015, one of Canada’s largest pension plans, the Ontario Teachers Pensions Plan, acquired a stake in Indian e-commerce company Snapdeal.

But pension funds can still be more strategic with their existing portfolios.

“The other opportunity is to reinvest into other property sectors like health (hospitals and clinics),” added the ZAPF boss.

And with regards to salvaging their existing investments in property — at least in the short-to-medium term, Musevenzo said the funds should consider lowering rentals to ensure that buildings retain higher occupancy ratios. In its Pensions Markets in Focus (2020) paper, the Organisation for Economic Co-operation and Development (OECD) has projected a re-bound in global pensions assets in the short-to-medium-term.

“Assets in retirement savings plans are forecast to follow the same trends as financial markets in 2020.

“Preliminary forecasts suggest that pension assets would have declined by 10 percent in the first quarter of 2020 in the OECD area, from US$49,2 trillion at end-December 2019 to US$44,3 trillion at end-March 2020.
— Ebusinessweekly.co.zw.