Pension funds struggle to comply with regulations
Players in the pension fund sector have called for a change in the way compliance levels for prescribed asset status are measured, saying the current method made it difficult to be compliant given the volatile operating environment.
Prescribed assets are bonds or securities issued by the Government, local government, quasi-government organisations or any other bonds that may be accorded the prescribed asset status.
Although the country’s insurers and pension funds are required in terms of the law to invest a certain percent of their total investment funds in prescribed assets, compliance levels remain significantly low.
Prescribed asset status for the year to December 2021 stood at 4,06 percent which is way below the minimum prescribed ratio of 20 percent.
In 2020 the prescribed asset status for the pension industry stood at 6,40 percent and was even higher at 7,67 percent at the end of the first quarter to March 2020.
Commenting on the low levels of compliance regulator the Insurance and Pension Commission (IPEC) urged the industry “to regularise the non-compliance position”.
In its Pensions Report for the 4th quarter to December 2021, IPEC even pointed out that in order to improve compliance level, “various bankable projects have been accorded prescribed assets status as they meet both the developmental and value preservation requirements of insurers and pension funds.”
Sector players have, however, said their efforts to comply were becoming futile as the value of assets have now become a fast paced moving target.
According to Zimbabwe Association of Pension Funds (ZAPF) Director General, Sandra Musevenzo, the revaluation of properties and upward price movements in the equities market has meant the prescribed asset status is a moving target.
Given the depreciation of the local Zimbabwe dollar both investment properties and equities assets are having to be significantly revalued resulting in investments made in prescribed assets failing to meet regulatory ratios.
The industry’s asset base of $318.96 billion translates to an average asset share per member (including beneficiaries) of $337,824.58 compared to $121,852 as at December 31, 2020.
The increase in the asset base was mainly driven by quoted equities and investment properties, which had a combined share of 81.15 percent of the industry’s total assets. Quoted equities, which constituted 55 percent of the industry’s asset portfolio, increased by 318.45 percent while investment property grew by 87.36 percent.
This is at a time contributions, a source of funds to invest in assets including prescribed assets, only grew by 9,40 percent to $16,4 billion.
As at December 31, 2021, the total amount invested in prescribed assets increased by 84,14 percent to $13 billion from $7,06 billion reported in December 2020.
However, despite an increase in the absolute amount invested by the pensions industry in prescribed assets, the compliance level remains low.
“We have asked the commission to change the way compliance levels are measured because it has become a moving target. There is need to maybe come up with a certain target that can be used to measure compliance,” Musevenzo said.
Welcome Mavingire, Managing Consultant at Intellego Investment Consultants, had the same observation and said the significant uplift in the equities market in the last two years have been driving up market values and exposure to listed equities, in the process reducing exposure to prescribed assets.
Trigrams Investment Analyst, Walter Mandeya, said given the volatility in the valuation of assets the old way of measuring compliance levels is no longer fit for purpose. “Maybe they now have to say a certain portion of the premium received over a period must be invested in prescribed assets,” he added.
However, some pension funds are already heavily exposed to illiquid assets such as properties so don’t have the flexibility to switch asset allocation to invest in these assets with prescribed asset status, according to Mavingire.
Mavingire said the other challenge is that of unavailability of suitable assets.
“This has traditionally been the reason as traditionally most assets with prescribed asset
status were fixed income assets.
“However, IPEC now grants PA status to alternative investments, which takes longer to
evaluate and most investors are too conservative and risk averse to readily embrace
alternative investment asset classes Meanwhile during the fourth quarter of 2021, 8 applications were conferred with prescribed asset status.
The largest issue amount of US$100 million was by IDBZ for infrastructure development
such as road rehabilitation, upgrading and equipping of health facilities and irrigation
infrastructure.
In local dollar terms the biggest amount was $13,5 billion issued by AFC to finance the 2021/2022 Agriculture season. The amount is not only bigger than the $13 billion currently in prescribed assets but almost equal to the contributions for the year.
This means the industry might not have capacity to fund available projects unless they sell off some of their assets.
Pensions funds struggle to comply with regulations
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the way compliance levels are measured because it has become a moving target. There is
need to maybe come up with a certain target that can be used to measure compliance,”
Musevenzo said.
Welcome Mavingire, Managing Consultant at Intellego Investment Consultants, had the
same observation and said the significant uplift in the equities market in the last two
years have been driving up market values and exposure to listed equities, in the process reducing exposure to prescribed assets.
Trigrams Investment Analyst, Walter Mandeya, said given the volatility in the valuation
of assets the old way of measuring compliance levels is no longer fit for purpose.
“Maybe they now have to say a certain portion of the premium received over a period
must be invested in prescribed assets,” he added.
However, some pension funds are already heavily exposed to illiquid assets such as
properties so don’t have the flexibility to switch asset allocation to invest in these assets
with prescribed asset status, according to Mavingire.
Mavingire said the other challenge is that of unavailability of suitable assets.
“This has traditionally been the reason as traditionally most assets with prescribed asset
status were fixed income assets.
“However, IPEC now grants PA status to alternative investments, which takes longer to
evaluate and most investors are too conservative and risk averse to readily embrace
alternative investment asset classes Meanwhile during the fourth quarter of 2021, 8 applications were conferred with prescribed asset status.
The largest issue amount of US$100 million was by IDBZ for infrastructure development such as road rehabilitation, upgrading and equipping of health facilities and irrigation infrastructure.
In local dollar terms the biggest amount was $13,5 billion issued by AFC to finance the 2021/2022 Agriculture season. The amount is not only bigger than the $13 billion currently in prescribed assets but almost equal to the contributions for the year.
This means the industry might not have capacity to fund available projects unless they sell off some of their assets.-eBusiness Weekly
