A PFR2 tsunami and the market’s sink-or-swim moment
Mbongeni Mguni | Wednesday September 6, 2023 11:38
Local investment professionals reject the criticism that they are too conservative. The debate over changes to the pension fund rules, has been raging for years and at times accusations have been traded between the regulators and the investment professionals managing billions of Pula on behalf of the pension funds.
Known formally as the Pension Fund Rule 2 or PFR 2, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) statute previously required pension funds to invest at least 30% of their assets locally. By May, that figure equalled P38.2 billion.
Under changes to the Retirement Funds Act, local pension funds will be required to invest a minimum of 50% domestically, a figure that as at May would have equalled P63.6 billion.
After years of backs and forths, NBFIRA has kicked off the new PFR 2 and pension funds have been given between now and December 2027 to reach the threshold of 50%.
By December 2023, pension funds and the asset managers who handle their billions, are required to have reached a threshold of 38%, then 41% by December 2024 and 44% by December 2025. By May, pension funds were slightly below target at 36.8% and, based on the May figures, will have to repatriate another P1.6 billion or so to meet the target by December.
By next December, again based on the May figures, pension funds will have to repatriate an additional P5.4 billion from their offshore asset classes to the domestic market.
Changes in the pension prudential rules have been on the cards for more than a decade, with an original proposal made by NBFIRA in 2010 to shift to a minimum of 70% domestic investments over 20 years.
Government believes the amendments could increase investment in local infrastructure and foster the development of the capital market through innovation. Asset managers, meanwhile, have said the proposals will dent pensioners’ returns and increase risks by reducing the portfolio diversification the funds enjoy.
Prominent economist, Keith Jefferis, sums up the issue.
“There’s nothing stopping the pension funds from pouring 50% onshore already, so why don’t they,” he said recently to a roomful of asset managers and pension fund trustees at the Bifm business seminar.
“The big question is: is there a shortage of funding or is there a shortage of assets?
“If there’s a shortage of funding, of course, the move from 30 to 50% make sense, but if there’s a shortage of assets, well, the answer is different.”
For government, mobilising more funding into the economy is increasingly urgent. At a funders’ conference called by government last July to test the private sector’s appetite to invest in public infrastructure, Finance Minister Peggy Serame painted a bleak picture of the country’s fiscal future.
According to Serame, between 2012–2013 and 2021–2022, government funded 95% of the total development spending of P108 billion, with the balance coming from project-specific loans and donors.
“This situation is not sustainable,” she said.
“Government revenues are declining, as a share of GDP, as the diamond industry matures and costs of production increase, while the recurrent budget is continually increasing.”
In fact, government has officially invited private capital to help finance the upcoming National Development Plan 12 which kicks off in 2025, saying its ability to keep funding public works is weakening.
The pension fund billions are also being eagerly eyed by other sectors of the economy, such as Small to Medium Enterprises (SMEs) for whom access to capital has long been a thorn in the side. Endeavours such as innovation, citizen enterprise development and even research and development, will be hoping to get a piece of the pie as well.
For asset managers, however, the challenge is the ability to find safe, stable assets or instruments that can provide strong returns in the local market. This is not simply because asset managers “like” strong returns or survive on them in terms of their fees. Rather, in the case of pension funds, these monies represent the nest-eggs or savings that many, ordinary, salt of the earth citizens have spent their lives building and are banking on for their futures.
The responsibilities they carry, mean asset managers cannot afford to “try out” certain investments or take certain chances. Their investment guidelines are precise and their deliverables are strict. Much of the investment opportunities and asset classes that tick their boxes are more widely available offshore than in the country. Analysts say while the local market has deepened and become more sophisticated over the years, to some extent it still represents a channel for risk diversification than optimising returns.
Analysts say the local capital market’s dearth of investment opportunities is apparent from the large cash holdings pension funds are keeping. By May, just over P10 billion in pension fund assets was held in cash or near cash, an investment vehicle Jefferis describes as “an asset class of last resort”.
“Cash is the asset class of last resort and it’s currently too big and has minimal returns,” he said.
“If this tsunami of money is going to come into the domestic market, there’s a huge risk of asset price bubbles and how do we avoid that?
“How do we avoid concentration risk and as we all know diversification is the only free lunch in finance? “How do we avoid having too much concentration risk and penalising pensioners through lower returns?”
For Jefferis, the answer involves more listings on the Botswana Stock Exchange, the development of unlisted alternative assets, private equity and also the long-standing dream of more Public-Private Partnerships, particularly for infrastructure-related opportunities.
The chances of the repatriated billions winding up as cash in banks and in the Bank of Botswana Certificates (BoBCs) is high. BoBCs or Bank of Botswana Certificates are instruments used by the central bank to mop up excess liquidity in the banking sector and represent risk-free investments for the banks.
This possibility has a precedent, according to financial markets’ veteran Paul Masie.
“It’s happened before,” he told Mmegi recently.
“In the 1990s the (investment) limit was reduced to, I think, 65% and then it went back to 70% because the money came and sat here and the managers could not find enough suitable assets timeously.
“They had to do the prudent thing by putting the money in banks.”
According to Masie, at the time BoBCs were providing returns of about 13%, meaning the asset managers were earning competitive yields compared to where the funds were coming from. Today, the yield on the seven-day BoBC is 2.65 percent.
“We need to ask ourselves why the money has been out there,” Masie said.
“The simple answer is that there are not enough investible assets in the country.
“The danger with something like that if it’s not properly implemented, is that all this money might come back here and not find a place to invest.”
The BSE’s head of product development, Kopano Bolokwe, acknowledges that investment opportunities in the local market have been difficult to come by in recent years, but also points out that the asset managers and pension funds are not entirely blameless in this challenge.
“The reality on the ground is that equities are hard to come by,” he told the Bifm seminar.
“It’s not just in Botswana, but across Africa and everywhere in the world.
“The last time we had an Initial Public Offering was 2017, the last time we listed a company was 2018 and five years down the line, nothing.
“But then, the focus for the asset managers tends to be mostly on the blue chips and I think there’s an outcry as to the lack of support for those companies that aren’t seen as blue chips, be they small caps, the SMEs.
“That’s where we need to see a lot of innovation in terms of how we can safely deploy capital into these companies to help them and support them to become blue chips in the long term, like we have seen with some of the major listings.”
The local exchange has also noted a large mismatch between the approved programme memoranda of corporate debt issuers and the actual issuances made to the market. A possible reason may be that those corporates who have ventured into the capital market of late have left with less than what they were hunting for.
“We are also not seeing a lot of support in corporate actions,” Bolokwe said.
“If I remember well, Lucara at one point tried to raise about P2 billion and didn’t get a lot of support from the local market. They went offshore and raised the money, but we are crying that there’s a lot of cash that’s sitting in the banks.
“We recently had a rights issue that was not fully taken up, by a retail company and had to be taken up by the underwriter, an external party.”
In addition, the BSE executive said there was a tendency amongst local asset managers to shy away from other products available on the local exchange. These products include Exchange Traded Funds (ETF), including a fixed-income ETF listed by the African Development Bank.
“That’s one of the most credible products because it’s looking at almost risk-free instruments from the African continent.
“We have the likes of New Platinum which hasn’t been touched this year but it has done phenomenally well from its primary market on the JSE, but we are seeing nothing on the BSE.
“So there happens to be lack of attention on the other instruments rather than the traditional ones we are used to.
“It’s not right because we are working hard to bring more of these.”
So are the asset managers too conservative? Jefferis, who has decades of experience in the local financial market and recently finished a three-year term as a senior policy advisor in the Finance Ministry, says he does not buy that view.
“I don’t think that’s generally the problem, but maybe, there needs to be a bit of pressure,” he said.
Pressure is in plenty supply, judging by statements from the Finance Ministry.
Director of Insurance and Pensions, Patrinah Masalela, says the repatriation of pension fund billions and the questions around investment opportunities, returns and risks, is a national challenge.
“A return is an objective, just as much as development is an objective and it’s up to us to balance that,” she told Mmegi.
“As a country, we cannot shelve our own development, talking only about a return.
“We have to balance these things.”
She added: “If we don’t develop our country who will develop it for us?
“(At the moment) we are taking this money to develop other people’s economies but we are saying let’s think for ourselves and this is one of the avenues.”