Botswana's pensions system 'a ticking time bomb'
Boitshepo Majube | Friday November 1, 2013 15:35
The Non-Bank Financial Institute Regulatory Authority (NBFIRA) faults that the pension system encourages early withdrawals from formal contributor funds prior to the nationally established retirement age. Presenting the NBFIRA perspective at the Botswana Pensions Society Annual Conference in Gaborone this week, senior technical advisor Melville Brown said amongst the challenges facing the local pension system is the current state of the national social security, which he said is severely underdeveloped.
He also observed that the pension sector system is overly dependent on employer-based pension funds resulting in low pension coverage as a percentage of the population.
“The other challenge is credit risk in the current annuity system due to lack of long-term government instruments. Instead default risk inherent in annuity portfolio is managed by defined contribution pensions funds against capitalised insurance companies,” Melville stated. In its 2012 annual report, Botswana’s largest insurance company, BIHL, also laments the acute shortage of longer dated investment instruments in the market, which it says could hamper the insurance company’s ability to underwrite annuities. Melville further pointed out that another challenge is the fundamental flaws in the operational structural and tax policies which can jeopardise the safety of retirement funds and the future of the Botswana pension fund system.
He noted that employer-based pension funds are responsible for mobilising most of Botswana’s household savings and long-term funding, and constitutes a potential source of financial instability risk.
Systemic risks and weaknesses that need to be addressed, Melville said, include government policy issues. He pointed out that a system, allowing for early withdrawal is detrimental to pension funds stability and lowers level of returns available for retirement.
“This is contrary to the long-term objective of pension funds which is to provide sufficient income for retirement,” he said, adding that government’s policy on issuance of long-dated bonds must be aligned with the requirements of the growing annuity book.
Melville further advised that government policy on limits on offshore investments versus locally held assets must be further developed with greater understanding or the risks inherent in such restrictions.
“Implement changes in tax treatment of pension fund distributions to align with mandatory retirement age, with early withdrawals allowed only for listed emergencies,” he said. He further advised that the Botswana Public Officers Pensions Fund be restructured.
Although NBFIRA has a limited role in the basic policy decisions regarding pension fund structures, Melville said the authority intends to recommend and promote policy measures and education programmes.
He said this will improve preservation of individual retirement savings, promote long-term retirement savings with tax incentives, alter the cycle of excessive consumer debt and low savings, reform and improve the structure of life annuities and ultimately reduce retirees dependence on the state and other family members. Melville said the goal to reform the pension system is to promote savings and preserve benefits. Currently there are 97 stand-alone pension funds registered in the country, plus five umbrella funds (205 sub-funds). BPOPF accounts for 76.8% of total pension funds assets.