Known formally as the Pension Fund Rule 2 or PFR 2, the NBFIRA (Non-Bank Financial Institutions Regulatory Authority) statute previously required pension funds to invest at least 30% of their assets locally.
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 meant that P16.8 billion would have to be repatriated.
According to the PFR 2, published recently by the Authority, pension funds are required to reach the threshold of 50% between now and December 2027. By December 2023, pension funds are required to have reached a threshold of 38% and by May, were slightly below target at 36.8%, or P46.7 billion out of total funds of P127.3 billion.
The new rules also adjust the limits of the asset classes pension funds can be invested in and for the first time, introduce a specific exposure for local infrastructure funds. The new PFR 2 also introduces considerations for Environmental, Social and Governance (ESG) standards in pension fund investments, but stops short of making these mandatory.
“In making investment decisions, the board of trustees is encouraged to consider the ESG factors, along with financial factors, that may contribute to achieving the long-term retirement objectives of fund members and their beneficiaries,” the rules read. “Where ESG factors have been factored in the investment process, the board of trustees should include a narrative explaining how the ESG factors have been applied as part of their annual financial year-end reporting.”
The new rules come after an extended period of intensive debates between NBFIRA, the pension funds and asset managers who are responsible for investing pensioners’ funds.
While government believes the amendments will increase investment in critical assets such as local infrastructure and foster the development of the capital market through innovation, fund managers have said the local market has insufficient investment opportunities and the new PFR 2 will ultimately dent pensioners’ returns. In addition, asset managers have said repatriating the funds will increase risks by reducing the portfolio diversification the funds enjoy when they are invested offshore.
Speaking recently at the Bifm business seminar, prominent economist, Keith Jefferis, said the new changes were a challenge to the approach taken by fund managers, who he said may have been “too conservative” in the past.
“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, 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? “(The answer involves) more listings on the Botswana Stock Exchange and I know they have been trying, the development of unlisted alternative assets, private equity where there’s some scope there and also the long-standing request for public-private partnerships and infrastructure investment opportunities. “These are the key to stopping this money ending up in the banks and BoBCs,” he said.
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.
The BSE’s head of product development, Kopano Bolokwe, acknowledged that the efforts to raise listings have been difficult in recent years, but added that asset managers tended to shy away from certain available listed products.
“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 everywhere in Africa and 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 and 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, to support them to become blue chips in the long term.”
Government has said the new pension prudential rules are regulations and not law, meaning if the new changes cause any catastrophe, the Finance minister can make corrections even overnight.
