eBusiness Weekly
Tawanda Musarurwa
Government is pressing pension funds to increase their investments in prescribed assets as it emerged majority of them are still lagging behind in terms of compliance with the new regulations.
Pension funds, in particular, are required by law to invest at least 10 percent of their portfolio in prescribed assets.
Official figures show that prescribed assets compliance stood at 7,42 percent as at the end of last year.
All things being equal, prescribed assets, such as stocks, bonds and other types of Government paper should be generating significant returns.
But inflationary pressures have affected the level of returns investors can generate from such assets.
On Thursday, the Reserve Bank of Zimbabwe (RBZ) issued $200 million Treasury Bills (TBs) float with a tenure of 180-days to raise funds for “agriculture financing”.
TBs are short-term financial instruments issued by Treasury to be paid at par-value after a particular maturity period, often a maximum of a year.
Although the central bank formally invited “commercial banks, building societies, the POSB and IDBZ to subscribe”, insurance and pensions regulator, the Insurance and Pensions Commission (IPEC), had earlier sent a request to pensions funds to utilise the TBs auction to improve their prescribed assets compliance levels.
“Treasury has advised that there will be a Treasury Bills auction on 12 March 2020. In this regard, the (pensions) industry is expected to participate in the auction to improve compliance,” said IPEC Commissioner Dr Grace Muradzikwa in a letter to the Zimbabwe Association of Pension Funds (ZAPF) dated March 11, 2020.
“We therefore call upon you as the industry association to lobby your members to submit bids for the auction. Participation in the auction will give industry an opportunity to have a say in the determination of the coupon rate.”
The latest float is an open tender on a yield basis.
Special features of the TBs issue include: the obvious prescribed asset status, liquid asset status, the TBs are tradable, tax exempt, acceptable as collateral for overnight accommodation by the RBZ, and their allotment will be at weighted average rate.
Below par compliance to set minimum prescribed assets requirements has emerged as the country’s present inflationary environment has increased the risks associated with such investments, particularly insofar as they are performing below inflation.
Because prescribed assets are mostly fixed interest assets, it is difficult to reconcile a fixed interest instrument and very high inflation.
Experts say investing in under-performing assets by pension firms would be tantamount an expropriation of part of future pensions without compensation.
Another issue is that of constrained liquidity positions of local pension funds.
Said John Legat of market analysts Imara Asset Management in a note earlier in January:
“In order to meet the 10 percent prescribed asset level target, these combined pension funds would need to invest US$15million of their cash into prescribed assets.
“They have no other liquid asset to call upon except for equities but these too are illiquid; on a good day the market trades just US$500 000.
“Property is likely totally illiquid in this environment without significant write downs being incurred to force sales through. Putting the pension fund industry in perspective then, available liquidity for new investments amounts to well below US$30 million and at today’s black market rate less than US$20 million at best.”
Meanwhile, demand for TBs appeared to have taken an upward curve this year, after a dipping trend at the end of 2019.
Last month, Government successfully raised $200 million through the first Treasury Bills (TBs) auction of the year.
At the end of last year, TBs auctions had been largely underwhelming.
A $300 million float last October received an uptake of just 27 percent ($81 million), pointing either to investor fatigue in the Government – issued debt instrument or market concerns over returns in an inflationary environment. And a $200 million float of 272-day paper the next month had yielded a 52,5 percent uptake.
