The Looming Retirement Crisis

These asset managers must also realise that we also as government should start developing ourselves, Patrinah Masalela, the Director Insurance & Pensions at the Ministry of Finance and Economic Development said in response to question from The Business Weekly & Review this week. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] Masalela had just deliberated on commencement of the Retirement Funds Act 2022 which will see an estimated P13 billion injected into the economy by pension funds in line with the new law which reduced pension funds’ offshore investment from 70 percent to 50 percent. “We cannot run with only one aspect,” Masalela argued in an interview with this publication on the sidelines of a media briefing by the finance ministry. The background to the question from this publication was that since P13 billion will be repatriated, there may be implications in that pensioners are being denied an opportunity to earn higher rates of return overseas. Observers have also argued that by limiting offshore investments to 50 percent, the rules sort of make it difficult for asset managers to fulfil the fiduciary duty of being able to diversify overseas in a greater range of instruments and deliver higher risk adjusted returns. Yes, Masalela agrees that offshore investments are good. “But at the end of the day, will you be happy if the pensioners are making money and we don’t have roads and hospitals?,” she quizzed rhetorically. Bokete Mokgosi, the Principal Investment Consultant at Alexforbes, disclosed during a panel discussion last week that in 2012, total pension fund assets were around P40 billion. Around that period, he said, about 58 percent of pension assets was invested offshore and that this gradually shot to about 65.5 percent in 2019. Within that period, pension fund assets grew to nearly P105 billion. “Cleary they were taking advantage of the diversity and higher returns of developed markets,” Mokgosi said in discussing the new retirement fund law. From that perspective, he considered the benefit of growth when it comes to offshore assets. “In term of our member profile, a large majority of members are active as opposed to deferred or pensionable,” he pointed out, adding that in that context, active members actually need growth, that growth coming from offshore assets. Over 10 years in total returns in Pula terms, the MSCI ACWI delivered 13.4 percent while the local Domestic Company Index total return index delivered 5.7 percent. DCI has struggled due to a number of factors that include sluggish economic growth and low liquidity. The Botswana Stock Exchange has also been set back by delistings. Investors argued that the stock exchange does not offer returns any more, given that asset managers buy and hold stocks. During COVID, all markets were in the red while the BSE was not moving, a perfect display of its inefficiency. Between 2015 and 2020, DCI declined by an average of 8.3 percent annually. The local equity market has declined from P43.5 billion to P39.4 billion since 2013, which experts argue indicates the gap between the growth and higher returns the pension funds have benefitted from in foreign assets over the past decade. While some experts argue that by reducing size of offshore assets pension funds will deny them higher returns, Masalela opines that a return is an objective as much as development is. “We cannot as a country shelve our own development for the sake of returns,” she emphasised. “We have to balance these things.” She asks pointedly: Why should the government go and borrow money from outside while there is a pool of funds it can tap into? Mokgosi concedes that the repatriation means “you are now able to borrow cheaper and develop the economy”, noting that “we should do this with caution”. He observed that the problem in “our market is we don’t have the depth of products”. “The challenge is we need those products and skills. The biggest challenges will be implementation,” Mokgosi said. Like other experts, he warned of asset bubbles. The Chief Operations Officer at Alexforbes, Ati Mannathoko, recently cited a Bank of Botswana report that he said showed that pension funds were currently sitting with about P10 billion in cash, meaning cash is in abundance. Against this background, the general consensus was that an influx of cash may be negative to equities or bonds. To soften the landing, government will now phase the total domestic investment limit, which will be increased to 41 percent by April 2023 and to 43 percent by December 2023. The total investment limit will be increased to 45 percent by December 2024 and full compliance with the target 50 percent achieved not later than April 2025. Said Masalela: “ We are saying government is not going to do it in a manner that is irresponsible. It will be a soft landing and the impact might not necessarily as high as assumed.” The government is on the lookout for anything going wrong. “We are monitoring this daily,” she emphasised. But for a member, Mokgosi argued that “it’s a question of where are my funds going to go” perhaps with no immediate assets available. Masalela said “ as a government we are looking at this as a package. Even our PPP, we are trying to revamp.” If there is a need to fund the budget, she said, there should be money going there. Fund managers argue that the funds will not necessarily find their way into bonds but cash, private equity and other such forums. Fund managers who spoke to this publication argued that it would make sense if government had a privatisation programme that would align with the repatriation of the funds. In other words, they call for sequencing of events which would improve the transitions such that there is a clear cut programme which would allow funds to flow into them. Observers also argue that the alternative is more exciting. Mokgosi has observed that in the UK and Germany, there is a small allocation towards equities with more allocated to alternatives. Such a set of circumstances has compelled asset owners to consider other local asset classes that can offer decent returns such as private equity, real estate and infrastructure. Asset Classes FY 2013 (%) May 2022 (%) Local Equities 19 13 Local Bonds 14 9 Local Property 1 3 Local Cash 5 9 Local Unlisted Equities 2 2 Offshore equities 49 47 Offshore bonds 7 6 Offshore Cash and Alternative Investment 3 11 100 100 Onshore/Offshore split 41/59 38.5/61.5 Source: Bank of Botswana As one can observe from the table above, both local equities and local bond allocations have reduced considerably since 2013, even though on an absolute basis their values have increased by 35 percent and 24 percent respectively. Whilst the allocation to local unlisted equities has remained the same over the same period, the allocation to local properties (real estate) has increased from 1 percent to 3 percent. The net result has been a marked increase in local cash allocation from 5 percent to 9 percent since 2013. Unlike other African and emerging economies, experts say private infrastructure investing in Botswana has not been adequately explored despite its potential. They believe that this asset class can aid in increasing the opportunity set available to fund managers in light of the above mentioned challenges and the recently proposed amendment to allowable local investment thresholds. Onshore alternative asset classes like infrastructure present a viable option to pursue. Local infrastructure investment strategies could cover a wide spectrum of projects, from economic to social infrastructure. The investment structure can also take different forms: primary vs secondary markets, debt vs equity funding, private vs listed opportunities, direct vs indirect. While such opportunities present new and exciting sources of returns for long term investors, observers say they also introduce peculiar risks that require careful consideration and management. Private equity is another prospect that is yet to be explored to its full potential. Private equity (PE) predominantly provides investors with exposure to strategic investments in the private sector, in companies not listed on a securities exchange, which offer significant growth prospects but need capital to be able to achieve their growth ambitions. As these companies are not listed on a securities exchange, they do not have access to public equity capital markets and need to obtain capital from other sources. Currently, the PFR2 has a limit of 5 percent of local private equity, which represents P3.1 billion potential in the asset class. However, the allocation to the local unlisted space is limited (currently less than half of that allocation is used). As indicated above, some local pension funds have already made direct allocations to this asset class, and with the expected inflows, this will be one of the asset classes likely to see significant growth in AUM over time. Real estate continues to rebound following a turbulent 2020 characterised by rental pressure, a sharp decline in market activity and suppressed valuations due to the COVID-19 pandemic. With the ongoing economic recovery, investors are returning to the asset class, deal activity has accelerated, particularly on the development side and recovery has been seen across most sub-sectors of the property market. Despite the challenges experienced by oversupply in some sub-sectors such as office and retail, opportunistic and value add properties exist in some nodes. Investors must tread carefully to identify these bouts of opportunities. The real estate market has outperformed the listed real estate in Botswana in the past 10 years. This excess alpha, coupled with being an inflation hedge in the long run, will continue to draw investors to this asset class. [/ihc-hide-content]

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The Looming Retirement Crisis

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