Zimbabwe: Offshore Pension Investments Preserve Value

14 February 2020
editorial

Parliament sat, for the first time this year, on Tuesday with at least 10 Bills set to be debated during the Second Session of the Ninth Parliament.

The Pension and Provident Funds Amendment Bill that seeks -- among other things -- to allow pension funds to invest some of their assets offshore will be debated.

The law does not provide for offshore investment. However, the draft Pension and Provident Funds Bill has a provision for offshore investments subject to certain conditions, including investing in prescribed assets.

However, there are few instances where authorities granted waivers. A case in point was a prescribed asset status granted by the Government allowing local pension funds to invest in the African Export-Import Bank (Afreximbank) bond.

The National Social Security Authority (NSSA) said last week that its decision to invest US$20 million offshore yielded US$2 million in dividends between 2017 and 2018.

That is quite reasonable by any measure.

NSSA said foreign currency generated from the Afreximbank investment will help meet its external obligations as the authority plans to expand its offshore investment portfolio.

This demonstrates how offshore investments can help to preserve the balance sheet value of local pension funds, particularly in this hyper-inflationary environment.

The local pension industry is struggling to preserve value in an environment characterised by absence of high yielding assets, low occupancy levels in the properties market and inflationary pressure on fixed income securities.

It is our firm belief that there are huge benefits that can be derived from investing outside the country.

To start with, offshore investments represent the geographic diversification of assets which assists pension funds to effectively diversify investment risks their portfolios are exposed to.

Pension funds can also diversify their sources of investment returns.

Investing abroad also exposes pension assets to lucrative sectors that Zimbabwe may not have. It also enables investment in economies which are growing more than Zimbabwe, a positive aspect for investment return.

Furthermore, investing offshore exposes the pension assets to currency movements which could, however, be beneficial or costly depending on when investments are made and repatriated. There are operational aspects which must be borne in mind.

Offshore investment vehicles and products may carry higher management fees relative to costs incurred locally. Therefore, the fund would need to ensure that expected investment returns are not only achievable, but also adequately above the costs.

Ultimately, allowing offshore investment has significant potential benefits of investment returns for pension funds, especially during times when the domestic economy is not enabling investors to generate high returns.

The condition of adhering to prescribed assets investment thresholds before venturing offshore seems like a good idea, but may be limiting if there aren't enough prescribed securities for the market to absorb or if the existing prescribed securities are yielding lower returns on a comparative basis.

This could be a great conflict for trustee boards with fiduciary responsibilities of care and prudence in allocating pension fund assets.

Pension funds are possibly the largest reservoir of resources for investment in the productive sectors of the economy and also for financing infrastructural projects.

Given that Zimbabwe at the moment does not have access to meaningful offshore capital for infrastructure projects such as roads, rail and energy, domestic savings become critical.

In its 2019 report, the African Development Bank (AfDB) estimated that Zimbabwe has an infrastructure backlog of US$30 billion following several years of little investment in that regard.

For instance, Zimbabwe only spent US$2 billion on infrastructure development between 2009 and 2016, an amount analysts say should have been spent on an annual basis due to tight fiscal space.

The huge debt overhang and arrears to the multi-lateral financial institutions, including the World Bank, coupled with illegal sanctions imposed by the US and its Western allies are making it difficult for the country to raise long-term capital for infrastructure projects.

There is a growing trend in the world where retirement savings are being invested in critical projects; thus bringing socio-economic transformation.

Countries on the growing list of nations encouraging the use of pension reserves for infrastructure development include South Africa, Nigeria, Russia and Canada.

This week, pension funds expressed willingness to invest in key infrastructural projects and struggling State-owned enterprises.

Pension funds are already warning up to it, creating an enabling environment is of paramount importance.

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