The continued decline in the performance of the Zimbabwe Stock Exchange (ZSE), coupled with inflationary pressures and currency depreciation, will have a significant impact on pension fund assets.
According to the first quarter report released by regulator Insurance and Pension Commission (IPEC), at least 44,62 percent of pension fund assets are invested in equities.
As at 31 March 2019, the value of pension fund assets invested on the stock market stood at $2,4 billion down from $2,52 billion as at 31 December 2018.
This value could be much lower now as the stock market has continued to head south giving investors negative returns.
As of Thursday last week, the main Industrials index on the ZSE was up by just 13 percent while the most sort after ZSE top 10 index was up by a mere 2,1 percent.
While the nominal performance is marginally positive, the returns are negative against inflation, which reached 175,66 percent by June 2019.
Also worrying for pension fund managers is that this asset class, which was US dollar denominated as at December 2018, is now denominated in the local Zimbabwean dollar, resulting in significant value erosion.
Value erosion, if not guarded against, will result in pensioners not fully benefiting from years of contribution as witnessed post the hyperinflationary period which is subject of discontent up to now.
Pensioners are currently receiving paltry payouts resulting from alleged value erosion post hyperinflation.
Zimbabwean pensioners and insurance policyholders suffered significant prejudice when the country’s currency was converted to US dollar following unprecedented and prolonged periods of hyperinflation during the period 2007 to 2008.
The material prejudice suffered by policyholders resulted in Government appointing a Commission of Inquiry led by Retired Judge Justice George Smith with a mandate to establish the extent of prejudice, if any, to pension fund members or to insurance policyholders or the beneficiaries of such persons.
With the equities market heading south, the country faces old age poverty if fund managers are not innovative enough to safeguard policy holder assets.
Pension fund managers who spoke to The Sunday Mail said with the equities market set to stay negative for longer, there is need to diversify into other asset classes as a way of preserving value.
“Investment property and probably prescribed assets are interesting avenues that we are now channelling funds to, but it has to be done cleverly so that we don’t end up with dead assets,” said a fund manager who cannot be named.
As at 31 March 2019, investment property valued at $1,27 billion accounted for 23,58 percent of the total assets, having grown from $1,1 billion prior as at December 31, 2019.
Approximately $400 million worth of assets is currently invested in prescribed assets. This is a prescribed asset ratio of just 7,32 percent.
Pension funds are currently looking at increasing their investments in this asset class and led by the Zimbabwe Pension Fund Association (ZAPF) they are looking for areas of investment with prescribed asset status.
The association intends to present a paper to the Ministry of Finance through IPEC which will be subscribed by the pensions industry.
“ZAPF is, therefore, calling for investment proposals that seek for Prescribed Assets status which will then be forwarded to IPEC for approval.
“Please note that your proposal must fall within the Government priority list of investments,” reads a letter to pension funds by ZAPF.
An analyst with Hucklib Pvt Limited Kuda Mundowozi said the main challenge in the local capital markets is lack of investment alternatives to diversify into.
“However, the alternative investments that are there include going into private equity and venture capital where you invest in businesses that have potential to expand, but the challenge again of these alternative investments is every business locally is also affected by the same macroeconomic fundamentals that are affecting the listed companies, to some extent we can use what is happening to the listed companies as a measure of what is taking place in the whole economy,” he said.
Mr Mundowozi suggested that to preserve value, investors should be allowed to participate in the global markets by investing offshore into other markets such as JSE, LSE and NYSE and also other investment opportunities in the global economy such bond markets and derivatives.
“Unfortunately there is the risk of capital flight when the economy is opened up but it helps our markets to integrate into the global markets.”