Time for pension fund members to invest in their future

THE Namibian Government has announced its intention to prescribe to all institutional investors, i.e. retirement funds and insurance companies, to invest a minimum of five per cent of their total assets in unlisted investments (companies) in the country.

Numerous opinions have been expressed about this policy intervention and I wish to contribute to the debate with the view to give momentum and traction to its implementation. The local financial services industry was consulted on the proposed policy framework and supported the intended ruling following a robust and rigorous engagement.The industry task force on domestic asset requirements presented proposals for a pragmatic and prudent implementation of the decision.It is my understanding that the Government has tasked Namfisa to draft the necessary regulations to facilitate the implementation of the decision.Currently, all pension funds and insurance companies are obliged to invest 35 per cent of their total assets in qualifying Namibian assets such as shares, bonds, cash and properties, 20 per cent in international instruments and approximately 50 per cent in South African bonds, equities, cash and property.The proposed five per cent minimum investment in unlisted Namibian companies is included in the 35 per cent that should be invested locally and amounts to an estimated gross amount of N$2,6 billion on total assets of N$51,8 billion.On a net basis the figure is around N$1,3 billion.The five per cent ruling is seen in many circles as controversial and contentious.The IMF and the World Bank regard the prescription as risky and as having the potential to lead to continuous losses, depending on how it is implemented.Both bodies have commented that the Namibian Government will be ill advised to have a minimum of five per cent invested in unlisted Namibian companies.It is also submitted that, given the limited investable universe in Namibia, the five per cent rule could lead to asset price inflation, risky behaviour and efforts to circumvent regulation.It is additionally argued that the prescription will overheat the local economy, be inflationary and generate lesser investment returns to pension fund members and policyholders, relative to performance that could potentially be produced by investing in South African and/or international instruments.Furthermore, best-practice arguments in managing pension funds of prudence, diligence and transparency would seem to delay the implementation of the decision.These arguments are generally valid, reasoned and do have sound bases in economics.Namibia currently saves more than it is investing and the bulk of Namibian savings are presently invested in South Africa, earning good investment returns.As a matter of principle, I’d like to contend that we should never throw good money after bad, nor subject institutional assets to undue risks.There are four fundamental issues on the flipside that we need to consider regarding regional and offshore investments.FUNDAMENTALS Firstly, Namibia and other countries in Sub-Saharan Africa – relatively poor developing countries – are subsidising the rich, developed world.Economic theory holds that money should flow downhill.Indeed, money does both well and good: investors get a higher return than they could get in their own mature economies, and poor countries get the capital they need to get richer.In many circles, transferring money from the rich developed world to poor developing countries is seen as a justification for economic globalisation.This remains an argument advanced by many a protagonist of globalisation.According to the United Nations, in 2006 the net transfer of capital from poorer countries, including Namibia, to the developed world was US$784 billion, up from US$229 billion in 2002.We are money exporters and in fact are redistributing wealth upwards.Why this absurd situation? The US is by and large the banker for the world and most countries accumulate hard-currency reserves to cover their foreign debts, mitigate against speculation against their own currencies, for import cover or to use in case of natural or financial disasters.Investing in US bonds and Treasury Bills, in effect, boils down to us lending money to the US, which in turn, allows the US to keep interest rates low while running up massive deficits with no apparent penalty.Does the current US twin deficit really matter given this absurd situation? In a Namibian context, this is similar to any local commercial bank paying higher interest on deposits than it is receiving from its lending activities.The cost of this to Namibia and similar, poorer nations is considerably high.Whilst it is true that the instruments in question are risk free and allow investors to achieve stability, the returns are relatively low and the money could have been used, or at least some portion of it, to develop the local economy.Investing billions of Namibian savings in South African bonds and Treasury Bills, despite generating good investment returns, means we are lending money to the South African government to develop the South African economy.Instead, should we not support the intention of the Namibian Government to require institutional investors to invest five per cent in Namibian unlisted companies and ultimately contribute to the development of our own economy? Development requires that local savings be locally invested and there is something strange about poor Namibians financing the consumption of US residents or South African residents in the name of higher investment returns.Is it not time for local institutional investors to balance higher investment returns offshore and within the region against the development of their own country? Secondly, it is an accepted fact that most economies that have successfully developed have redirected some of their savings towards domestic capital accumulation.Japan, Korea, and Taiwan, to a lesser extent, are good examples in this regard.Most local observers would agree that the introduction of domestic asset requirements has been pivotal in the development and expansion of domestic capital markets.Does the intention to introduce the five per cent rule, in a prudent manner, not deserve support? Countries like Singapore and Japan that have succeeded in implementing domestic asset requirements have made use of their respective governments to apply prescription whereby these governments have either operated as direct owners (Singapore), or as guides to bank lending (Japan).Thirdly, the industry has proposed that private equity and alternative investments are included in the definition of unlisted companies to ensure the proper management of risks involved.Using a portion of pension fund assets to fund unlisted investments is relatively novel in Namibia and it is understandable why more than two years have been spent in crafting the framework for a smooth implementation of this decision.Is it not time for the country to give momentum to its intentions? The future is not shaped by people who don’t really believe in the future.Men and women of vision and vitality have always been prepared to bet their futures, even their lives, on ventures of unknown outcomes.Is it impossible to implement the decision prudently and responsibly by mitigating the risks known to us and adjust accordingly as the situation evolves? Fourthly, there are some philosophical undertones, at least in my estimation, to the five per cent prescription.What would the quality of our living standards be at retirement if retirement fund members and institutional investors have the best of investment returns in this world, and the country in which they retire (Namibia) lacks basic infrastructure such as roads, water, electricity, hospitals, medical centres, firms, etc that provide basic necessities? Should we thus not, in the case of five per cent of our assets, consider trading off the need for the “highest possible investment returns” in the “safest possible environment”, for what could amount to marginally lower overall returns from investments in assets that would contribute to the long-term development of Namibia? In fact, funds that are entrusted to credible asset managers with the necessary skill, capacity, resources, products and track record to invest in alternative assets could potentially generate higher returns than most conventional asset classes.Even developed countries have “home-asset preferences” for their own pension funds.CHALLENGES The challenge is how we institutionalise the decision.The industry has made certain proposals on how best to implement the decision and to manage the risks involved.Pension funds are subject to a variety of risks which can be classified primarily as portfolio or investment risks, systemic risks and agency risks.Portfolio risks include unsystematic risks or diversifiable risks and systemic or market risks.Agency risks arise when the interests of fund administrators, asset managers, or consultants are not fully aligned with the interests of fund members and include the potential of fraud, misfeasance, malfeasance, bulking, and theft of assets or improper advice.Systemic risks on the other hand, arise from the link between the retirement fund interactions with other areas of the financial system, including the economy as a whole.Regulatory regimes are first and foremost aimed at addressing the above risks and to ensure prudent management of institutional assets.They also have a role to balance their responsibility with outcomes in the overall economy as guided by policymakers.Whilst I concur that the protection of pension fund members’ assets in unlisted investments require a very strong institutional infrastructure, it is my contention that it is possible to implement the five per cent rule via prudent mechanisms such as proper disclosure requirements, allowing only managers with the necessary skills, resources, solutions and track record.Added to this, credible barriers to entry should be established to eliminate fly-by-night and corrupt operators.In conclusion, I must re-emphasise that implementing this decision requires a fine balancing act.Although it is a road less travelled, this is the right thing to do, provided we mitigate the risks highlighted by various stakeholders including the IMF, World Bank and regulators.Resistance is normal and natural whenever one creates something new, introduces change or wants to progress.As Alfred Whitefield eloquently puts it, “The art of progress is to preserve order amid change and to preserve change amid order”.As this process evolves, I look forward to contributing towards the realisation of the said regulations to implement the decision that will substantially add to the economic growth of Namibia.* This article has been written and submitted by Johannes !Gawaxab in his private capacity and not that of Old Mutual MD.The local financial services industry was consulted on the proposed policy framework and supported the intended ruling following a robust and rigorous engagement.The industry task force on domestic asset requirements presented proposals for a pragmatic and prudent implementation of the decision.It is my understanding that the Government has tasked Namfisa to draft the necessary regulations to facilitate the implementation of the decision.Currently, all pension funds and insurance companies are obliged to invest 35 per cent of their total assets in qualifying Namibian assets such as shares, bonds, cash and properties, 20 per cent in international instruments and approximately 50 per cent in South African bonds, equities, cash and property.The proposed five per cent minimum investment in unlisted Namibian companies is included in the 35 per cent that should be invested locally and amounts to an estimated gross amount of N$2,6 billion on total assets of N$51,8 billion.On a net basis the figure is around N$1,3 billion.The five per cent ruling is seen in many circles as controversial and contentious.The IMF and the World Bank regard the prescription as risky and as having the potential to lead to continuous losses, depending on how it is implemented.Both bodies have commented that the Namibian Government will be ill advised to have a minimum of five per cent invested in unlisted Namibian companies.It is also submitted that, given the limited investable universe in Namibia, the five per cent rule could lead to asset price inflation, risky behaviour and efforts to circumvent regulation.It is additionally argued that the prescription will overheat the local economy, be inflationary and generate lesser investment returns to pension fund members and policyholders, relative to performance that could potentially be produced by investing in South African and/or international instruments.Furthermore, best-practice arguments in managing pension funds of prudence, diligence and transparency would seem to delay the implementation of the decision.These arguments are generally valid, reasoned and do have sound bases in economics.Namibia currently saves more than it is investing and the bulk of Namibian savings are presently invested in South Africa, earning good investment returns.As a matter of principle, I’d like to contend that we should never throw good money after bad, nor subject institutional assets to undue risks.There are four fundamental issues on the flipside that we need to consider regarding regional and offshore investments.FUNDAMENTALS Firstly, Namibia and other countries in Sub-Saharan Africa – relatively poor developing countries – are subsidising the rich, developed world.Economic theory holds that money should flow downhill.Indeed, money does both well and good: investors get a higher return than they could get in their own mature economies, and poor countries get the capital they need to get richer.In many circles, transferring money from the rich developed world to poor developing countries is seen as a justification for economic globalisation.This remains an argument advanced by many a protagonist of globalisation.According to the United Nations, in 2006 the net transfer of capital from poorer countries, including Namibia, to the developed world was US$784 billion, up from US$229 billion in 2002.We are money exporters and in fact are redistributing wealth upwards.Why this absurd situation? The US is by and large the banker for the world and most countries accumulate hard-currency reserves to cover their foreign debts, mitigate against speculation against their own currencies, for import cover or to use in case of natural or financial disasters.Investing in US bonds and Treasury Bills, in effect, boils down to us lending money to the US, which in turn, allows the US to keep interest rates low while running up massive deficits with no apparent penalty.Does the current US twin deficit really matter given this absurd situation? In a Namibian context, this is similar to any local commercial bank paying higher interest on deposits than it is receiving from its lending activities.The cost of this to Namibia and similar, poorer nations is considerably high.Whilst it is true that the instruments in question are risk free and allow investors to achieve stability, the returns are relatively low and the money could have been used, or at least some portion of it, to develop the local economy.Investing billions of Namibian savings in South African bonds and Treasury Bills, despite generating good investment returns, means we are lending money to the South African government to develop the South African economy.Instead, should we not support the intention of the Namibian Government to require institutional investors to invest five per cent in Namibian unlisted companies and ultimately contribute to the development of our own economy? Development requires that local savings be locally invested and there is something strange about poor Namibians financing the consumption of US residents or South African residents in the name of higher investment returns.Is it not time for local institutional investors to balance higher investment returns offshore and within the region against the development of their own country? Secondly, it is an accepted fact that most economies that have successfully developed have redirected some of their savings towards domestic capital accumulation.Japan, Korea, and Taiwan, to a lesser extent, are good examples in this regard.Most local observers would agree that the introduction of domestic asset requirements has been pivotal in the development and expansion of domestic capital markets.Does the intention to introduce the five per cent rule, in a prudent manner, not deserve support? Countries like Singapore and Japan that have succeeded in implementing domestic asset requirements have made use of their respective governments to apply prescription whereby these governments have either operated as direct owners (Singapore), or as guides to bank lending (Japan).Thirdly, the industry has proposed that private equity and alternative investments are included in the definition of unlisted companies to ensure the proper management of risks involved.Using a portion of pension fund assets to fund unlisted investments is relatively novel in Namibia and it is understandable why more than two years have been spent in crafting the framework for a smooth implementation of this decision.Is it not time for the country to give momentum to its intentions? The future is not shaped by people who don’t really believe in the future.Men and women of vision and vitality have always been prepared to bet their futures, even their lives, on ventures of unknown outcomes.Is it impossible to implement the decision prudently and responsibly by mitigating the risks known to us and adjust accordingly as the situation evolves? Fourthly, there are some philosophical undertones, at least in my estimation, to the five per cent prescription.What would the quality of our living standards be at retirement if retirement fund members and institutional investors have the best of investment returns in this world, and the country in which they retire (Namibia) lacks basic infrastructure such as roads, water, electricity, hospitals, medical centres, firms, etc that provide basic necessities? Should we thus not, in the case of five per cent of our assets, consider trading off the need for the “highest possible investment returns” in the “safest possible environment”, for what could amount to marginally lower overall returns from investments in assets that would contribute to the long-term development of Namibia? In fact, funds that are entrusted to credible asset managers with the necessary skill, capacity, resources, products and track record to invest in alternative assets could potentially generate higher returns than most conventional asset classes.Even developed countries have “home-asset preferences” for their own pension funds. CHALLENGES The challenge is how we institutionalise the decision.The industry has made certain proposals on how best to implement the decision and to manage the risks involved.Pension funds are subject to a variety of risks which can be classified primarily as portfolio or investment risks, systemic risks and agency risks.Portfolio risks include unsystematic risks or diversifiable risks and systemic or market risks.Agency risks arise when the interests of fund administrators, asset managers, or consultants are not fully aligned with the interests of fund members and include the potential of fraud, misfeasance, malfeasance, bulking, and theft of assets or improper advice.Systemic risks on the other hand, arise from the link between the retirement fund interactions with other areas of the financial system, including the economy as a whole.Regulatory regimes are first and foremost aimed at addressing the above risks and to ensure prudent management of institutional assets.They also have a role to balance their responsibility with outcomes in the overall economy as guided by policymakers.Whilst I concur that the protection of pension fund members’ assets in unlisted investments require a very strong institutional infrastructure, it is my contention that it is possible to implement the five per cent rule via prudent mechanisms such as proper disclosure requirements, allowing only managers with the necessary skills, resources, solutions and track record.Added to this, credible barriers to entry should be established to eliminate fly-by-night and corrupt operators.In conclusion, I must re-emphasise that implementing this decision requires a fine balancing act.Although it is a road less travelled, this is the right thing to do, provided we mitigate the risks highlighted by various stakeholders including the IMF, World Bank and regulators.Resistance is normal and natural whenever one creates something new, introduces change or wants to progress.As Alfred Whitefield eloquently puts it, “The art of progress is to preserve order amid change and to preserve change amid order”.As this process evolves, I look forward to contributing towards the realisation of the said regulations to implement the decision that will substantially add to the economic growth of Namibia. * This article has been written and submitted by Johannes !Gawaxab in his private capacity and not that of Old Mutual MD.