Ipec urges pension funds to invest in value-preserving instruments

Nelson Gahadza

THE pensions industry acquired 4,99 million milligrammes of gold-backed digital tokens in 2023, which were valued at $2,12 billion, as the industry regulator, the Insurance and Pensions Commission (Ipec), continues to encourage the sector to invest in value-preserving instruments.

The gold-backed digital tokens are tradable as a means of payment, used as a store of value and also bear the prescribed asset status.

In the 2024 Monetary Policy Statement (MPS), Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mushayavanhu said both the gold coins and gold-backed digital tokens would continue to be used as investment instruments and to manage liquidity in the economy, with a view to stabilising the currency and exchange rate.

The gold-backed digital tokens (GBDTs) are no longer called ZiG but GBDTs following the introduction of a new currency, Zimbabwe Gold, commonly known as ZiG.

According to the pensions sector report for the year ended December 31, 2023, the industry had also acquired 1,995 gold coins of varying denominations worth $28,25 billion.

“The industry has an option to convert the gold coins to digital tokens; however, as of the reporting date, no entity had exercised the option.

“Therefore, pension funds are encouraged to invest in value-preserving instruments, which can facilitate person-to-person (P2P) and person-to-business (P2B) transactions,” Ipec said.

The gold-backed digital tokens became an approved means of payment for domestic transactions with effect from October last year.

As of March 5, 2024, the RBZ had issued 759,31 kilogrammes’ worth of gold-backed digital tokens since their introduction towards the end of last year.

Pension funds long-term savings products remain key in mobilising funds for long-term investments, which are critical for financing national projects, including infrastructure development.

With pension funds playing a critical role in advanced and developing economies, it is also time Zimbabwe looked at how it can capitalise on the retirement savings of workers to revive the economy.

Considering resource constraints that most developing countries face, there is need for the country to turn to domestic sources of funding such as pension assets, particularly to finance long-term infrastructure projects such as power generation.

However, the pensions industry’s assets are spread across various investment instruments.

As of December 31, 2023, total industry assets stood at $12,18 trillion, which was a nominal increase of 1 000 percent from $1,1 trillion reported in December 2022.

In US$ terms, assets increased from US$1,6 billion to US$2 billion during the period under review.

According to the report, the industry’s assets for the year were concentrated in investment properties and quoted equities, which constituted a combined position of 73 percent of the industry’s total asset portfolio.

Investment property constituted 50 percent of total assets, compared to 44 percent for the prior year.

“The increase in the share of investment property is largely on account of revaluation gains,” reads the report.

The proportion of quoted equity investments to total assets decreased from 28 percent to 23 percent, notwithstanding the nominal increase of 801 percent during the last quarter of 2023.

During the year under review, investments in unquoted equities increased by 454 percent, from $73 billion to $404 billion.

However, there was a decrease of 38 percent in real terms despite the nominal increase, and its share of total assets declined from 7 percent to 3 percent.

“The commission will continue to monitor the valuation of private equity investments to ensure consistency and comparability within the industry,” said Ipec.

The industry’s prescribed assets amounted to $1,1 trillion, which constituted 9 percent of the industry’s total assets and this was a nominal increase of 1 325 percent from the prescribed asset investments of $73,84 billion, which constituted 7 percent of total assets.

“Notwithstanding the increase in the prescribed asset ratio, the ratio is still below the regulator’s minimum of 20 percent, and the industry is urged to invest in a pool of instruments conferred with prescribed asset status to meet the minimum prescribed threshold,” said Ipec.

According to the report, foreign currency-denominated assets for the industry increased by 445 percent from US$193,31 million as of Q4/2022 to US$1,05 billion as of December 31, 2023.

The major asset classes were equities, investment property and prescribed assets, which constituted 54 percent, 27 percent and 8 percent, respectively.

“This was compared to the major asset classes as of December 31, 2022, which were equities, prescribed assets and money market investments constituting 38 percent, 27 percent, and 10 percent, respectively,” reads the report.

According to the document, as of the reporting date, 13 counters were trading on the Victoria Falls Stock Exchange (VFEX), where pension funds are also investing.

Ipec said the holding of foreign currency-denominated assets helps cushion the assets from inflation.

“Pension funds should ensure that the income generated by foreign currency-denominated assets is equitably allocated to members so that member benefits can improve,” it said.

During the year under review, contribution arrears stood at US$22,44 million, constituting 2,13 percent of the industry’s foreign currency-denominated assets.

The foreign currency-denominated assets of the industry were mainly invested in quoted equities, investment property and prescribed assets.

They collectively constituted 90 percent of total foreign currency-denominated assets.

The major investments are mainly VFEX counters, the Eastern and Southern African Trade Fund, Afrexim, Nedbank, Quilter Plc and Anglo America.

However, total income for the industry for the year under review was $10,49 trillion, compared to $310.24 billion for the same period the previous year.

Of the $10,49 trillion, total income earned in foreign currency was US$236,83 million, which is equivalent to $1,4 trillion, thus constituting 13 percent of the industry’s total income.

The report noted that the major source of income was fair value gains on investments, constituting 65 percent of total income and amounting to $6,83 trillion.

Contributions constituted 2 percent of total income, for a total of $160 billion.