Pension funds embrace VFEX as safe haven

Nelson Gahadza

THE Insurance and Pensions Commission (IPEC) says the Victoria Falls Stock Exchange (VFEX) has enhanced diversification and sustainable value for pension funds by enabling investments in foreign currency-denominated securities.

This comes as the pensions industry’s foreign currency-denominated assets increased by 38,97 percent to US$399,98 million as of June 30, 2024, from US$287,81 million as of the second quarter, thus commanding 18,38 percent of total assets.

According to the IPEC Q2, 2024 pensions report, the major asset classes were listed equities, prescribed assets, money market investments and investment property, which constituted 34 percent, 19 percent, 12 percent and 11 percent, respectively.

“The holding of foreign currency-denominated assets has helped in cushioning the investment portfolios from being eroded by inflation.

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

In an interview, business analyst Mr Kudakwashe Mundowozi said, with a stable environment characterised by low inflation, pension funds can offer the required capital for investment with the money emanating from their investment portfolios.

“VFEX has managed to provide a safe haven for companies earmarking to raise money, as well as preserve value. Therefore, due to the bourse being US dollar-denominated, a number of pension funds are seeing it worthwhile to invest in companies listed on VFEX in order to hedge from past experiences,” he said.

Mr Mundowozi added that pension funds should ensure that earnings from their investments in hard currency also benefit pensioners, a move that would go a long way in building trust.

In the insurance and pensions sectors, the pre-2009 loss of value issue remains outstanding, even after recommendations by the Justice George Smith-led Commission of Inquiry.

Pensioners and policyholders lost their savings when the country switched from the Zimbabwe dollar to the multi-currency system in 2009.

According to the report, contribution arrears as of June 30, 2024 stood at US$37,5 million, constituting 9,4 percent of the industry’s foreign currency-denominated assets and 71 percent of US dollar contributions received.

IPEC said pension funds are encouraged to verify whether the sponsoring employer has the contribution liability reported in their audited financial statements. The commission further said boards of funds and employers are urged to address the challenge of US dollar arrears, which are adversely impacting reasonable expectations of members.

Timely remittance of contributions, IPEC added, is a critical aspect of managing pension funds and ensuring the financial security of employees.

“Boards of funds are encouraged to establish clear guidelines aimed at facilitating prompt and consistent remittance of contributions. Engaging with sponsoring employers is also essential to safeguard the interests of members,” reads part of the report.

Investment analyst Enock Rukarwa said VFEX has provided the much-needed conduit for capital to flow in the market, hence pension funds saw it fit to hedge funds in the US dollar-denominated exchange.

“VFEX has particularly been a boon for companies seeking to preserve value, hence pension funds, being sceptical following pre-2009 losses, are seeing it prudent to invest in VFEX counters,” he said.

“With the VFEX working to introduce new investment products such as the commodities market and the bond market, this will provide additional investment asset classes in which the funds can secure pensioners’ funds, and, at the same time, create value.”

According to the report, foreign currency-denominated assets were in equities, prescribed assets, money market investments and investment property, which collectively constituted 76 percent of total foreign currency-denominated assets.

The major investments are VFEX counters, the Eastern and Southern African Trade Fund (ESATF), Afreximbank, Nedbank, Quilter Plc shares and Anglo American.

In terms of local currency assets, IPEC said growth in contribution arrears in the half-year period, though affected by exchange rate distortions, is also an indicator of the growing challenge of non-remittance of contributions by fund sponsors as they fall due.

According to the report for the half year to June 2024, contribution arrears were US$53,88 million, constituting 2,47 percent of the industry’s assets, and this was an increase of 133,75 percent from US$23,05 million in the prior year, wherein contribution arrears constituted 1,45 percent of total industry assets.

“The industry is being reminded that the commission can garnish the bank accounts of the defaulting sponsoring employers,” IPEC said.

During the period under review, the industry’s total assets stood at US$2,18 billion, an increase of 37,11 percent from US$1,59 billion as of June 30, 2023.

The pension industry assets were concentrated in investment properties and quoted equities, which constituted a combined position of 69 percent of the industry’s total assets portfolio.

Investment property amounted to US$992,98 million, being 46 percent of total assets as of June 30, 2024, compared to US$828,52 million, which was 52 percent of total assets in the comparative period.

Quoted equities increased by 20,18 percent in US dollar terms, from US$421,41 million as of June 30, 2023 to US$506,47 million as of June 30, 2024.

According to IPEC, the irregular trend in industry assets was influenced by exchange rate distortions and delays in valuing direct property holdings.

During the period under review, prescribed assets increased by 104,33 percent to US$248,90 million, from US$121,81 million as of June 30, 2023, with revaluation gains being the primary driver.

Prescribed assets constituted 11 percent of the industry’s assets as of June 30, 2024, and this was an increase from 7,65 percent recorded at the same time last year.

“Notwithstanding the increase in prescribed assets, the ratio is still below the regulatory minimum of 20 percent . . . ,” IPEC said.

The report shows that the number of gold coins acquired by the pensions industry remained constant from the previous quarter, with 1 995 coins of various denominations.

However, the value of the coins increased by 5,97 percent to reach US$4,70 million as of June 30, 2024, up from US$4,44 million reported as of March 31, 2024. The increase in value was driven by gains in the price of gold.