Prescribed assets channel funds towards economic development

“That a private equity investment has been accorded prescribed assets status by the regulator does not, in and of itself, automatically qualify it for inclusion into a pension fund’s investment portfolio”

Tawanda Musarurwa

IT IS generally accepted that pension funds and insurers are excellent sources of long-term capital, but it is also important that such funds are effectively channeled to long-term development finance assets.

With local pension funds and insurers having traditionally piled their monies into property and stocks, this has constrained their capacity to fund critical sectors of the economy.

But, prescribed assets and the accompanying requirement for pension funds and insurers to invest a portion of their investment funds into these assets, provides a channel for directing long-term funds into development.

For instance, several prescribed assets that were approved during the first nine months of 2023 will direct funds into the country’s agriculture sector.

As at the end of September 2023, 13 more prescribed asset instruments had been added to the portfolio.

Of these 13, four instruments will inject capital into various aspects of Zimbabwe’s agricultural sector.

The four instruments include Agrowth’s US$10 million debenture; AFC Land and Development Bank of Zimbabwe’s two Agro-bills of US$20 million and ZW$8,5 billion, respectively; Stratus and Partners’ US$50 million issuance; and Harvest Capital’s US$100 million issuance.

Agriculture is critical to Zimbabwe’s economy for several reasons, not least that it is a major source of employment.

According to the Zimbabwe National Statistics Agency’s 2023 First Quarter, Quarterly Labour Force Survey report, the agriculture sector employed 800 087 individuals, accounting for 24,9 percent of the country’s labour force.

Official figures show that the sector contributes between 11 and 14 percent to the country’s gross domestic product (GDP).

And, the local agricultural sector also supports industries such as agribusiness and agro-processing, providing around 60 percent of all raw materials for industry.

These figures show that the sector can have significant benefits across its complex value chain.

Addressing the 48^th Zimbabwe Association of Pension Funds annual congress earlier in May, Comarton Consultants managing director Mr Richard Muirimi said agriculture is a viable investment option for pension funds.

“Another investment that we should consider is farming, which can create annuity income of export proceeds for a minimum period of 20 years,” he said.

Statistics provided by the Confederation of Zimbabwe Industries (CZI) highlights investment opportunities in the country’s other primary sectors – in 2022 the local manufacturing sector sourced 48 percent of its raw materials from external markets, with 54 percent of manufacturers citing the non-availability of the raw materials locally.

Another key economic sector ripe for investment is the manufacturing sector.

The sector’s importance to the economy lies in that it allows increasing diversification of production.

Manufacturing allows more products to be brought onto the market, thereby expanding and diversifying the economy.

Notwithstanding the almost unlimited scope of expanding the local manufacturing sector with new producers, data from CZI pointed to the sector’s 2022 capacity utilisation levels at 56,1 percent, which shows the scope of possible expansion of current manufacturers.

The country’s prescribed assets framework was remodeled in 2019 to allow private equity and alternative investments as prescribed assets, hence insurers and pension funds can invest broadly.

The country’s approved prescribed assets are broad, and touch various key areas of the economy.

Some of the 13 new instruments approved as prescribed assets during the first nine months of the year include: Centra West’s US$42,5 million issue for power generation; the Zimbabwe Electricity Industry Pension Fund (ZEIPF)’s US$6,5 million issue for the construction of Marondera Shopping Mall; First Mutual Wealth’s US$5,6 million issue for student accommodation; the Revitus REIT’s US$11,88 million issue for the refurbishment of distressed properties; and IDBZ-Rooiport’s US$4,9 million issue for residential area development.

In 2021, some of the approved prescribed assets included: Datvest-Coutic Investments’ US$3,5 million issue for the development of a specialist hospital; the US$4,5 million Guruve Solar Park; the IH Advisory-Innscor Africa US$100 million issue for the purchase of stock feed for Innscor and Colcom, and to finance contract farming; ZEIPF’s US$4,6 million issue for the development of a specialist hospital and specialist psychiatric rehabilitation centre in Harare; and New Glovers (Pvt) Limited’s US$8,3 million solar energy project in Kwekwe.

Zimbabwe’s insurance and pensions sector’s contribution to the economy is however still low compared to international and regional benchmarks.

For example, Zimbabwe’s pension fund assets (for example) as a percentage of GDP were at around 10 percent at the end of 2022, compared to the global average of 30,5 percent.

At that time, neighbouring South Africa’s pension fund assets as a percentage of GDP stood at 83,8 percent.

The ascribing of prescribed asset status to privately issued instruments has the potential of broadening the sector’s impact in the economy, but the efficacy of prescribed assets is also dependent on the extent to which local insurers and pensions funds take them up.

In Zimbabwe, pension funds are required by law to hold at least 20 percent of their investment portfolios in prescribed assets.

Life assurance and funeral assurance companies are required to invest 15 percent and 10 percent, respectively, of market value of the total adjusted assets in prescribed assets.

Short-term insurance companies are required to invest 10 percent of their investment funds in prescribed assets.

But, players in the industry are still to fully comply with the statutory requirements with regards to prescribed assets.

According to information provided by the Insurance and Pensions Commission (IPEC), the country’s funeral assurers sector had an average prescribed asset ratio of just 0,07 percent, while that of life assurers stood at 9,27 percent at the end of the first six months of 2023.

For pension funds, prescribed assets accounted for just 8 percent of the industry’s total assets during that same period.

In respect of the short-term insurance sector, eight out of the 20 short-term insurers were compliant with the minimum prescribed asset ratio.

IPEC has since said it will “be escalating regulatory measures to cause compliance”.

Among other measures indicated in Statutory Instrument 206 of 2019, the regulator is empowered to compel a non-compliant insurer to liquidate its financial resources or investments in other asset classes, and have them channeled towards investment in any financial instrument with prescribed assets status.

And if all else fails, IPEC can cancel the registration of the non-compliant entity.

However, beyond compelling these entities to comply with the minimum prescribed asset ratios, there are other factors that influence insurers and pension funds’ investment decisions, such as risk appetite, market conditions, and taxation, just to mention the more common ones.

Observers say Government can also encourage pension funds to invest in the economy by providing tax incentives, offering regulatory support, and promoting infrastructure projects that align with long-term investment goals.

And, fostering a transparent and stable economic environment can boost the confidence of local investors.

For critical infrastructure projects, there is need for Government to put in place policy, legal and institutional frameworks that establish the governance of the various types of public-private partnerships (PPPs), if it is going to leverage long-term funding from the insurance and pensions sector.

Lessons can be drawn from neighbouring South Africa.

Ms Zareena Camroodien, head of fund governance and trustee conduct at South Africa’s Financial Sector Conduct Authority said that country’s laws now specify the kind of investments a retirement fund can invest in, and in what proportions.

“Regulation 28 (of the Pension Funds Act) now provides a definition for infrastructure, so there is no uncertainty about what can be invested in.

“And there is the 45 percent limit for infrastructure across all classes, but that excludes Government bonds

“It was important for us to do this, as signalling to invest into infrastructure.

“In South Africa indirect investing into infrastructure was at only 2 percent, which was rather low,” said Ms Camroodien while addressing an Organisation for Economic Co-operation – International Organisation of Pension Supervisors (OECD/IOPS) Global Forum on Private Pensions meeting in October.

“Usually infrastructure investments were funded by the State, but escalating debt exacerbated by the Covid-19 pandemic led Government to turn to the private sector, including retirement funds to potentially fund infrastructure investments.”

Large-scale infrastructure projects have the potential to generate stable and long-term returns for these entities, while simultaneously boosting economic productivity and improving the quality of life of retirees.

On the insurers and pension funds’ side, these entities should never invest blindly.

As actuary Mr Gandy Gandidzanwa has said (with regards to pension funds’ investments specifically):

“That a private equity investment has been accorded prescribed assets status by the regulator does not, in and of itself, automatically qualify it for inclusion into a pension fund’s investment portfolio.

“Trustees still need to carry out, with guidance from their appointed professional investment consultants, thorough due diligence on each and every private equity project coming through the prescribed assets status pipeline that could be of interest to them.”

Local insurers and pension funds must always be circumspect about the risk-return computations on certain large-scale infrastructure projects, limited liquidity to invest in huge projects especially for smaller funds, and the lack of clarity on some investment opportunities.

And there is also the question of whether insurers and pension funds have the necessary expertise internally, to make such significant investment decisions.