The Sunday Mail
Tawanda Musarurwa
Should insurance and pension companies continue to be compelled to pump money into assets with reduced potential of decent returns?
All things being equal, prescribed assets, such as stocks, bonds and other types of Government paper, should be generating significant returns.
Pension funds, in particular, are required by law to invest at least 10 percent of their portfolio in prescribed assets.
Life and funeral assurance companies are required to invest 7,5 percent of market value of the total adjusted assets in prescribed assets.
Short-term insurance companies are required to invest 5 percent of their funds in prescribed assets.
However, Zimbabwe’s present inflationary environment has increased the risks associated with such investments, particularly in as far as they are performing below inflation.
Because prescribed assets mostly attract fixed interest rates, it is difficult to reconcile a fixed interest instrument and very high inflation.
Insurance and pension firms’ investments in underperforming assets would be an expropriation of part of future pensions without compensation.
And when it’s all said and done, the main losers tend to be the ordinary folk.
The Insurance and Pensions Commission (IPEC) in its third quarter Pensions Sector report highlighted that pensions funds could be facing the liquidity risk since most of their current investments are in immovable properties.
To then compel these same entities to meet their prescribed assets requirement means that it will drain the cash they have at hand to pay-out pensioners.
“The industry is also exposed to relatively high liquidity risk on account of the concentration of the asset portfolios in properties and equities,” highlighted IPEC.
“As at 30 September 2019, the two real asset classes accounted for 76,48 percent of the industry’s total asset base.
“The aforementioned contribution and rental arrears also heighten the risk. Some players are unable to unwind from their positions to meet liabilities on time without incurring huge financial losses. The funds end up selling assets at discounted prices.”
The third quarter 2019 numbers show that pensions funds had a prescribed assets compliance of 7,64 percent, having invested $722,12 million.
Says John Legat of market analysts Imara Asset Management in January: “In order to meet the 10 percent prescribed asset level target, these combined pension funds would need to invest US$15million of their cash into prescribed assets. They have no other liquid asset to call upon except for equities but these too are illiquid; on a good day the market trades just US$500 000.
“Property is likely totally illiquid in this environment without significant write downs being incurred to force sales through. Putting the pension fund industry in perspective then, available liquidity for new investments amounts to well below US$30 million and at today’s black market rate less than US$20 million at best.”
On the insurance front, data from IPEC show that short-term insurers’ investments in prescribed assets decreased by 25,63 percent from $28,48 million as at June 30, 2019 to $22,67 million as at September 30, 2019.
During that period, none of the 18 short-term insurers were compliant with the minimum prescribed asset ratio of 10 percent.
Legat raises similar concerns over compelling these firms to comply with the prescribed assets requirement.
“The amount invested in equities by the insurance sector at the end of September amounted to 3,7 billion or US$240 million. Prescribed assets stood at $1,4 billion. Cash and money market funds stood at a mere $241 million or US$16 million, which to us looks like a scary number given the need to pay out for insurance claims as they fall due,” he said.
“If they are to meet the prescribed asset requirements, most of their liquid assets will need to go into prescribed assets. Bottom line is that there is little to no money available for new investments at a time when policyholders must be questioning whether they can afford insurance at all and may choose to stop paying their premiums altogether.”
IPEC commissioner Dr Grace Muradzikwa said there is need for a re-think on prescribed assets paper to make sure that these forms of investment are attractive to pensions and insurance firms that are required to hold them.
“We are worried about the funeral assurance because at under 1 percent against a compliance level of 10 percent, there is need for quite a shift in their investment portfolios.
“The short-term industry as well, we have seen them coming and asking Government to come up with a paper that is acceptable. I think there is a genuine desire to comply, it’s just that Government needs to come up with an acceptable instrument which meets their investment goals, especially when you look at the need to preserve value,” she said at the release of the third quarter reports.
“I have been on record saying that a prescribed asset paper should not be seen as inferior, we need to reach that stage where the market will actually be looking for prescribed assets because it’s paper which actually meets their requirements as well in terms of tenures and yields.
“I know it (prescribed assets) is always of a developmental nature, but there is no reason why it cannot be developmental, have social impact and is still able to meet acceptable investment criteria.”
