Govt mulls private bonds for Pension Funds

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PHILLIMON MHLANGA IN VICTORIA FALLS

Government will allow pension funds to issue private bonds to preserve value of pension and retirement income of their clients, a senior government official has disclosed.

Empirical evidence, the world over has shown that there is a positive correlation between pension funds’ performance and economic growth.  They pool together funds, channel them towards projects that stimulate economic growth such as infrastructure.

Joseph Medzano, a deputy director for financial and capital markets in the Ministry of Finance and Economic Development said government was currently working on developing “strong” features for the proposed private instruments.

Zimbabwe currently has no active bond market and only has Treasury Bills and bonds issued by government, to fund its activities. Government excessive borrowing from the market meant that the private sector had been crowded out.

“There is a movement by government to allow individual pension funds to issue private bonds in order to preserve value of members’ subscriptions,” Medzano said at the Zimbabwe Association of Pension Funds Congress in Victoria Falls on Thursday.
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“As the Ministry of Finance, we are enhancing features to the proposed bonds so that we preserve value. We want to make sure that the instrument is attractive, where inflation cannot break through to destroy the value of the investment. It should be risk free so that
you are comfortable to put your money in.”

He said infrastructure development can only be driven by pension funds from subscriptions.

Medzano said government had listened to proposals from the industry to float private bonds.

“It is unfortunate that in this market as you might be aware there is only government Treasury Bills and bonds in the market at the moment but we want to open it up to private players as well. This can be done because years ago we floated two quasi-government bonds in the market so that you can participate. Now, we have taken the initiative to open
up the space for pension funds,” he said.

Pension funds play a pivotal role in economic development through their primary role of allocating pensioners’ contributions into securities, real estate, hedge funds, bonds, stocks, equities and other alternative investments that are relevant to preserve value of
pensions and retirement investments, especially given that inflation in Zimbabwe is eroding value of pension contribution.

Annual inflation for April this year is almost 76% up from 60,80% in the month of March. This means, the more effective and efficient the pension fund industry of a country is, the more acceleration to economic growth.

Zimbabwe’s pension funds industry had an asset base of $5 billion as at December 31. The sector is plagued by contribution arrears, which continue to rise. Currently contribution arrears are more than $600 million.

Non-remittance of pension contribution by companies has deprived members and their families of entitlements in the event of retirement, death or other development. The benefits can only be paid to beneficiaries whose contributions are up to date.

The Pensions Regulations (Statutory Instrument 323 of 1991 and 61 of 2014), stipulates that all sponsoring employers should remit contributions within 14 days after the end of each month to which the pension contribution relates.

However, employers continue to deduct amounts from salaries and wages of their employees and deliberately fail to pay such amounts to the relevant retirement fund.

This high level of contribution arrears also reduces the level of investible assets for pension funds and heightens the liquidity risk in the industry, something which impinges the economic role of pension funds.

The development also comes at a time when Zimbabwe’s infrastructure is dilapidated and the country, according to a recent Africa Development Bank report, requires more than US$20bn to cover the gap. It is expected that the bulk of investments in physical infrastructure over the next years will come from the private sector, particularly the
pension funds.