Pension funds investment strategy requires overhaul – experts

Players in the pensions industry are pushing for a rethink of the rules and regulations guiding investment of pension funds, arguing that the current system stifles innovation and hardly deliver the best returns on contributions.

Currently, more than 73 percent of the almost GH¢15 billion in Tier 2 funds are invested in government bills and bonds with just 2percent invested in equities listed on the Ghana Stock Exchange, a situation experts believe does not offer a secure future for these funds, since there is ample evidence, globally, of governments defaulting on their obligations.

“Only 2 percent of pension fund assets is invested in equity. This leaves contributors very exposed to long-term inflation. For pension funds to deliver positive real returns for contributors in the next decade, we need to think beyond fixed income,” Afriyie Oware, CEO, Axis Pension Trust, said.

Mr. Oware was speaking at the 2020 Pensions Strategy Conference organised by Axis Pension in collaboration with the CFA Society, Ghana. The conference had presentations on Ghana’s Economic Prospects and the viewpoints of leading fund managers in Ghana from a survey by Axis Pension Trust.

Nana Wiafe Boamah, Chief Investment Officer of Axis Pension, explained that countries in Europe, Asia and Africa have their pension funds well diversified into different sectors of the economy.

“You see the proportion of assets invested in the real economy, and by real economy, I mean equities, private equities, infrastructure, organised real estate. If we see assets move into these sectors, perhaps our growth rate could pick up more than what we currently have.

We are not allowed to do private investments but can you imagine the killing pension funds would have made during the banking sector recapitalization if we had been allowed to invest in banks like Zenith Bank, Fidelity and the likes, so that is what we are talking about,” Mr. Boamah explained.

The National Pension Regulatory Authority (NPRA)’s guideline on investments stipulates that pensions funds can be invested in bonds and other securities issued by the Government of Ghana, bonds or instruments issued by local authorities, bonds issued by corporates, Mortgage Backed Securities (MBS), Real Estate Investment Trusts (REITs), debentures, equities listed on a recognised on stock exchange, money markets securities and mutual funds.

Despite the number of opportunities for investments, many of these asset classes are unavailable in the Ghanaian economy. The Securities and Exchange Commission (SEC) is yet to give approval and issue guidelines on REITs, MBS and local authorities or municipal bonds.

Also, since the reforms in the financial sector, many investment options such as mutual funds have taken on increased risk and these challenges are forcing pension funds to look to only government bills and bonds or other bonds backed by government such as ESLA and a few corporate bonds.

“What I am advocating is for regulators to start looking at a floor to most of the strategic asset classes. Take equity for instance, there is a maximum allocation of 20percent but average allocation across the industry is 2percent but I feel we should put in a floor of 5percent.

It will encourage investors to buy. Tier 2 is long term and why would you want to take long term money and play short term? If you go into equity with a five-year horizon, we can wait and ride the storm that comes as a result of volatility, and wait for when market picks up. In 2017 alone, equities rallied by 50 percent; you won’t get in any other asset classes,” Mr. Boamah noted.

Frank Senyo Dewortor, Managing Partner, New Market Asset Management, a UK-based asset management firmed noted that globally, pension funds invest a significant portion of their funds in asset classes outside the countries of origin.

Even though the NPRA guidelines allow pension funds to invest up to 10percent of their funds outside the country, Mr. Dewortor noted that bureaucracies and cross border challenges hamper these initiatives.

“By international standards the pension funds here are significantly under diversified, they are highly exposed to Ghana’s country risks because all the investments are in Ghana more or less and you have a big portion of that mainly in government debt.

“We know that at the moment there are a lot of restrictions, bureaucratic restrictions, in place that make it difficult for pension funds to invest some of their funds abroad, even though the law allows them to invest up to 10percent abroad. It’s very difficult to do that because of bureaucratic processes in place,” he said.