Says new regulation transfers savings to household
The new Retirement Fund Act, adopted in 2022, is very likely to impact the liquidity of retirement funds, calling for a robust liquidity management, the International Monetary Fund (IMF) has warned.
The new Act provides more (lumpsum) withdrawal options for pension scheme members, thereby effectively transferring liquidity from pension funds to households, IMF said in its report for Botswana titled ‘Financial Sector Assessment Program – Technical Note on Systemic Liquidity Management’. The report was released this month.
The lender argued that withdrawals could potentially compromise the ability to accumulate long-term retirement savings.
“Already now, payments upon retirement account for only around 80% of all payouts, of these around 40% are paid as a lump sum.”
IMF found that these numbers differ considerably between retirement funds, depending inter alia on the age and salary of members and the cyclicality of the employer’s industry. “Especially for smaller funds—and those where benefits already exceed contributions—a robust liquidity risk management will be critical.”
The Act also reduces sequentially the cap on foreign assets to 50% which IMF worries raises questions about the capacity of domestic capital markets to absorb repatriated investments.
Cash holding increase
A chunk of money has already made its way into Botswana last year evidenced by the increase in cash holdings by pension funds.
During a panel discussion at the Botswana Pension Society Conference, Ntsoaki Rampa, the Investment Analyst at Allan Gray, argued that local equities lack the capacity to absorb some of these funds. On the alternative, the primary issuer is the government, and there is an expectation of increased issuances. Bank of Botswana (BoB) Governor Cornelius Dekop recently remarked that it wouldn’t be surprising to witness heightened government bond issuances, given the strong appetite for them. Consequently, the cap on the P30 billion note program may be lifted.
There is also cash; however, interest rates have also decreased. Cash is typically viewed as the last resort for investment. Historically, fund managers have allocated funds predominantly to conventional assets. A decade ago, balanced mandates were allocating local funds across traditional asset classes such as listed equities, listed bonds, and cash. In the international market, allowances were made for property, private equity, and other alternative investments.
Integration of asset classes to absorb liquidity
With the implementation of new regulations, the market has integrated some of these asset classes into the local framework to absorb the anticipated influx of funds, estimated to exceed P13 billion returning to the country.
Ntsoaki observed that some fund managers have introduced infrastructure funds and established other investment schemes, such as SME funds.
However, a key concern for her is whether those alternatives can effectively absorb this capacity. For instance, regarding the SME fund, she argued that within the Botswana context, there might not be sufficient SMEs to absorb a billion pula. She questioned the capacity for deployment and utilisation of such funds in a manner that can generate returns.
IMF said authorities should thoroughly analyse the impact on funds’ liquidity and require liquidity risk management to be commensurate with expected withdrawals from its members.
“Effects of the new Act will be seen also in other financial sectors, e.g., in life insurers annuity business.”
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