With Reports that Pension funds failed to beat inflation in the year 2022, we take a look at the two MAIN challenges that schemes risk to face soon:
1. Reduced returns from the current traditional assets – this is due to increasing interest rates which impacts on bond valuations negatively. Unfortunately, one can argue that increasing bond interest rates gives better opportunities for investment, but this is only for new money. Most schemes new money is a small percentage hence impact is very low. RBA’s regulation of requiring all the bonds to be market to market needs to be reviewed and allow sections of the portfolio to be held to maturity especially with the introduction of 50% benefits being preserved.
2. Reduced activity at the NSE due to reduced participation of the international investors in the market. This is because the risk of investment has become high across the globe so you better have your assets close to you and secondly interest rates in developing countries have gone up significantly. This becomes an attraction to invest locally.
We also note that No other alternative asset classes are available for large investments like pension schemes.
We need to sort out issues around REITS to enable more firms bring these assets to Feb market which will help to spur up activity on the market. We also need to bring appropriate legislation which will increase participation of schemes into direct infrastructure funding.
In the medium term as a scheme Trustee you should be looking for investments in guaranteed funds where a small return is assured.
This Research was prepared and published by the Institute of Pension Management with support from the Group CEO, Octagon Africa, Fred Waswa