ZIMBABWE’S pension funds may face a severe liquidity crunch this year as the over-valuation of their property portfolios backfires, a local investment firm has warned.
In a research note titled Pensions Funds: More Smoke and Mirrors, Imara Capital says overvalued investments — property or alternative investments — can have serious consequences for the country’s pension funds as the funds liquidate their shares on the country’s equities market to meet their pay-out obligations.
Official figures from the Insurance and Pension Commission show that as at September 2020, the total value of the pension industry was ZW$108 billion or US$1 billion at the parallel market rate and US$1.3 billion at the official auction rate. This compares with a value of US$622 million (based on the official rate) in September 2019, effectively doubling in size in real terms over the year.
Imara Asset Management Chief Executive and founder John Legat said while the performance of that fund might look good on paper, in reality the real or market value (the value another investor may be prepared to pay for those assets) may be much less.
“Overvalued pension fund assets will serve to boost any fees that are determined by the value of the pension fund thereby increasing the expenses of the fund. More seriously, any pension pay-outs will also be overinflated leading to far greater cash calls than should be the case. This would benefit those receiving those cash calls now and be disadvantageous to those individuals remaining in the fund who may have to experience a write down in such asset valuations at a later date,” Legat said in the research note.
“There is a further negative consequence to consider. If pension pay-outs are in reality too great for the real underlying value of the pension funds’ assets on the one hand, and on the other, there is minimal cash to make those pay-outs, then the only liquid asset left to sell are equities which trade on the ZSE (Zimbabwe Stock Exchange) on a daily basis. The property investments and alternatives cannot be sold without taking a significant write down given a lack of demand for such investments. Over time, equities will become a smaller portion of pension funds as a result.
“Anecdotally a number of our clients have asked us to raise sizeable amounts by selling equities in order to fund large pension pay-outs as a result of early retirements and redundancies. Should this continue into 2021, then we should expect equities as a proportion of pension funds to fall even further. At some point there could be a severe liquidity crunch for those pension funds who hold too great a proportion of their assets in illiquid assets and can no longer fund pay-outs. This situation could be even worse if the company behind the pension fund is not paying pension contributions on time or the contributions are less than the pay-outs.”
Official figures show that equities, which accounted for 39% of pension assets in 2019, have fallen to just 28%. Investment property, on the other hand, rose to a whopping 50% of assets as compared with 36% a year earlier.
In US dollar terms, investment property rose from US$225 million to US$671 million over one year, a gain of US$446 million, accounting for 66% of the entire gain of the pension funds.
“We very much doubt it is possible for investment property to nearly triple in USD over that period,” Legat said.