tawandamusarurwa
Gandy Gandidzanwa and Itai Mukadira
When it comes to pensions, most discussions usually centre on what financial portfolios are safest or grow the fastest, as well as whether promises by pension funds and their boards can be relied on.
The extent to which inflation erodes members’ retirement savings is also topical.
While stakeholders are preoccupied with all these critical questions, little focus is given to the utilitarian value of pensions to the economy.
Granted, the primary objective of pensions is financial security in old age, which, therefore, makes focus on the health of the pension system extremely important.
It is even critically important for members who consider pensions as their only source of retirement income.
However, the secondary goal of the pension funds policy should also be to facilitate economic growth and development, including helping to achieve efficiency in financial markets.
An efficient financial system is one that typically helps allocate scarce economic resources for the most productive use in the most effective way.
It reduces misallocation or waste of economic resources.
By making our financial system as efficient as possible, we maximise our chances of generating sustained economic growth and prosperity.
In most economies, pension funds have become the largest single institutional investor class and, inevitably, a key anchor of the economy.
Aggregating savings
Considering our present economic circumstances, we need to think more about how our pensions system can contribute to economic efficiency.
Currently, there is need for long-term investment in critical infrastructural projects to sustain economic growth.
With the right combination of appropriate investments and regulatory framework, and incentives, the large pool of pension fund assets can be channelled to sectors of the economy where they can have the most impact.
Our policy should be driven by the twin objectives of not only growing this pool of capital to maximise returns, but also to maximise the growth of the economy’s production capacity.
Pension funds, as aggregators of individual retirement savings, can be very effective at generating economic efficiencies.
Large pension funds tend to have sophisticated asset managers.
Such funds have the ability to invest across appropriately varied asset classes.
Since pension funds invest over long-term horizons, they can provide the much-needed finance for large investment projects, some of which have remained work in progress for years.
Pension expenditures are also vital for our rural communities, which do not have steady sources of income.
Other than income from farming, monthly pensions — meagre as they might be — are what keeps most of our rural economies going.
Various research findings have shown the power of pension fund assets to accelerate economic growth.
For example, the accumulation of pension fund assets naturally has a significant impact on private savings.
We, thus, have at our disposal a weapon that, if used well, can have a huge impact on the economy.
More pension funds mean higher savings rates, which are important for overall capital formation in an economy.
Money that is invested in pension funds is locked in for decades.
Consequently, pension funds can afford to undertake investments that will yield better in the long term, regardless of the short-term pressures.
Projects related to renewable energy, water reticulation, power generation, waste management and highway construction, among others, usually favour long-term investors.
The argument that growth in pension assets crowds out other forms of savings has not been proved, either in theory or empirically.
This is especially apparent in our situation, where the savings level is so low that they can rarely be considered to be crowding out other savings.
Where we could even do better, taking advantage of our very low savings base, is in making pensions mandatory.
For most people, this would be the only saving they would have with no crowding out of any prior savings at all.
Furthermore, where the institutional investors actively participate in the corporate governance in their investee companies, this reduces the cost of capital for firms and also positively influences the stock market capitalisation.
The size and sophistication of some of our pension funds should naturally lead them to actively advocate good corporate governance, thus contributing to market discipline and supporting overall market efficiency and economic growth.
We also know that individuals, investing on their own, tend to be risk-averse in terms of the assets they would hold.
If left completely to themselves, individuals would prefer investing in secure and risk-free mediums like cash, cash equivalents and money market instruments.
Of course, we now know, with the two bouts of hyperinflation we have experienced in the recent past, that cash is not entirely risk-free, from a real terms’ perspective.
Despite all of that, natural human behaviour is that individuals, even when saving for retirement purposes, still tend to invest for much shorter periods.
Maybe it is because this gives them an opportunity to correct bad investments.
Labour market
It has to be considered that pension fund contributions are a form of a delayed salary, and, therefore, belong to the member on whose behalf the contributions have been made.
This is especially so under the defined contribution arrangements and is regardless of whether they are labelled employer or employee contributions.
In fact, pensions should be seen as an important part of basic compensation.
For employers, pensions are used for attracting, retaining and motivating employees as part of the total compensation package.
When a member resigns, to treat the allocation of employer contributions as conditional on certain terms is misleading and disingenuous.
That, together with a very high unemployment rate, discourages labour mobility, thus depriving the economy of the opportunity for human resources to move to sectors where they know they are most productive.
This leads to inefficiencies in the labour market.
Government
It is often said pension funds can only be as successful as the economy they invest in.
But this is not necessarily so.
Inasmuch as Government should manage the economy effectively and establish a strong regulatory environment if pension funds are to be rewarding, there is a much higher-level strategic role that our pension funds need to be playing to help turn around the fortunes of our economy.
In some cases, while pension funds help in growing savings, accumulated assets might not necessarily translate to economic growth.
It has to be remembered that the primary goal of pension funds is asset growth, which is not the same thing as economic growth.
Furthermore, it is not usually possible to get Government out of the pensions business, as it can be the single largest player in any economy.
It can also be intentional in supporting pension funds by giving tax exemptions for pension contributions and funds investment returns.
Government should, therefore, establish a strong regulatory framework that ensures high fiduciary standards and transparency in the capital markets.
There is need to strike a balance between establishing sound guidelines for investing pension funds to benefit the economy and to safeguard invested assets in the interest of pension fund members.
The regulator ought to be vigilant.
What we have seen over the years is the dominance of financialisation — the reorganisation of ownership relations and economic activity in ways that serve the needs of institutional capital pools.
Emerging from this reorganisation is a financial sector whose primary function has shifted from financing investments to preserving wealth, along with a shift in institutional form from banks to asset managers.
Under this “asset manager capitalism”, the dominant figures are no longer the traditional bank CEOs but, instead, asset manager CEOs.
Asset managers’ power is most visible vis-à-vis listed corporations, that is, in corporate governance.
But it reaches much further.
From closely held companies, private property, infrastructure, land, agriculture to private equity, there is no sector that asset managers have not made accessible for financial capital and where they do not exercise substantial structural power.
Asset managers are, thus, a critical party in the transformation of the economy through the assets under their custodianship.
Our pensions fund assets pool
As of December 31, 2022, our pension fund assets as a percentage of gross domestic product were 10 percent.
This is much lower than that of South Africa at 83,8 percent and the world average of 30,5 percent.
We are, of course, far behind the world number one, Canada, sitting at 180 percent, but well way ahead of Ukraine, which is at 0,1 percent (even before the conflict with Russia started).
Our neighbours, Namibia, at 100 percent, are the only African country in the top 10 (number seven), even ahead of pension powerhouses like Chile.
A move to mandatory pension contributions would certainly see us improve.
Conclusion
While we are not where we would want to be. We still have a relatively large enough pool of heavy artillery with which to power our economic development ambitions.
Under the right socio-economic conditions, stable long-term investment environment and higher levels of investor confidence, these savings bastions with so much dry powder should be commanding significant economic growth.
*Gandy Gandidzanwa is a director at Risk and Investment Management Consulting Actuaries (RIMCA) and has more than 20 years of financial services experience across three countries. Itai Mukadira is a director at RIMCA and a seasoned consulting actuary. The two write in their own capacities.
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