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FINANCIAL WATCH: Pensioners’ pooled cash badly in need of investment guidelines
2005-08-17 08:08:26
By Mireny John
Pension funds in a transition economy like Tanzania are of crucial importance to both the national economy and the community at large.
The prime objective for establishing pension funds throughout mature market economies has been the social role of enabling retired persons survive the hardships of being jobless in old age.
Laws would be enacted to force both the employees and employers to pay monthly cash contributions into a pooled basket called a ’’pension fund.’’
Upon retirement, or an agreed age limit, a sum of money would be paid by the fund regularly to people above a certain age and to widowed or disabled people, or by former employers or financial institutions to retired persons.
In order to meet all of their social obligations over time, pension funds need to grow, the reason why such funds are invested to earn returns which in turn make them sustainable.
Hence, the secondary role of pension funds is to support viable long-term investments in partnerships or going alone to invest in sectors where they feel more conversant to manage the risks involved.
Thus, pension funds would arrange their investment portfolios in such a way that returns from invested members’ contributions buoy their growth, targeting the less risky investments so that they don’t eschew from their noble obligation of supporting members in their old age.
History is full of accounts about pension funds’ crises, the root of which has always been failure by entrusted managers to ensure the right mix of investment portfolios necessary to sustain such funds, sailing over the waves of inflation, exchange rate fluctuations, economic health as well as trends in international trade.
Some pension funds in Tanzania survived very well during the era of state monopoly owing to lack of stiff competition among the pension funds as well as for projects whose break even points were quick to be realized.
Before the mid-1990s, for instance, pension funds had a penchant for investing in real estate (buildings in urban areas) to accommodate office seekers or hostels for college students.
By then, few private companies could erect the kind of edifices being built by the Parastatal Pension Fund (PPF), National Social Security Fund, (NSSF), or the Local Authorities Provident Fund (LAPF).
To-date, even commercial banks are investing in real estate, the reason why rentals are going down day by day.
Before 1990, Dar es Salaam used to discourage investors because of its exorbitant rentals unknown anywhere else in Africa.
Right now, there are downtown structures built by pensioners’ money, but they are largely empty due to rent ceilings that are perceived by potential office space seekers as too expensive.
Even if one were to underestimate the supply and demand relationship in determining investment in real estate, it may not be equally easy to discount the fact that the advantages formerly arising from office location are none-issues in today’s world of information and knowledge.
Through satellite phones and the Internet, an office based in California can quite efficiently operate a corresponding office located in a partner’s basement in Dar es Salaam.
There is unfortunately no shortage of cases whereby some pension funds have extended loans to individuals and companies of shoddy standing resulting in losses.
Some of the projects are not of a sufficiently long-term nature to warrant loans from the funds. Even small micro-finance lenders could make it happen.
Some funds have even decided to invest in long-term infrastructure projects, tying up pensioners’ monies for at least 50 years to break even.
That is why the pendulum of public opinion has swung towards establishment of regulatory bodies to oversee the operations of pension funds, this being part of the partial institutional reforms in consolidating funds’ financial outlook.
It’s only in Tanzania where pension funds operate without investment guidelines, leaving unsuspecting statutory boards and managers at bay in determining investment options.
Ever since liberalization of the financial sector in early 1990s, pension funds were quick to take up the opportunity provided by investment in one of most lucrative financial instruments— government papers.
It may be that this opportunity enabled pension funds to provide interest to members above the obtaining interest rate.
However, the scramble for Treasury bills and bonds is on the wane, because of the current multiplicity of capable investors, including merchant banks.
All these constraints call for an urgent thrust for innovative investment under the guidance of regulatory bodies whose composition must be seen to be truly technical, with proven ability to provide guidance for long-term investments.
One of the areas for thought could be establishment of tailor-made lending schemes exclusive for members before retirement at an interest charge much below the going market rate of interest, using their future pensions as collateral.
This seems to be a double-edged approach: in the first place members would be building more confidence in their funds.
A longer-term sustainable impact is to mould entrepreneurship among future retirees, with the expectation that they would be able to employ themselves as well as hiring others upon retirement.
When jobs are multiplied, pension funds get more members who in turn regenerate coffers through increased contributions.
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