MARKET DATA REVIEW: Pooled investment funds can unlock financing sources

 If you are employed, earning a regular income, but could not rely on soundly-run pension funds, now imagine how fearful you might be as you grow older, not knowing where your income is going to come from?

Probably, saving under the mattress is one way to reduce the fear, but wouldn’t it be far better to save into the fund that invested that money in industries, projects, enterprises and in various asset classes within the economy and (possibly) outside in the form of shares, government bonds, corporate bonds, infrastructure bonds, etc producing a nice steady accumulation of wealth, which ends up benefitting you and (indirectly) others whose benefits ends up to you again?

Wouldn’t it be better to have the discipline of being a member of the investment scheme that every month deducts contributions from your income whether that income is in the form of a salary, or business profits, or interest income, or rent income — that you will barely notice — and places it at arm’s length from you, under the professional management of funds managers, and you were forbidden to touch it until you were ready to retire or when you need it — depends on the scheme? And even after retirement, you could only take a portion of it each year — imposing another discipline to avoid you over-optimistically spending, or investing in a get-rich-quick schemes or other type of undesired schemes.

Clearly, pension managers, fund managers, trustees, investment advisers and consultants provide an important service. Now further imagine if you could have part of your salary contribution in a statutory/compulsory pension scheme and part of it in the supplementary pension scheme.

But, other than pension, there are other groups of organisations that allocates funds to the purchase of securities is the pooled or collective investment funds — these types of pooled investment funds go under various names — from mutual funds and unit trusts (the like of Unit Trust of Tanzania - UTT) to investment trusts and investment companies (like the National Investment Company Limited - Nicol) to sovereign wealth funds and others. These funds help investors (especially retail investors and the less sophisticated) to spread their savings across a range of securities under the professional management; they also help in mobilisation of funds within the economy and direct them into productive sectors of the economy whether in private enterprises, in development projects, etc. In the next few weeks I will provide more details for each of the collective/pooled investment vehicles that I have mention above, in today’s article I will focus on the pensions, read on:

While many countries, ours included, provide a basic compulsory/statutory pension, however, as opposed to our current situation, statutory pension schemes usually need a top up by means of supplementary pension to give a reasonable quality of life for retirees and those who are temporarily unemployed. There are many types of pension available, even in our current state of pension space, but in whatever form, usually the person wishing to have a pension in the future or a form of regular income (even after retirement) has to begin the process of putting money aside to fund it. This fund is then put into an organisation that invests it to provide for the pension when required. The total amount invested in these kinds of schemes at the global level is huge. The CityUK (previously the International Financial Services London) estimates that global pension assets totalled closer to $40 trillion at the end of 2016, from about $31 trillion in 2010. The major contributor to this $40 trillion of global pension assets is the United States, with 63 per cent of the total global pension assets — is by far the largest; followed by the United Kingdom which has 9 per cent; Japan, Netherlands, and Australia each contributing 3 per cent of the global pension assets; these are followed by Switzerland and Denmark each contributing 2 percent while Brazil, France and Sweden contributes 1 per cent; with the rest of the world contributing the other 12 per cent.

Now consider this statistics for a while, as of 2016 the United States Gross Domestic Product (GDP) was $18.5 trillion, while its pension assets was about $25 trillion — meaning, US pension assets is 135 per cent of it GDP. In our case in Tanzania, as of 2016 our GDP was estimated at about Sh109 trillion ($45 billion) while our total pension assets was Sh11 trillion ($5 billion) — about 10 per cent of the GDP. Other than this data/statistics, the other aspect to note is that the pensions system in the United States consist of the social security system, a federal social insurance program which pays old-age pensions, as well as various personal/private pension plans. Keen to this is the personal/private pensions — what is this? Personal or private pensions are usually not provided either by the government or private sector employers. These put the onus of funding a pension solely on the recipient, who pays a regular amount, usually every month or a lumps to the pension provider who will invest on their behalf. These funds from private/personal pensions are usually run by financial organisations such as insurance companies, banks, mutual funds, or unit trusts.

In our current situation, this aspect of the pension sector (i.e. personal/private pensions), plus the need to reform the current contributions system/structure so as to pave way for the development of the supplementary pension schemes, as well as the need for separation of statutory public pensions’ administration functions from their investments functions are the three key areas that require improvements or reforms to motivate the necessary change and so we can increase the vibrancy of the pension space and unlock the private fund management with its embedded efficiencies, and also unlock some idle funds which could be intermediated for the long term financing needs of our economy.

Going back to the state of major economies pension and the status of their investments: In the United States 58 per cent of their pension funds assets are allocated in equities, 35 per cent in bonds and 7 per cent in other assets classes (i.e. real estate/property, bank deposits/cash, hedge funds, etc); in the UK — 54 per cent is in equities, 36 per cent in bonds and 10 per cent in other assets; in Japan 36 percent in equities, 47 per cent in bonds while 17 per cent of their pension assets are allocated in other assets; similarly in Australia it is 42 per cent, 19 per cent and 39 per cent for equities, bonds and other assets respectively; so is the Netherlands where 28 per cent of the pension assets are in the form of equities, 47 per cent in bonds, and 25 per cent in other assets. What does this mean? It means that pension funds are major investors in listed securities in their markets; it also means that these economies use pooled investment funds in the form of pension funds to invest in financial instruments issued by corporate enterprises, central governments, government agents, local government, etc — in this way they facilitate the mobilisation of funds for investment in long-term enterprises and development projects within their economies; it further means that pooled investment funds in the form of pension funds are used as essential tools for the enhancement of the growth of their stock markets — as data above indicates in all these major economies over 75 per cent of their assets are in the form of equities and bonds. In our case, this isn’t the case yet, we are at a situation where less than 10 percent of pension assets are in the form of listed equities and less than 20 percent of in the form of bonds.