Zimpapers Logo

Business Reporters
PENSION Funds, which were recently directed to invest a portion of their funds in prescribed assets, want Government to ensure foolproof mechanisms to prevent abuse of funds invested in the financial instruments.
They cautioned against strict and instantaneous enforcing of the directive, warning this could drain deposits in banks and starve firms battling to secure liquidity.
These proposals were part of a series of recommendations to the Government on crafting of a framework for prescribed assets threshold of 10 percent.

In April, Government directed pension funds to submit plans on how they intend to comply with the requirement. The funds must submit their plans by September 30.

Finance Minister Patrick Chinamasa said in April this year that he was looking to tap into pension funds to finance infrastructural projects, particularly energy projects.

The Zimbabwe Association of Pension Funds has since proposed that its members be appointed to the boards of institutions that would have received funds invested in prescribed assets to monitor their application.

ZAPF said prescribed assets were always meant to protect investors from the loss of value of their funds and security was paramount.
As such, they recommended that any prescribed asset had to be secured by a Government guarantee.

“Mechanisms need to be put in place to ensure good corporate governance of the organisations that receive funds mobilised through prescribed assets to ensure that the funds are used for the intended purposes.

“We propose that monthly reports on disbursements be submitted to the Ministry of Finance and the insurance and Pensions Commission,” ZAPF said in a statement.
Pension funds, which had assets valued at $1,8 billion, last year invested only 2 percent of their value in prescribed assets, citing lack of the instruments in the market.

ZAPF also proposed that any return on the investment in the assets be exempted from taxation as an incentive to investors.
They also want partial capital repayment whenever interest is paid to the investor.

The pension funds said the industry preferred bonds with features that give full redemption if the Zimbabwe dollar was introduced during the life of the bond.
They said the pension funds industry would prefer that the bonds be offered on an open tender basis, as yield expectations will change with the market conditions.
“The industry (also) proposes that the bonds be listed to allow for secondary trading,” ZAPF said.

ZAPF further recommended that the entire yield curve be populated and that instruments be issued in the entire range of 90 days, 180 days, one year, two years and three years.

It said as the environment improves, tenure can be extended to 10 years, adding populating the entire yield curve made pricing efficient and deepened the market.
“Issuing a one-time bound instrument has a very limited effect. It is recommended that the instruments be offered on a tap basis to allow funds to buy the paper as and when their liquidity allows,” the association said.

ZAPF said that prescribed asset status should be ascribed to any asset/instrument that provides short to medium-term financial support to any sector of the economy.
The funds also believe that prescribed assets should be done for specific projects that generate their own income in particular infrastructural projects, an example being the completion of the Joshua Nkomo Airport in Bulawayo.

They said if a prescribed asset was issued to fund the completion of this project, Government would have to pay interest and capital at a fixed date.
Alternatively, they said it could tender for the management and completion of the airport on a build operate transfer basis.

The winner of the tender would be responsible for completing the project, running the airport while paying off holders of the prescribed assets who would earn fixed return profits.

“The issuers of prescribed assets must have a good credit rating and their cash flow streams must be good to service the debt without resorting to the Government guarantee.”

The funds said the solution could be that the prescribed assets portion of the investment be accorded elevated priority in terms of being paid out in the event a prescribed assets vehicle does fail.

The ZAPF said the key aspect was that legislation should provide for broad parameters within which innovative products could be developed to fund what historically was a Government burden, which must be done way with in future.

It said this will reduce the likelihood of unsustainable projects being supported resulting in them being unable to meet their liabilities in the long term, leaving Government and pension funds with non-performing assets.