Pension portfolio growth lags economy
Real estate assets account for less than five per cent of pension fund portfolios, despite a vibrant property market.
It's likely, says CEO of VM Pensions Management Limited Rezworth Burchenson, that fund managers are losing out on bigger returns from real estate and other asset classes that are outperforming the safe haven of government securities.
The private pension market is now valued at $534.6 billion at March 2018, but its status was largely unchanged in the quarter, exceeding the December numbers by just one per cent, new data released by the Financial Services Commission show.
Major asset classes such as direct holdings of equities, real estate, and bonds and debentures saw nominal growth during the quarter, while direct holdings in equity investments improved 2.8 per cent over the previous quarter. Equities now account for 21 per cent, or $113.3 billion, of total investments.
Direct holdings in real estate amounted to four per cent of pension assets.
Asked for comment on the new numbers, Burchenson said Wednesday that the sector's response to changes in the economy was slow, while urging fund managers to step up their game.
"The industry is adjusting, albeit slowly, to the current, positive macroeconomic variables locally, with low interest rates, manageable current account deficits, rising but low growth, and declining debt levels. It is within this context that investment managers and trustees need to urgently review their asset allocation, considering that interest rates are below two per cent and, interestingly, below the rate of inflation," the pension expert said.
"We still maintain that the industry is underweight equities and real estate, as equities have been the top-performing asset class in Jamaica since 1970, not-withstanding the challenges of the 1970s, the turbulent 1980 elections, the structural adjustment of the 1980s, the massive increase in interest rates in the early 1990s, the Finsac era of the mid-1990s, the multiple debt exchanges of the past 10 years. Additionally, corporate profits have been strong and balance sheets are quite healthy for most listed companies," he told the Financial Gleaner.
The conservative nature of the sector is played out in its overwhelming subscription to government securities, which accounted for 38 per cent of total funds.
The FSC noted that for the March quarter, the marginal growth of the major asset classes in pension portfolios reflected the anaemic growth in the pensions industry at 1.2 per cent, which lagged the 1.4 per cent growth in GDP for the same period.
Burchenson, even while pointing to a need for both pension fund managers and the administrators of approved retirement schemes to deal with portfolio diversification, also says the authorities need to do a review of the allowable assets in which pension funds can invest, primarily private equity investments and high-quality overseas assets, saying "such limits should be, and can be, increased gradually over time towards maintaining currency stability".