New pension fund regulations projected to unlock billions of capital

Fund managers will soon have a wider pool of assets to pick from when investing pension savings, following the adoption of amendments to pension regulations by Parliament on July 23.

The regulations still have to be approved by the Senate, but industry representatives are already cheering the initial passage in the Lower House.

Sanya Goffe, president of the Pension Industry Association of Jamaica, PIAJ, called it a welcome development, but said fund manager and  trustees should take advantage of private equity training to ensure that their investment picks align with the fund’s risk and return objectives, and stay within prescribed limits for different asset classes.

The amendments broaden the range of permissible assets in which pension plans can invest to include bonds, that is, unsecured debt, issued by companies that have an investment-grade rating from a recognised rating agency, as well as bonds issued by companies listed on the Jamaica Stock Exchange.

In a related release, the Ministry of Finance said the amendments correct the anomaly where pension plans could invest in equities of listed companies but not unsecured debt issued by the same companies “even though these have a senior claim on the assets of the company compared to the company’s equity securities”.

Pension funds will also now be able to invest up to five per cent of their portfolios in equity or debt of private companies, established under the laws of Jamaica. This will allow pension funds to make private equity and venture capital investments for the first time, the finance ministry said.

Goffe told the Financial Gleaner that the amendments are expected to unlock billions of capital.

“The liberalisation of limits expands the investment universe available to pension funds to diversify their investment portfolios in the current environment where the Government of Jamaica is less active in the debt market,” said the PIAJ president.

“There will be a positive spin-off for the country with billions of dollars – $25 billion to $50 billion based on the private equity limit – of long-term investment capital being available to be deployed to the local economy, specifically to small and medium-sized companies,” she said.

Jamaica’s private pension industry was valued at $607.2 billion in March, industry data provided by the Financial Services Commission, FSC, shows.

Over the past five years, the private pension sector has grown by three per cent on average every quarter. Coverage of the Jamaican labour force has also increased to 9.8 per cent, up from 9.6 in the December 2018 quarter.

Government of Jamaica debt had long been a staple of pension portfolios, but GOJ has been largely absent from the capital markets since its economic reforms, which has seen fund managers seeking out alternatives.

Better returns

Christopher Zacca, president & CEO of Sagicor Group Jamaica Limited, whose insurance subsidiary manages the largest pool of Jamaica’s private pension assets, says the amendments offer more opportunities for better returns on pension investments.

“They prudently allow pension fund managers to invest in Jamaican assets, thereby providing, simultaneously, new Jamaican dollar assets for investment to replace the government debt of old, while allowing pension funds to more fulsomely participate in higher returns for pension members, while investing in the growth and development of the Jamaican economy,” he said.

The FSC last reported that fixed-income assets, such as commercial paper, promissory notes, and bonds and debentures, all experienced significant growths of 46.12 per cent, 34.06 per cent and 9.18 per cent, respectively, in the March quarter.

“This reflects the lack of GOJ securities for investment and the desire of industry stakeholders to seek higher-yielding investment opportunities,” the regulator said.

At the end of the quarter, the value of direct holdings of stocks and shares stood at approximately $140.2 billion and direct holdings of GOJ securities at $146.2 billion.

Investment arrangements, which are pooled investments, accounted for the largest portion of total pension assets at 37 per cent or $224 billion.

avia.collinder@gleanerjm.com