The retirement funds industry is faced with a bleak future due to a number of factors, among them, insufficient legislation as well as the growing number of the ageing population, a Whitepaper published by the World Economic Forum has revealed.
The World Economic Forum, a not-for-profit international organisation which promotes public-private cooperation and publishes several other reports such as The Global Competitiveness Report, has indicated in the whitepaper titled ‘How can we save our future’ that several governments around the globe should look into their legislation to save the situation.
“Retirement systems worldwide are currently under strain. While examples of progress made to improve systems are numerous, further reforms are required in many parts of the world to ensure they are sustainable, inclusive and able to provide future generations with financial security in their retirement,” said the report. As part of averting the impending crisis, the whitepaper recommends that governments around the world to be cognisant of this and act in a manner that would secure the future of its working population.
“Many countries’ retirement systems are organized in a multi-pillar framework, usually resulting in the involvement of many different ministries, government agencies and other organizations. Responsibility is typically split across government departments, and often a holistic vision is lacking,” the whitepaper indicated. “Governments must take responsibility to understand their population’s retirement savings needs, ensure retirement systems have clearly stated objectives or goals, and measure and monitor the metrics on a regular basis.”
THE BOTSWANA STORY
Zooming into Botswana, the pension fund industry has been marred by controversy in recent years, most ranging from political interference, corruption and other forms of maladministration. Earlier this year, an audit conducted on the Botswana Public Employees Pension Fund (BPOPF), the biggest pension fund in Botswana, revealed that close to 1.5 billion pula worth of funds have no trace of active pension members, raising suspicion of possible corruption from some of the fund administrators.
This has been compounded by recent decisions of the BPOPF to cut ties with a number of independent fund managers owing to alarming level of mismanagement of funds as well as acts of corruption. BPOPF is the third largest pension fund in Africa, with assets value worth over P55 billion, making it bigger than Botswana’s entire banking sector.
The battles for its money, mostly from predatory independent fund managers have seen BPOPF bleeding in several battles in court over its money. The involvement of key senior government officials, such Carter Morupisi, the Permanent Secretary to the President who has been BPOPF board chairman have also added salt to injury.
Morupisi has since left the chairmanship position, but in his trail, after a short stint industry players have seen battles over the BPOPF money. Morupisi has also been subject of Directorate on Corruption and Economic Crime (DCEC) in connection with several contractual obligations that the fund entered into during his stewardship of the board.
According to the World Economic Forum whitepaper the key driver of the challenges facing retirement systems globally is increasing life expectancy and a falling birth rate, which leads to a smaller workforce supporting an ever growing population of retirees. One of the problems identified as a threat is the long-term, low-growth environment, as indicated in the preceding whitepaper published in 2017 titled ‘We’ll Live to 100 – How Can We Afford It?’
“Given past strong performance in equity and bond markets, future expectations for long-term investment returns are significantly lower than historic averages. Equities are expected to perform ~5% below historic averages and bond returns are expected to be ~3% lower. In addition, low interest rates have grown future liabilities and future investment returns are unlikely to make up the growing pension shortfall,” indicated the report.
“Taken together, these factors put increased strain on pension funds as well as on long-term investors that have commitments to fund and meet the benefits promised to current and future retirees. Individuals will also be impacted as they will likely see smaller.” The whitepaper further recommend that governments should strive to make systems inclusive so that the pillars of a pension system are coordinated holistically to meet the needs of all individuals and provide support for marginalized groups.
Key challenges facing retirement systems include:
Greater longevity, resulting in higher levels of savings required to sustain longer lifetimes and ageing populations, putting a strain on the sustainability of payas-you-go systems
Increasing responsibility for individuals to ensure adequate retirement income, largely driven by trends among governments and employers to move away from traditional defined benefit (DB) systems towards defined contribution (DC) systems. Also, trends in labour markets are resulting in less traditional employment patterns and more contingent and self-employed workers who are unlikely to have access to employer-facilitated plans
Low levels of savings by individuals
Poor financial literacy in an environment where responsibility has shifted to individuals
A lower expected investment return environment, placing more importance on the level of contributions
Lack of access to savings vehicles -one of the biggest barriers to saving for retirement.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”