Concerns raised over pension funds' investment strategies - Comment from Axis Pensions Executive
In a significant move aimed at fostering economic growth and diversifying investment portfolios, the National Pension Regulatory Authority (NPRA) has released a new investment guideline that supports capital allocation to the private sector. According to Afriyie Oware, CEO of Axis Pensions Trust, this development is a step in the right direction.
However, a closer look at the current investment trends reveals that approximately 75 percent of pension funds are channeled towards government securities, a situation that has raised concerns about the long-term consequences and risks involved. Mr. Oware, who is also an anchor investor for the Injaro Ghana Venture Capital Fund, a private equity-focused fund, has been vocal about the need for pension funds to direct capital towards the private sector.
The excessive investment in government securities presents several risks and potential consequences that affect both long-term economic growth and short-term market viability.
1. Low Returns and Inflation Risk: Government securities, especially those issued by stable governments, offer low rates of return. This low yield may not keep pace with inflation over the long term, potentially eroding the real value of pension fund assets and threatening the adequacy of future retirement benefits.
2. Concentration and Reduced Diversification: Overexposure to government securities can lead to constrained portfolio diversification, reducing exposure to higher-return assets such as equities or alternative investments. This reduced diversification increases overall investment risk.
3. Interest Rate Risk and Market Volatility: Fixed-rate government securities are sensitive to interest rate fluctuations. In a rising interest rate environment, the market value of existing bonds falls, leading to short-term losses in pension fund valuations.
4. Legal and Operational Risks: Pension funds, particularly those managed by less sophisticated entities, may be exposed to legal risks such as involvement in securities litigation or mismanagement. These legal battles divert resources and can reduce trust in pension management.
5. Sectoral and Economic Impact: Heavy investment in government securities limits pension funds’ ability to invest in productive economic sectors, reducing capital available for corporate investment in research, development, and automation, which are essential for long-term economic growth.
6. Risk of Foreign Government Defaults: Investing in foreign government securities introduces sovereign risk — the risk of default or political instability. Historical default events have caused significant losses for investors, threatening both short-term asset security and long-term portfolio stability.
In light of these risks, it is crucial for pension funds to navigate these systemic risks carefully to ensure resilience and sustainable market viability. The Securities and Exchange Commission (SEC) Director-General has emphasised the need for a collective effort to enable businesses in the country to participate in the approximately US$1 trillion private equity market.
The Ghana Venture Capital Fund, with the potential exit routes to list well-governed, investor-ready companies on the Ghana Stock Exchange, presents an opportunity to address these concerns. The CEO of Axis Pensions Trust, Afriyie Oware, has warned about the excessive exposure of pension funds to government securities, and the need for a balanced approach that considers opportunities for higher returns and economic contribution through more diversified and growth-oriented investments.
In conclusion, excessive reliance on government securities by pension funds can compromise their financial health and ability to support economic growth effectively. While government bonds provide safety and liquidity, they should be balanced against opportunities for higher returns and economic contribution through more diversified and growth-oriented investments.
- To maintain financial health and support economic growth, pension funds should consider a balanced approach that includes investing in the private sector, as supported by the new investment guideline released by the National Pension Regulatory Authority (NPRA).
- Overreliance on government securities by pension funds might limit their ability to invest in productive economic sectors, essential for long-term economic growth.
- The Securities and Exchange Commission (SEC) Director-General has called for a collective effort to allow businesses to participate in the approximately US$1 trillion private equity market.
- Investing in foreign government securities can introduce risks like sovereign risk, which could cause significant losses for investors and threaten both short-term asset security and long-term portfolio stability.
