How is my money being invested and how diverse is my portfolio?
Economy, Insurance

Imagine for a minute you have now clocked 65 years old. Your days of labour are long gone. Your youth is gone. How do you imagine spending the rest of your life? This is the fundamental question, all Zambians must ask themselves. Many never want to think about retirement. In fact, with the spending patterns of most Zambians with income, consumption driven by hedonistic behavior is often the order of the day. However, a few astute Zambians have taken it upon themselves (or their employers have empowered them) to take up pension contributions that will ensure that the epilogue of their lives is not marred with misery.

That is why FiZ has been looking closely at the pension offerings in Zambia. In an earlier article, we discussed the types of pension options Zambians had access to: the defined benefit (DB) scheme and the defined contribution (DC) scheme (read earlier article for definition). Our argument that the latter offered more value for money because of the complex investment portfolios that astute investment teams opt for when investing pension funds. We have seen the infrastructure development that has been going on. Many will now note that NAPSA has been participating in some of these projects (NAPSA plays both in the DC and DB schemes). What this means is that your pension funds now sit in brick and mortar. Therefore, if the financial models that were used in making the investment were off the mark, or some of the assumptions that were made were off key, your pension contributions remain in brick and mortar.

That is why it is important for pensioners to ask their fund managers the fundamental question “How is my money being invested and how diverse is my portfolio?” These questions that arise are no different from the questions that arise from any investor who seeks to create value. Therefore, when we followed the purported debacle of Saturnia Regna Pension Trust regarding the investment of pensioner’s funds in off shore instruments, we wondered what the rationale was for the argument against creation of value.

To put the argument into perspective, according to Pension and Insurance press statement, net pension assets have grown from K3.6billion to K5.9billion. That is around 3% of Zambia’s GDP (according to World Bank at 2016 Zambia GDP was $19.55B) or 8.2% of Hon. Felix Mutati’s 2018 budget (K71.66B Zambian budget for 2018). Furthermore, PIA reports that it now has north of 109,734 members on its roster. That translates to less that 1% of Zambia population that has a pension plan. This statistic is alarming. However, what is even more alarming is the fact that part of those contributing do not ask the question “How is my money being invested and how diverse is my portfolio?

To give an idea of what a pension fund manager will look at when they are investing funds is first they have to understand the cost of capital. Second, they have to consider what sort of return on investment they should be after when investing funds. For the Zambia case, there are options such as safe assets that include treasury bills or bonds (this is the DB space). In addition, they may also seek non risk averse assets such as stock in listed companies on LuSE (this is the DC space). However, consider when exchange risk also threatens your investment. Astute fund managers will look at currency hedging to reduce the losses they may suffer from exchange erosion. Hence why, it is no surprise that with Ministerial approval fund managers are allowed to invest in instruments outside the country. The rational for this is to ensure fund managers are able to protect projected return on investment (diversification of portfolio). To put it into perspective, the global growth rate for pension funds invested in international markets indicate that the top 300 pension funds as at 2016 grow their investments by 6.7%.

So the next time you look at the pension deduction on your payslip, ask the question “How is my money being invested and how diverse is my portfolio?

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