BOJ lifts cap on forex pension assets - Dual rules may complicate compliance
Published:Wednesday | November 11, 2020 | 12:14 AM
New regulatory guidelines will allow pension funds to double their US dollar-denominated assets by next year, but industry insiders say it may might lead to a reduction in portfolio holdings for some.
That’s because some funds already hold more than the proposed limit, due to different regulatory rules that are in the process of adjustment.
The Bank of Jamaica, BOJ, recently raised the allowable limit for local pension funds holding US assets from 5.0 per cent to 10 per cent by April 2021. The increase will be done in two phases.
Some funds already hold up to 20 per cent of their portfolios in US assets, based on an earlier guideline set a decade ago by a separate regulator, the Financial Services Commission, or FSC.
Conroy Rose, CEO at VM Pension Management Limited, explained that the FSC limit was set in 2007 when investments regulations were being enacted. FSC is the regulator for securities dealers and the private pension market, whereas the Bank of Jamaica, as the monetary authority, has primacy over the foreign exchange market and foreign currency-related transactions.
The FSC 20 per cent cap remained in force until 2019, when the regulation was amended and the foreign exchange limit was brought into alignment with the BOJ’s 5 per cent rule, said Rose in an interview with the Financial Gleaner.
“The FSC moved to address that difference by advising that the limit should be adhered to that of the BOJ’s,” said Conroy Rose, CEO at VM Pensions Management Limited in an interview with the Financial Gleaner. The FSC directive was issued on October 30 last year.
Rose said that the BOJ directive would likely result in the growth in US assets for those not hitting the limit. But for those pension funds that are already above the limit, the new BOJ edict may result in a shift from US dollar to local currency investments as they seek to attain compliance, he added.
Under the new BOJ Directions for Pension Funds signed by Governor Richard Byles, the lifting of the cap starts this month with a shift from 5 per cent US holdings to 7.5 per cent for private pension funds, and then to 10 per cent next April.
Neither FSC nor BOJ responded to requests for comment on the new cap. Byles’ directive advises pension funds with greater levels of US assets above the new BOJ cap to utilise the six months to reduce their holdings.
“For pension plans under management for which relative foreign currency assets holdings are in excess of the prevailing requirements, BOJ will be prepared to exercise forbearance provided that there is no further acquisition of foreign assets outside of these requirements,” the BOJ directive stated.
COVID-19 has depressed certain asset prices locally and overseas, but Rose said that the lifting of restrictions could lead to better portfolio diversification during the realignment of assets.
“Yes, regulations that facilitate compliance, while allowing pension funds the flexibility to diversify in responding to market conditions, are always welcome,” he said.
At June 2020, the private pension market was valued at $640 billion in assets, up 11 per cent from the previous March quarter, but still down from $700 billion in December 2019 before the COVID-19 disease began its super-spreading spree.
The market comprises 811 plans, with 135,000 members, according to the FSC Private Pension Industry Quarterly Statistics. The data did not disaggregate the value of assets held in foreign currency.
The FSC data, however, indicates that the bulk of pension portfolios is held in investment arrangements such as unit trusts at 37 per cent, which was unchanged as a percentage compared to December 2019. It was followed by government securities at 22 per cent, up from 20 per cent; while stocks accounted for 22 per cent, down from 26 per cent.
FSC expects the pension industry to move in the general direction of the economy, which in the June quarter contracted by 18 per cent. FSC noted in its report that in the services and tourism sector, which remains one of the largest affected areas, 36 per cent of the active pension plans have participants who are employed in those industries.
Additionally, the FSC sees any reduction in employment and reduction in disposable income as curtailing opportunities to expand the pension map.
“During the June 2020 quarter, the business process outsourcing sector lost approximately $5.88 billion in revenue due to imposed restrictions caused by the COVID-19 pandemic,” said the regulator.
“Continued downtime in this sector will significantly stymie the growth of the employed labour force; which in turn could dampen the possibilities of increased participation in pension arrangements necessary to improve overall national pension coverage,” the report said.