Regulators finalising more liberal forex rules for pension funds

Sabrina Gordon, Business Reporter

The Bank of Jamaica (BOJ) and the Financial Services Commission (FSC) are in discussions on closing the regulatory gap on the amount of foreign assets that a pension fund can legally hold.

The BOJ, as manager and regulator of the foreign-exchange market, mandates a cap of five per cent.

The FSC, which is the regulator of pension funds under the Pension Act of 2004, stipulates 20 per cent, but pension funds have had to adhere to the five per cent restriction because the central bank has final say over foreign-exchange transactions.

Fund managers have been lobbying for the BOJ to lift its restrictions since the new pension laws took effect, and appear to have the backing of the FSC. The parties appear to have agreed that to adopt the 20 per cent cap, but are discussing how to get it down.

"There is a disconnect, we know, and so we are working with the BOJ to see if there is a way that we can harmonise the 20 per cent with the five per cent," said Nicolette Jenez, senior director of pensions at the FSC.

"As soon as something has been agreed, then an announcement will be made and there will be changes," she said.

Private pension funds manage J$255 billion of assets.

Concentration risk

Otherwise, pension fund managers are also concerned about concentration risk given the high pooling of pension funds invested in Government of Jamaica assets and related investments - as much as 46 per cent at June 2011.

"We think that the funds should also be allowed to be invested in listed stocks on exchanges such as the Dow Jones or NASDAQ, as well as investment grade securities," said Rezworth Burchenson, managing director of Prime Asset Management and executive member of the Pension Fund Association of Jamaica.

The BOJ, in its response to the Financial Gleaner on the talks with the FSC, said any changes to the rules would have to be implemented carefully so as not to be disruptive to the foreign-exchange market.

Pace and structure

"The bank and the FSC are in discussions regarding the pace and structure of reform that will facilitate the industry moving towards the statutory provisions without an unduly disruptive effect on the foreign-currency market," said Gayon Hosin, deputy governor with responsibility for financial institutions supervision, via email to the Financial Gleaner.

"The authorities are now engaged in the exchange of industry data to inform this exercise. Given the nature of the market and the environment, any fundamental change to the framework that could substantially affect demand for foreign currency has to be carefully considered and implemented," she said.

The central bank has managed in recent years to maintain a stable foreign-exchange market, even during the recession. Its strategy has included special funding windows for one-off events, including unusual levels of margins calls at the apex of the global financial crisis in late 2008, as well as interventions in the market to affect the value of the currency.

Since the crisis, the Jamaican currency has spiked to about J$90 per US$1 before falling back below J$86 in 2010 but is now trading closer to J$87.

In the last quarter, the pace of depreciation slowed to 0.34 per cent, but the central bank said there were demand pressures in the market principally influenced by insufficient net private capital inflows relative to the demand for hard currency.

Consequently, the BOJ said it had to intervene in the market, selling US$254.2 million during the quarter. The central bank trades foreign exchange through a network of primary dealers to whom itdictates the price for on-selling to end users in the market, thereby influencing the forex rate.

Its interventions contributed to a decline of US$114.5 million in the net international reserves to US$1.96 billion at the end of December 2011.

BOJ's concerns

Pension fund managers say they are aware of the BOJ's concerns and would concede to a phasing in of the 20 per cent rule.

"As an association, we are mindful of the concerns of BOJ, the impact it may have on the currency, and with that in mind we are willing to compromise on a phased approach to get to the 20 per cent over a period of time," said Burchenson.

"We operate in a global environment where we want to maximise returns and minimise the risk," the pension association executive said.

Hosin said a phased approached is being considered.

"However, the relevant data to inform the timing is still being compiled. The settling of any time-line will depend on the analysis of this data and the projected impact (if any) on the market," she said.

FSC data to June 2011 indicates that the J$255 billion of private pension funds are largely invested in low-risk assets, 46 per cent; followed by deposit administration contracts and pooled funds, 25 per cent; stock and shares 11.14 per cent; while repurchase agreements, bonds and debentures, real estate and other assets making up the rest.

Administration contracts refer to arrangements under which the plan sponsor deposits an asset, such as cash, in an insurance company account. On the retirement of the plan's beneficiaries, the insurance company withdraws sufficient funds from the account as a lump sum payment for an immediate annuity.

Membership in pension plans totalled just over 85,000, with some 29,000 members signed up to defined-benefit plans and 56,000 to defined-contribution plans.

Private pension coverage as a percentage of the employed labour force currently stands at 6.7 per cent.

Combined membership in private pension plans and those covered under the public pension system amount to over 173,000 or 13.6 per cent of the Jamaican labour force.

sabrina.gordon@gleanerjm.com