Pension fund managers want more investment leeway
Avia Collinder, Business Reporter
The second phase of pension reform aims will relax some of the rules of investment, but fund managers say the amended rules as proposed remain far too restrictive, among them a five per cent limit on concentration risk.
These and other proposals form the basis of reform that eventually will be legislated as an amendment to the decade-old Pensions (Superannuation Fund and Retirement Scheme) Act. The bill is yet to be drafted.
Pension regulator and reform leader, the Financial Services Commission (FSC), is stipulating that a pension fund manager, which operates more than one fund, may invest no more than five per cent of its total asset portfolio in a single security or a single issuer.
Government of Jamaica securities are exempted.
But the Pension Funds Association of Jamaica (PFAJ), which argues that the FSC suggestion would, in effect, "reduce the investment universe" have counter-proposed a limit of 10 per cent.
The PFAJ's investment committee argues that strictures on concentration risk will further limit avenues for investment, and that the proposal is counterproductive, especially now that the Government of Jamaica - whose debt issues currently account for more than half of pension asset portfolios - is less active in the debt market in line with the goals of its IMF-backed economic reform programme.
Brenda-Lee Martin, assistant vice-president of treasury and asset management at Sagicor Life Jamaica and a member of the PFAJ, said at a July 4 pension forum that fund managers may be left with funds from maturing investments that GOJ is no longer prepared to rollover.
The association is more appreciative of another FSC proposal, which lowers the bar on the types of securities that can be held by the pension fund to include instruments with a credit rating of 'investment grade', that is, of medium-credit quality.
But it has concerns about the FSC plan to lift its 20 per cent cap on foreign securities and replace it with the "foreign assets" limits set by Bank of Jamaica, saying it can curtail foreign investments, at least in its early implementation.
"Based on the Bank of Jamaica directive to some investment managers and trustees, the foreign asset limit is five per cent and if this is not increased simultaneously with the effective date of the amendment act, then it would be represent a reduction in limits to some market participants," said Brian Frazer, general manager of Scotia Asset Management Jamaica Limited and a member of the PFAJ.
As at March 2014, the pension industry had total funds under management of $317 billion, of which 55 per cent or $173 billion is invested in GOJ securities.
The PFAJ wants an increase in the concentration limits from five per cent to 10 per cent, a less conservative approach to the investment of some pooled funds, and more leeway on acquisition of foreign financial assets.
Regarding the latter, the group is seeking an amendment to the definition of "recognised jurisdiction" and consequently "recognised stock exchange" to include all countries with which Jamaica has double-taxation treaty arrangements - the list includes the CARICOM bloc and 12 other countries.
Currently, the FSC's definition of recognised jurisdiction is restricted to Canada, the United States and the United Kingdom, but is to be amended to include CARICOM.
"We are proposing that we go further than expanding the definition to include CARICOM member states, but also to include any country with at least an investment-grade sovereign rating," PFAJ told the Financial Gleaner.
"For example, in Trinidad they have included any Commonwealth county of dependency, the Republic of Ireland, any member of the Organisation of Economic Cooperation and Development as well as the USA, which is a more exhaustive list of countries," the group said.
Martin says the FSC should also consider allowing pension funds to invest in private equity and shares offered through methods other than IPOs, including preference shares that are already listed on recognised stock exchanges.
The PFAJ also says it is generally in support of concentration limits, but sees the five per cent cap as restrictive.
"Market players felt that based on Jamaica's relative small and illiquid markets, this limit would not be practical, as it would force managers to invest relatively more in 'weak' stocks and relatively less in stronger stocks," said Frazer.
Regarding the treatment of a Type I Pooled Fund, the FSC decrees that no more than 10 per cent of the total assets of a pension portfolio can be invested in the fund manager or an associated company.
The restriction previously applied only to individually managed funds.
The Type I fund is defined in statute as an investment fund formed for the sole purpose of investing the assets of more than one approved superannuation fund or approved retirement scheme and is operated by a licensed investment manager.
It differs from the single fund which is individually managed.
"While market participants agree that establishing some sort of limit may be reasonable, in the case of Type 1 pooled funds, it was felt that it would restrict the ability of managers to utilise the "fund of funds" investment approach, which is very popular in developed markets," said Frazer.
"A more reasonable approach would be to make an exception for the fund of funds investment approach."
The fund of funds approach is where the fund manager - instead of investing in individual securities - he or she invests in other pooled funds such as unit trusts.
These funds, Frazer said, are usually diversified.
"It maybe would be even more diversified than a few local securities," the asset manager said.
Public consultations on pension reform phase two are ongoing, including talks between FSC and PFAJ.