PENSION FUND INVESTMENTS IN INFRASTRUCTURE Presented by CHIPO HLABANGANA

Presentation Outline Primary and secondary Roles of Pension FundsThe role of Pension Funds in Infrastructure DevelopmentPension Funds and economic growth: Chile studyPension Funds and economic growth: Zimbabwean scenario Constrains to effective Pension Fund participation Managing the risksQ & A

Primary Role of Pension Funds  To provide retirement income security for the remaining life of the plan member.  Securing the future of employees financially to manage longevity

Secondary Role of Pension Funds  Financial Markets Development.  Provides funding via capital markets.  Improve access to finance for productive activities in developing countries (Government/Private sector projects).  Key role in mortgage financing due to asset liability matching.

Secondary Role of Pension Funds Cont’d …  Reduce debtors refinancing risks, including governments, by lengthening the maturity of debts (term structure of debt).  Stimulate financial innovation & inclusivity, competition and efficiency – owing to its substituting and complementary roles with banking institutions.  Provide financing to sponsoring employers subject to prudential limits (10% of pension fund value in case of Zimbabwe).

Why use Pension Funds for infrastructure development  Pension funds have long term liabilities on their balance sheets;  Can therefore fund long term investment projects.  Pension Fund Investment Strategies biased towards long term bonds and equities markets.  Pension funds channel large amounts of long term savings to investment.  They create and develop markets for long term bonds and stocks.

The Infrastructure Gap  The prevailing economic environment, has reduced the scope for public investment in infrastructure within government budgets.  The result has been a widespread recognition of a significant infrastructure gap and the need for greater recourse to private sector finance.  Institutional investors i.e. pension funds, insurance companies and mutual funds –are being called upon to play a more active role in bridging the infrastructure gap.

Importance of Infrastructure  Infrastructures projects are not an end in themselves. Rather, they are a means for ensuring the delivery of goods and services that promote prosperity and growth and contribute to quality of life, including the social well-being, health and safety of citizens, and the quality of their environment.  Like other investment, infrastructure expansion typically adds to the productive capacity in an economy. However, OECD empirical analysis suggests that infrastructure investment can have effects on growth over and above those arising from adding to the capital stock.  These effects can occur through a number of different channels, such as facilitating trade and the division of labor, competition in markets, a more efficient allocation of economic activity, the diffusion of technology and the adoption of new organizational practices

Infrastructure Investment  Infrastructure is usually divided into economic and social sectors. Using a broad definition, economic infrastructure typically includes transport (e.g. Airports, roads, bridges etc.); utilities (e.g. energy distribution networks, power generation, water, sewage, waste); communication (e.g. fixed/mobile networks, satellites); and renewable energy.  Social infrastructure is also called public real estate - includes: schools; hospitals etc.

Infrastructure Investment  Long Asset Duration. Inflation Protection. Monopoly/Quasi-Monopoly Market Position. High Barriers to Entry. Inelastic Demand. Steady and Predictable Cash Flow.

Route to Investment  Through listed equity  Through fixed-income  Through alternative asset classes

 Pension funds are buy and hold investors and their main focus is on long term income rather than capital accumulation.

Development of Pension Fund Investment in Infrastructure Growth of Pension funds:

Historical Trends: Pension Funds & GDP  Developing countries’ Pension Contributions as percentage of GDP averaged 2.5% from 2008 to 2012 & Developed countries averaged 3.4%-OECD.  Lower Marginal Propensity to Save in developing countries owing to the dominance of low income earners.  Developed markets have sophisticated markets allowing multiple savings vehicles.

Historical Trends: Pension Funds & GDP  Pension fund assets as a percentage of GDP in developing countries for the period 2008 – 2012 averaged 12%.  Developed countries were at 55% for the period. This difference is attributable to lower development of capital markets in developing countries.

Historical Trends: Pension Funds & GDP  Pension funds benefits as a percentage of GDP was 2.89% for developed countries between  Developing countries had an average of 1.54%.

Main policy actions to promote long-term investments

1.The Investment Opportunities

2. The Investor Capability

3. The Conditions for Investment

CASE STUDY: The Chile Experience  In 1982 the Chilean economy confronted a severe balance of payments and financial crisis:-  14% decrease in GDP, a depreciation of the Peso of 100% &  intervention in 22 banks (60% of banking system).  Chile introduced fully-funded pension system based on individual capital accounts, managed by private companies.  Government issued securities to pension funds & banks.  In 1985 Chile started a recovery path that lasted until 1989.

CASE STUDY: The Chile Experience Cont’d …  At the end of 1989 Chilean Pension Funds held in their portfolios 45% of Central Bank debt.  Overall macroeconomic role of the Chilean pension system from the mid-1980s to the mid-1990s was the provision of long term financing for the government and the private sector.  Today pension funds are the largest investors in the Chilean capital market.

CASE STUDY: The Chile Experience Cont’d …  Pension fund assets increased from 0.8% of GDP in 1981 to 55.8% of GDP in 2002 yielding an annual average gross real return of 10.4% (not just national service, but meeting the needs of pensioners too.) Source: Central Bank of Chile

CASE STUDY: The Chile Experience Cont’d …  Total Factor Productivity grew at an average of 1% per year in Of that, average of 20% was due to the increase in pension savings.  Formal employment increased between 3.2% & 7.6%, while informal employment contracted. Source: Corbo and Schmidt-Hebbel

CASE STUDY: The Chile Experience Cont’d …  Between 31% & 46% of the increase in rate of financial assets to GDP was due to growth of pension funds between 1981 &  Pension funds availed long term savings to support private market for mortgage bonds.  In 1996, 17.9% of the pension funds portfolio was invested in mortgage bonds.  In the Chilean housing market, it means that two out of every three houses purchases have been financed by pension savings.  Key for pension funds is to finance the mortgages and not to manage the housing units/tenants.

CASE STUDY: The Chile Experience Cont’d …  Chile faced economic slowdown in mid 2000s & was also affected by the Global Financial Crisis of  It introduced further pension reforms The 2008 Chile pension system reforms helped expand the poverty prevention tier through:-  coverage for most self-employed workers;  incentives for additional voluntary saving through the system’s third tier of voluntary tax favoured savings.  Chile is home to just 17m people yet it had a fund management market worth about $200bn and pension fund assets of $170bn by September 2013.

Zimbabwe senario

Continued……  Zimbabwe is in dire need of investment into:  Housing provision  Commercial buildings  Roads and railway networks  Water and sewer reticulation  Power Supply

Zimbabwe Scenario: The Law  Government of Zimbabwe has a law in place that mandates pension funds to purchase prescribed assets up to 10% of the pension fund’s total assets.  Ratios were much higher during Zim$ era at 35%.  Infrastructure bonds issued to date:

Pension fund objectives… To be able to pay pension benefits … Not just to maximise returns or outperform an index …Not just to minimise risk – need returns too

Thank you for listening…