Inflation level threat to pension funds
The compounded effect of high inflation could potentially erode 55 per cent of the value of pension funds, Chief Executive Officer of Axis Pensions, Afriyie Oware, has said.
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He said the biggest threat to pension funds was inflation and as such pension fund managers must begin to look at how to invest the funds in a way that would safeguard the retirement savings of Ghanaians.
The disruptions to the global world economy on a account of the effects of the COVID 19 pandemic and the Russian/Ukraine war has pushed the global economy to near recession.
Ghana however, has felt the effect of this crises even sharper as inflation soared to record levels.
A combination of energy and food price increases have combined to see inflation in record levels.
Although the rate has started dropping in the last two months, the 52.8 per cent recorded in February 2023 is still on the high and has been identified as a major threat to pension funds.
Speaking in an interview with the Graphic Business on the sidelines of the Axis Pension Strategy Conference, Mr Oware advised the fund managers to cushion pension funds against long-term inflation risk by allocating more capital to alternative asset class.
He said the current debt crisis faced by the country and the Domestic Debt Exchange Programme (DDEP) was a wake-up call and an opportunity for pension fund managers to make amends as capital allocators.
“There is a direct relationship between credit to the private sector and the level of economic development of a country. Credit to the private sector in most advanced countries as a percentage of their GDP is in excess of 100 per cent,” he stated.
He said developed countries normally had deep and developed capital markets, sometimes 200 per cent of their GDP, so access to finance for the private sector was in abundance.
“Even among our peers in Africa, Ghana is trailing. South Africa allocates 112 per cent of their GDP in credit to the private sector, Mauritius does 92 per cent, Kenya does 32 per cent, Rwanda does 25 per cent and Ghana does only 13 per cent,” he pointed out.
He said the trend was also not comforting either, as from 2015, credit to the private sector had been declining from 18 per cent to 13 per cent in 2022.
DDEP to redefine next economic cycle
Mr Oware also noted that the DDEP would redefine the direction of the country for the next economic cycle.
“We know presently, the economy is not in a good shape because of the debt crisis and government has been borrowing a lot which means resources are not going to the productive sectors.
“Through the DDEP, debt stock will go down, government won’t borrow that much which means there will be an opportunity for capital to find its way to the private sector,” he stated.
He however pointed out that for the DDEP to be successful and make any meaningful impact, the government’s economic policy would also have to be properly implemented.
“Government is currently able to tax 12 per cent of our annual income but has been spending 18 per cent of our national income. The difference of six per cent is simply debt accumulation that the government of Ghana cannot pay when you look at it critically.
“So from time to time, creditors will have to take a hit. That was done between 2003 and 2006 when our development partners and bilateral partners forgave our debt during the HIPC debt relief initiative. Now the chickens have come to roost, and you and I are being called upon to bail out our government,” he explained.
Failure to heed advise
The CEO said there was abundance of advice to the pension industry but unfortunately trustees failed to heed the advice.
He said at the 2020 conference, the keynote speaker decried the concentration of pension funds in government bonds and advised the need to diversify in a bid to cushion the industry against what he foresaw as a potential debt crisis
He noted that other speakers also highlighted the issue of poor asset allocation as an industry and how pension funds played a catalytic role in economic development.
“Our speakers in 2021 urged trustees to allocate capital to the private sector through alternative investing in line with NPRA’s new investment guideline.
“Obviously, there was an abundance of caution but as trustees, unfortunately we failed to heed the advice,” he noted.
Diversify investments
In his keynote address, the Chief Investment Officer of Black Stars Investment- UK, Kojo Amoo-Gottfried, emphasised the need for pension funds to diversify their portfolios and look beyond traditional investments such as government securities.
Mr Amoo-Gottfried delved into the effects of the domestic debt exchange on pension funds, strategies for managing risks in the current economic landscape and approaches for optimising returns while ensuring long-term sustainability.
He further stressed that diversification alone was not enough and encouraged pension asset owners to focus on the quality of their investments.
“This means selecting assets that have a proven track record of strong returns, as well as those that align with our values and ethics,” he stated.