Pension industry tipped to invest in real estate

Following the revelation that pension funds face value-erosion in the mid of high inflation rates and continued depreciation of the kwacha, some economic experts have weighed in to suggest other areas that can return value of the savings.

The second-half of 2023 had pension contributions jumped by 117.6 percent to K203.3 billion as total assets grew to K2.5 trillion, but the Reserve Bank of Malawi (RBM) warns that the savings are on high risk of continued loss of value amid rising inflation.

Some economic analysts agree with RBM’s view on the need for Pension Funds managers to spread the investment risk and explore other high-yielding investment areas.

According to Bond Mtembezeka, the focus by the Pension Fund industry on government securities, safe as they may be, pose a concentration risk, a view that has also been raised in the RBM report.

“Ordinarily, government securities are deemed to be safer and in Malawi the yields are high so that compels pension funds managers to pile up pensions on government securities. However, the present levels of public debt pose a significant concentration risk,” he said.

He further said there are alternative investments such as property development, urging fund managers to be innovative enough to come up with unconventional investments.

“Malawi has significant developmental challenges and that presents opportunities. For example, pension funds can be deployed on so many infrastructure projects under build operate transfer schemes,” he said.

said that the nature of investment in government securities is risk-free but contested that it gives low returns that fail to cover the loss of value incurred due to the high inflation rate and currency depreciation.

“In addition, when interest rates rise, the price of the old government securities is reduced in preference to new securities with higher coupon rates. With the high inflation that we are experiencing, real return on investment goes down,” explains the former RBM economist.

He challenged pension funds managers to explore higher-risk investment areas that can yield more returns, citing infrastructure bonds, real estate development such as university hostels, shopping complexes and office buildings.

The structure of pension fund investments, according to the RBM report, shows listed equity takes up 56.4 percent of Pension Fund investments, dropping from 60 percent in the first-half of the period under review while government securities’ share dropped marginally to 24.7 percent from 25.1 percent