Pension Funds for Development Finance, sustainable returns for retirees

In my last post, I have discussed about the capital markets failure mainly focusing on the causes and effects. It is not a secret that Botswana’s capital markets are undergoing the same development. In my other previous post on “The last Piece of a Diamond” I highlighted that “the late entry of youth will cause pension crisis in future if not addressed”. It appears the future is now. In the recent Botswana Pensions Society (BPS) annual conference, it was discussed that “Pensions fall short of securing retiree’s future”. The Director in the Retirement Funds Department at the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), Ms Bopelokgale Soko was of the view that, Botswana should emulate Singapore, which has increased retirement age from 65 to 67 years in 2017 and provide incentives for employers who have employees of over 65 years. Still at the same conference, the Botswana’s prominent economist Dr Keith Jefferies, called for adjustment of the early retirement age in the public service so that workers can accumulate additional pension and help cover the saving gap. He explained that inadequacy of pension funds is due to inadequate contributions, poor investment returns, early retirement, high cash withdrawals and low annuity rates. Early retirement reduces both the contribution period and the accumulation period of investment returns. It also reduces pension levels, because annuities have paid for longer life expectancy at retirement and suggested pensions can be improved by raising the early retirement age in the public service and by encouraging more investment choices for pension fund members e.g. low fee products.

As already highlighted by our previous posts, we need to appreciate our current development challenges, think about our development finance strategies to address our investment objectives. Our current development challenges are vast. They include unemployment, diseases and epidemics, climate change, education, lack of diversification, declining economic growth rates etc. The literature of development challenges is well articulated however; development finance research is still at infancy. Governments are peddling with development finance strategies. On end is the developed countries are trying to address their foreign policies through international development which normally have development finance e.g. aid and grants. On the other hand, developing countries are working on their economic and financial policies to also address development finance challenges. Often at most, we are appearing to be looking more on the receiving side rather than utilizing our own resources. Pension funds are local resources and they constitute important aspect of personal saving to an individual. Everyone needs to save in one way or the other and as such when we think about the pension industry, we should think about it from an inclusive perspective. We should think about its productive use both in the hands of a saver and a pension manager. This requires very intense education not only on the financial education of the consumer but also on the investment education of the manager.

I see no reason why adjust retirement age. I bet to differ with the above experts. The economy as facing a huge challenge of unemployment that all of us we can collectively agree that, part of the solution is private sector development. Instead, through the available institutions and new forums, we can leverage the people in that demographic bracket to push the job creation endeavor. I regard someone above 50 years to the near the last years of economic activity. I regard a person who has above 30 years working experience of such a high value to be used in intensive commercial environment. I see them playing an active role as industry experts, board of Directors not in parastatals but potential firms looking to break from small and micro but to medium scale. This are the people who don’t only understand the public policy but these have also gathered industry connection which is vital to build firms in that stage. From the development finance perspective, new entrepreneurial development programme for the early retirements needs to be developed. This are the people that I think, they can also be supported by entrepreneurial development programmes because they have acquired some savings which they can further channel towards something productive. Because this is a new dynamic environment of cause, a support is required from the support of government programmes. It comes with risk appetite but I believe as we have seen in the past, some have gone to farming others tried property.

The country is in dire need of jobs both new and existing. I believe when one taps on his professional experience to build something of the above nature, the working life continues and they can continue contributing towards their pensions and further create other opportunities for the unemployed. It’s a matter of creating some further innovative savings products to accommodate the opportunity. For instance, most of these retiring people have mortgages in their near end for their urban living. But they also have other homes from their home villages, farms etc. which in most cases are debt free. It’s an issue of unlocking value in one property which may be leveraging through the most liquid one in say Gaborone and further invest in regulated investment products such as annuities, Collective investment undertakings (CIUs), securities etc. to diversify away from property. This requires qualified and regulated financial advisors and wealth managers or in a nut shell, “qualified investment professionals”. The challenge is there is a regulation lapse. The regulators themselves lacks financial and investment education themselves. Such that, insurance brokers are licensed with a COP certification to confuse the public on investment products. In Botswana, there is no distinction between a broker and a financial advisor. To make matters worse, sometimes brokers are even invited to confuse employees on financial matters by their respective employers during wellness days. From development finance perspective, financial regulation needs to brought to order.

Lastly, I encourage the Botswana Pensions Society (BPS) to also engage with stakeholders to try to figure their current needs so as to further develop the engagement strategy. I believe they can leverage the experiences of the current retirees to influence policies which can benefit the upcoming retirees. Of cause issues of regulatory impact on administration and compliance and fees will always occupy top priority, but above everything, pension funds need more new member to contribute to their funds and that will require other development challenges such as quality job creation being addressed.

In conclusion, for pension funds to contribute towards development finance and produce sustainable returns in Botswana, there is a need for enhanced entrepreneurial development programmes for the retired or retiring people, development of innovative investment products, tightened financial regulation and further improved public policy engagement. In deed Botswana can use its resources to address its current economic development challenges.