PENSION SECTOR BOASTS E25.6BN COMBINED ASSET BASE

MBABANE – The pension sector in the country has a combined asset base of E25.6 billion.
This represents 81.6 per cent of the industry assets.

According to the Central Bank of Eswatini (CBE) Financial Stability Report, there are two main players in the pension sector that have total assets that constituted about 64.8 of the country’s gross domestic product (GDP) as at 2018. On the other hand, the total pension industry assets to GDP stood at 77.3 per cent.

These two players are the Eswatini National Provident Fund and the Public Service Pension Fund (PSPF).
“The failure of either of these two institutions would therefore have a significant adverse impact on the entire economy. This is because the pension fund sector is interconnected with the broader financial system and the real economy through high investments and issuance of loans to corporates, as well as through holding of debt and equity,” reads the report in part.

The CBE reported that the pension sector therefore, continued to play an intermediation role between companies, households and the financial markets.

Exposure

Despite this major role, it was noted that the pension fund sector had high exposure to the fixed income and equity market which posed high market risk.
The report further acknowledged that the pension funds were likely to face mark-to market losses on their holdings of South African fixed income instruments due to South Africa’s sovereign debt downgrading, also given the fact that 69.9 per cent of the pension fund’s investment income was from foreign investments.

Declining

“The rising market risk is reflected in the declining trend in the Johannesburg Stock Exchange (JSE) All Share index, owing to fund large exposure to the two South African Collective Investment Schemes.”
The fall in asset prices in 2018, according to the financial stability report, had minimal impact on the pension fund sector, given the sector’s exposure to the South African Markets.

The South African policy environment (property rights through the proposed expropriation of land without compensation), was said to have depressed growth prospects and general aversion of market risks drove the performance of JSE All Share Index.
Meanwhile, domestically, the pension fund sector was said to have been exposed to default risk as 23.5 per cent of the pension fund sector’s investment income was from interest bearing assets (loans and advances).

Risk

This, therefore, was reported to have left the pension fund sector susceptible to credit risk. On the other hand, the funding ratio of the sector reflected a declining trend, which meant that the sector might be forced to reduce its investment risks.

“In turn, this might lead to a sell-off in some risky assets and negatively affect the prices of these assets. The size of the pension sector in the Eswatini economy is largely relative to the overall size of the economy and the financial sector, and as such has systemic importance.”

The CBE reported that there was a high participation by the pension sector in the economy a in terms of financial intermediation; while on the other hand, it had a high foreign exposure (mainly to South Africa) through collective investment scheme (CIS). The sector also has domestic exposures in CIS, domestic equity holdings, government bonds, and larges loans issuances to corporates in the economy.

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