LOBAMBA – The Financial Services Regulatory Authority (FSRA) is looking into whether the E1 billion asset swap transaction between the Public Service Pensions Fund (PSPF) and the Central Bank of Eswatini (CBE) is a permissible investment under the country’s retirement fund regulations.
This is the response that the Minister for Public Service, Mabulala Maseko has provided following a question that was posed by Mbabane East Member of Parliament (MP), Welcome Dlamini, during the portfolio committee debate of the ministry recently.
The minister has said that the matter is being addressed through the regulatory process, with the PSPF having submitted its response to the authority, defending its position that the instrument qualifies as a security issued by the Central Bank in its own name.
The MP also indicated that a Parliamentary Motion on the matter would follow, suggesting that the E1 billion arrangement could be subjected to further scrutiny in the House of Assembly.
In his response, Maseko confirmed that the FSRA had reviewed the transaction during its inspection of the fund and raised concerns about whether the instrument complied with the Retirement Funds Regulations, 2008.
“The fund has responded to the authority, setting out its position that the note is a security issued by the Central Bank in its own name. The fund respects the role of the regulator, and the matter is being addressed through the proper regulatory process,” the minister stated.
The revelation is significant considering that the PSPF is responsible for administering retirement benefits for public servants, making the investment of members’ contributions a matter of considerable public interest.
Although the fund maintains that the transaction was an exchange of financial assets rather than a loan or a donation to the Central Bank, the regulator’s concerns place the investment structure under scrutiny.
Explaining the transaction, Maseko said the PSPF and the Central Bank signed a Private Placement Agreement for an Equity-Linked Note on September 26, 2024.
Under the agreement, the fund transferred E1 billion in cash from its offshore assets to the Central Bank’s account at the South African Reserve Bank.
In exchange, the PSPF received a note valued at E1 billion, issued by the Central Bank in its own name.
The minister explained that the transaction was referred to as an asset swap because the fund exchanged one financial asset, being Rand cash held outside the kingdom, for another asset in the form of a Lilangeni-denominated note issued by the Central Bank.
According to Maseko, the arrangement did not amount to the fund giving away its money, as it continued to hold an investment registered in its name and whose value is assessed annually in its audited financial statements.
Essentially, the transaction involved the PSPF exchanging offshore cash for a financial instrument whose returns are linked to the performance of global equity markets.
The minister said the transaction was undertaken against the background of the country’s foreign-exchange reserves being below the level considered adequate by the International Monetary Fund (IMF) in 2024.
He explained that the placement of E1 billion into the reserves held by the Central Bank was intended to strengthen the country’s foreign-exchange position.
The reserves are important in supporting the Lilangeni-Rand peg, which also has implications for the purchasing power of the local currency and the real value of pension benefits paid to members in Emalangeni.
For the fund, the arrangement was structured to ensure that it retained returns linked to global equity markets, which it would otherwise have earned from its offshore assets, while benefitting from an additional fixed annual coupon.
Interestingly, the minister disclosed that the Central Bank had initially proposed that the fund invest E2 billion in the transaction.
However, following negotiations over the terms of the note, the two institutions eventually agreed on an investment of E1 billion.
The agreement has a five-year term and is expected to mature in September 2029.
However, it contains a three-year lock-in period, which will end in September 2027.
In terms of returns, the note is linked to the performance of the MSCI World Index, measured in Rand, with the return payable at maturity. In addition, the fund receives a fixed annual coupon of 1.5 per cent.
The agreement also makes provision for the fund to access liquidity before the investment matures.
Should the PSPF require cash before September 2029, it is permitted to borrow up to 80 per cent of the principal amount against the note.
The Central Bank is also required to provide the fund with monthly statements reflecting the value of the investment.
However, one of the important features of the agreement is that the investment is not capital-protected.
This means that its value can fluctuate depending on the performance of global equity markets and movements in the Rand.
The minister explained that this risk was similar to that associated with the offshore assets which the fund had exchanged for the note.
Consequently, although the investment is registered in the fund’s name, its value is not guaranteed to remain at E1 billion throughout the five-year period.
