When pension funds slowly turn into ‘gold’ in Malawi

Not so long ago, pension funds were merely untapped and just like a virgin precious stone underneath, the funds just remained a hidden treasure to the country’s socio-economic development.

But few years later, pension funds have slowly emerged into Malawi’s priceless ‘gold’ as most economic agents in Malawi have discovered a huge economic potential that the funds continue to unleash in Malawi, which is rated one of the impoverished countries in the world and is devoid of a myriad of tangible developments.

Fast forward to the year 2020, the situation on the ground speaks volumes of a state which has now wakened from a deep slumber and has embraced pension funds as a critical and important source of local finance for infrastructure and other longer-term socioeconomic development needs.

Even available official statistics are telling a different story all together.

In 2013, pension funds accounted for zero percent of the country’s domestic debt by holder. In layman’s language, this simply means that not even a single tambala was used for domestic financing.

In 2014, the trajectory changed, albeit marginal as pension funds contributed 2 percent of domestic debt by holder, implying that for every K100 of total pension assets in the country then, 2 Kwacha was used by Treasury or Ministry of Finance to finance for its yawning budget deficit through domestic borrowing.

Between 2014 and 2020, the contribution of pension funds to domestic financing have doubled from 2 percent to 4 percent, still signifying an upward curve, though marginal.

 In other words, the contribution of pension funds in financing public service delivery through domestic borrowing has slowly increased to date and is marginally picking up, unabated.

The 2019/20 annual public debt report says it all: “In terms of domestic debt by holder, by December 2020,commercial banks overtook the RBM [Reserve Bank of Malawi] as the largest holder of domestic debt with holdings at 34 percent of Malawi’s domestic debt, followed by the RBM at 26 percent. The foreign sector also saw a large increase in its holdings, which amounted to 24 percent of the total. Insurance companies and pension funds continue to play a minor but increasing role, with holdings of 9 percent and 4 percent, respectively.”

Exponential growth of pension funds in perspective:

According to RBM Principal Examiner responsible for Pension Regulations, Peter Kambalame, pension assets value has experienced a robust growth in nominal terms,  hitting K1.02 trillion by November 2020, but were just K74 billion in 2011.

At K1.02 trillion, Malawi’s pension assets value represented 14.7 percent of nominal gross domestic product (GDP) or the total value of finished goods and services produced in a particular period, usually a year or quarterly.

And the future for pension assets looks bright as the central bank projects that the funds will hit K2 trillion come the year 2025.

According to Kambalame, quarterly pension contributions in the country are averaging K27 billion and that pension assets have earned investment income of around K100 billion.

The Pension Act which became contentious in the year of enactment in 2011, was passed into law in April 2011, and comprehensively regulates the pension funds sector while containing mandatory provisions that aim to promote social protection and economic development.

Since the new Pension Act enactment in 2011, Malawi’s pension industry has been among the region’s fastest growing following a sharp rise in pension savings and assets at an average of 34 percent annually.

Under the pension law, the employer (co-contributor) contributes a minimum 10 percent towards pension while the employee (another co-contributor) makes a minimum 5 percent of his salary towards pension.

In the same vein, Kambalame says pension members had increased to 466,920 in September 2020 from only 73,837 in June 2011, adding that over 2,995 employers are participating as at September 2020 from under 300 employers in 2010.

“So far 17,094 employees have accessed benefits under section 65 [of the Pension Act of 2010] in 2020, and cumulatively from June 2011, over 127,929 employees have benefited from early withdrawals…pension assets are, therefore, projected to hit K2 trillion in 2025 if the
past is anything to go by,” he explains.

Figures also show thatpension assets went up by 34.6 percent in 2018 to close the year at K716.5 billion.On one hand, membership of the national pension scheme increased to 406,068 in 2018 from 304,256 in 2017, largely following the inclusion of the newly registered pension funds into the industry.

Pension funds are not underutilized:

Contrary to views by some quarters that pension funds are being underutilised, RBM’s Kambalame says as at June 2020, pension assets were inform of listed equities or in stock market (49 percent), government debt (26 percent), private debt (6 percent), fixed deposits (11 percent), unlisted equity (3.5 percent), and other investments at 1 percent.

The projected growth in pension, going ahead, will likely be funded mostly by contributions of new employees, as well as enforcement of compliance but feared that return on investments (ROI) from pension funds may diminish due to lack of investment avenues, pension experts say.

Pension funds have also been earmarked to finance Capital Market Development Plan (2020 – 2025) which aims to improving access to long term financing, and improving infrastructure
in the country, among others.

As it stands, government intends to make pension funds to be mandated to invest at least 5 percent of its assets in a public infrastructure and that the investment must be through a security or equity issued by a special purpose vehicle or a public private partnership contract.

Currently, there is a draft investment directive by government (which this reporter has seen)  which makes it clear that public infrastructure projects to be funded by pension funds shall include national and international airports, power generation, transmission and distribution, health care facilities, oil or gas pipelines, refineries or other installations, ports and harbours, power stations or installations for harnessing any source of energy, productive rural and agricultural infrastructure, public roads, public transport infrastructure, railways, sewage works and sanitation, waste infrastructure, water works and water infrastructure, and tourism infrastructure including four-star or higher category classified hotels

Economist Gowookani Chijere-Chirwa, who teaches economics at Chancellor College says in the context of limited fiscal space, some African governments have turned to pension funds and other assets managers to help provide fiscal support, including by accepting a temporary reduction in yields from their holdings of government securities. He cited Ghana as one of the countries.

But at some forum in 2019, former RBM Governor Dalitso Kabambe, lamented low flow of the funds towards infrastructure development and other investment avenues.

“Since a lot of that money was going into government security and partly into listed equities on stock market, it means we need to see more companies listed and other avenues like assets and infrastructure development that this money can go into,” Kabambe said.

On the flipside, pension fund schemes also face the risk of mass employee exit from funds due to job losses, particularly in hard-hit sectors such as tourism due to Covid-19 pandemic.Pension schemes are also facing the teething challenge of massive defaulting of remittances to pension managers.

But nonetheless, as it stands now, the fact remains that pension funds have slowly turned into some precious ‘gold’ in Malawi but still, the funds are yet to be fully exploited to maximize the country’s social and economic benefits.