By: Nghiinomenwa Erastus
In the wake of regulators trying to ensure individuals do not withdraw from their pension, the country’s Financial Stability Report revealed that retirement contributions were insufficient to cover benefits paid last year.
According to the Financial Stability Report, the cash flow mismatch was observed not only last year; it has been in existence since 2019. However, 2021 is the biggest, with around N$3 billion.
Benefits paid out have been growing since 2016, narrowing the gap between what has been received and paid out since 2015.
“The trend of benefits paid exceeding contributions received, which emerged in 2019, was observed to persist over the review period,” the report says.
As a result, the retirement fund’s cash flow mismatch increases the risk to the country’s financial system stability.
The Macro-prudential Committee explained that the shortfall for the reporting period (2021) between benefits paid and contributions received is not being felt in the economy or by those expecting their benefits because it is “absorbable by investment income many times over”.
Giving credit to the asset and investment managers tasked with the mandate to grow the retirement contributions- returns on investment were recorded at 15.6 per cent in 2021, growing from 6.7 per cent (2020) and 5.8 per cent (2019).
Furthermore, the report indicated that since retirement fund obligations are long-term in nature, this shortfall is expected to have a low to medium impact in the short term.
Namfisa will nonetheless closely monitor the trend, says the report.
The considerable growth in benefits paid in 2021 is attributable to the combination of a maturing retirement fund membership and early exits from retirement funds enforced by Covid-19.
The early exit and withdrawals are at the centre of the war between the regulator and the economic agents who want to be entitled to their retirement savings and withdrawals before retirement age to fund certain investment and consumption needs.
The regulator proposed that whoever wants to withdraw from their retirement savings before the age of 55 would only get 25 per cent, which again will be taxed heavily.
What is barely known by the economic agents is that their contribution to their retirement savings for the past three years has not been adequate to cover the benefit payout.
Moreover, the unplanned withdrawal and exits are widening the gap, posing cash flow issues.
According to the 2022 Financial Stability Report, “cash flow risk to the retirement fund sub-sector remains a concern, as indicated by the widening shortfall between benefits paid and contributions received.”
However, this risk is unlikely to materialise as other income (investment income) within the subsector is more than sufficient to absorb the related shortfall due to the long-term nature of the industry.
Beyond the retirement fund’s cash flow risks, the short-term threats to financial stability regarding household and corporate debt appear limited.
However, continued borrowing to support business operations or household cash flow could pose medium-term risks, especially if incomes are not elevated at the same rate.
Notwithstanding the current fluid economic environment, the report indicated that the probability of debt risks materialising is medium with a low impact in terms of household debt and medium for corporate debt.
Financial system stability is defined as the resilience of, for example, a domestic financial system to internal and external shocks, be they economic, financial, political or otherwise.
Financial system stability can also be described as the absence of significant macroeconomic disruptions in the system of financial transactions between households, corporates, and financial institutions.
The financial system in Namibia consists of financial markets, instruments, institutions and infrastructure.
While not strictly a part of the financial system, the regulatory structure plays a vital role in regulating and monitoring the system.
WHERE IS THE RETIREMENT MONEY?
During the review period, the retirement fund subsector’s assets grew by 17.9 per cent to N$212.9 billion as of the end of December 2021 due to favourable financial market performances.
The Financial Stability Report indicated that the retirement funds industry held at least 45.7 per cent of its money in equities during the review period.
Bonds (government securities and few corporate securities) and insurance policies made up the remainder of the subsector’s top three investment instruments/where the retirement savings are invested.
Over time, there is some reduction in exposure to equities coinciding with revisions to investment regulations governing these funds.
There has been contention on where the country’s huge savings are invested as it runs around the world looking for capital/money to invest in its economy.
The vast savings saw the previous finance minister Calle Schlettwein getting into legislation fights to bring the capital back to domestic markets.
According to the Financial Stability Report, the retirement industry has increased its savings allocation to the domestic market from 45.6 per cent in December 2020 to 49.4 per cent in December 2021.
The proportional growth in domestic assets is attributable to the domestic holding requirements prescribed by legislation.
Retirement funds’ investment assets held in the domestic economy amounted to N$104.6 billion as of December 2021, with N$107 billion held outside Namibia over the same reporting period.