Rezworth Burchenson, Guest Writer

The Bank of Jamaica Building, Nethersole Place, Kingston appears to meet the skyline. The central bank has placed a restriction on pension fund managers seeking to issue instruments on the international capital markets. – File

The Pensions (Super-annuation Funds and Retirement Schemes) Act 2004 made provision expressed in the investment regulations that pension funds could invest a maximum of 20 per cent in foreign assets.

This insertion was welcomed by investment managers, trustees and members as it contributed to the diversification of pension funds across geographic boundaries.

Diversification involves spreading investments around into many types of investments, investment strategies and geographic regions.

It reduces the risk of a portfolio but does not necessarily reduce the returns. This is why diversification is referred to as 'the only free lunch'.

However, most were disappointed to learn that under Section 22B of the Bank of Jamaica Act, "persons who operate or manage superannuation or pension funds" require the permission of the BoJ.

That permission is currently being denied, with the exception of instruments issued or expressly guaranteed by the governments of the United States, Canada or the United Kingdom and foreign-currency assets issued by the Government of Jamaica.

Retsriction arguments

The arguments for this restriction are:

It protects the domestic market and savings from the occasional shocks or 'falling out' of the international financial markets;

Investment professionals have not yet acquired the skills to successfully navigate First-World markets;

Pension assets contribute to the development of the local securities market via creating market depth and breadth;

The lack of a comprehensive regulatory framework highlighted by the creation of Finsac years before;

Such portfolio shifts could negatively impact the stability of the Jamaican currency.

Many of the concerns and arguments put forward are debatable.

Many changes to the financial and pensions landscape have occurred recently, such as improved regulatory oversight by the Financial Services Commission (FSC) of this important sector, coupled with the passing of the new Pensions Act.

Local investment expertise has been expanded of late, with many players currently operating in that market on a daily basis.

While it is stated that portfolio shifts may have short-term implications for the local currency, the companies in the local financial sector, with assets far in excess of the size of the pension market, are already part of a global financial community with minimal impact on the stability of the local currency.

While these rules have the objective of safeguarding retirement savings from less-regulated financial systems they:

1. Distort investment management practices;

2. Limit diversification opportunities and increases market risk;

3. In some instances negatively impact pension-fund returns;

4. Allow pension funds to control and invest in a disproportionate share of domestic market instruments;

5. May cause asset prices to be artificially based on the country's risk profile as the growing pension funds chase few domestic investment options;

6. Encourage investing in domestic assets at the expense of higher-quality assets which may be available overseas;

7. Increases the apprehension of workers - who are of the view that they can do better - towards contributing to a pension plan. Plus, the diversification redounds to protect the real value of the pension at retirement.

Social development

It may be timely for the monetary authorities to reconsider this restriction in an effort to allow the industry to continue to grow and play its role in our economic and social development.

An approach that could be taken is the phased removal of this restriction over a number of years, much like what was done in the Chilean experience, moving from three per cent in 1992 to 30 per cent by 2002.

This would allow the BoJ to assess the impact of the changes on the balance of payments and the local currency.

Additionally, the BoJ, with monitoring oversight by the FSC, could require that:

Authorised assets be restricted (in the first phase) to companies/equities of a particular market capitalisation which trade on stipulated exchanges;

Mutual funds be rated by a reputable ratings service and registered with the Securities and Exchange Commission or other approved financial services regulators;

Debt instruments must be of investment grade or higher and the issuer must have been profitable for the past five years;

No more than a specified percentage of each pension fund should be invested in any issue/ instrument.

These recommendations are by no means exhaustive, but should spark meaningful discussions on further liberalisation of this segment of our national savings.

The phased approach suggested above would allow key stakeholders to become more informed about the international capital markets and to monitor the effect of such liberalisation on the domestic economy.

Rezworth Burchenson is managing director of Prime Asset Management Limited, a pension fund management Company. Email: rburchen son@primepensions.com.