The Financial Services Commission, FSC, warned fund managers to stay vigilant to protect against the further erosion of clients’ pension funds, which took a $2 billion beating in the first quarter, amid the continued slide in equities on the stock market.
Jamaican tocks have shed even more value since March.
“As stocks and shares continue to represent the second largest asset class for the private pensions industry, it is crucial that trustees and investment managers continue to actively track market movements and execute appropriate portfolio rebalancing strategies where necessary to navigate potential risks and optimise investment strategies, ultimately ensuring that member benefits are properly secured for retirement,” the private pensions regulator said in its new pensions industry report released at the end of July.
Pension contributions are invested in various asset classes, including a basket of assets referred to as ‘investment arrangements’ that account for 39 per cent of allocated funds; stocks and shares at about 21 per cent; government securities, about 20.5 per cent; bond and debentures, 5.95 per cent, and real estate at roughly 5.0 per cent.
“Both stocks and shares and government securities experienced the largest value declines, with the former experiencing the larger reduction of $2.13 billion or 1.41 per cent,” explained the FSC of the movement in the March quarter compared to December 2022.
The FSC said the slide was a direct reflection of the downward movement in the Jamaica Stock Exchange Combined Index. The FSC wants a meticulous review of investment strategies and portfolio allocations. They want the managers to focus on growth while balancing risk. Equally paramount, noted the FSC, is the unwavering commitment to timely remittance of contributions, thereby safeguarding the interests and securing the “hard-earned” benefits of plan members at the crucial juncture of retirement.
In March, total pension assets inched 0.6 per cent higher to $707.6 billion relative to December 2022 but were 0.66 per cent lower than March 2022.
The value of the pension market is, basically, flat when compared to March 2019 levels a year prior to the onset of the pandemic. In other words, the total value of funds is slowly growing, but some underlying assets, including stocks, remain a drag on portfolios.
“The FSC continues to communicate with trustees and administrators regarding the development of effective strategies suitable for improving the solvency positions of insolvent plans as well as those at risk of becoming insolvent. However, to steer clear of the peril of insolvency, the trustees and sponsors bear a critical fiduciary duty to remain vigilant in monitoring the financial health of their plans,” the regulator said.
The JSE Combined Index closed the week down at 340,347 points on Friday and has shed nearly eight per cent of its value since the start of the year.
The wealth held in ordinary stocks on the main, junior, and US dollar was estimated at around $1.99 trillion in June, but by the end of July, when the combined index slid by just 0.4 per cent, market capitalisation dropped to $1.95 trillion. In other words, $35 billion of stock market wealth was erased in one month.
The market suffered its worst day on March 25, 2020, when it closed at 337,506 points, down more than one-third from its high of 528,380 reached in August 2019.
The FSC indicated that of the total 815 pension plans it monitors, 499, or 62 per cent, reported asset growth in the March quarter compared to December. Though marginal, this growth was consistent with interest rates being stabilised as well as the Jamaican economy’s continued growth, with real GDP projected to increase within the range of 1.0 to 3.0 for FY2024, the FSC said in the report.
The current size of the pension market marks a recovery from the pandemic rout.
In March 2019, pension assets were valued at $702 billion, but at the advent of the pandemic in March 2020, concurrent with the fallout in markets in Jamaica and overseas, Jamaican pension portfolios dropped to $624.6 billion that same month.
Pension fund membership is also on the rise, growing to about 152,100 contributors in March from just under 145,500 in December 2022. This increase in membership increased private pension coverage from 11.33 per cent to just under 12 per cent for active plans. The FSC used the latest employed labour force data to July 2022 for its assessment.
The FSC agrees with fund managers that the current macroeconomic environment of interest rates and inflation poses challenges for stocks and the real economy.
“This has led to higher cost of funding for many businesses, which has had a negative impact on their profitability. Also, the current environment has led to a decline in local consumer and business confidence, which may have been a contributing factor in the lower share price reflected for some companies. With some of these companies being listed on the local exchange, it is not surprising, that the JSE Combined index declined in value,” the pension regulator said.