A study of retirement funds in the Pacific suggests Papua New Guinea’s superannuation funds should diversify their investments more. It also says COVID-19 has had an impact on the funds’ liquidity.
Nambawan Super’s new logo. Credit: Nambawan/Linkedin
A new study from the Asian Development Bank’s Pacific Private Sector Development Initiative (PPSDI) says that the economic impacts of COVID-19 have left managers of Pacific retirement funds facing a dilemma.
The study, Pacific retirement funds: anchoring social protection in good finance, says funds need to assess whether to offer withdrawals to bolster household incomes, or protect member contributions as working hours have reduced and unemployment has increased.
‘PNG’s super funds have more diversified investment portfolios than other funds in the Pacific.’
‘Contribution withdrawals reduced fund liquidity,’ the report says, ‘As did decreased contributions caused by employment losses and lower personal incomes.
‘Fund liquidity was also affected by lower investment returns, due to lower interest rates and reduced dividends, and the overall financial strength of funds came under pressure.’
Investment risk
The PPSDI report notes that funds in Pacific countries with central banks and their own currencies – including Papua New Guinea – predominantly invest in domestic assets.
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While this seems counterintuitive, it is mainly due to foreign exchange restrictions, which are a ‘significant constraint on funds implementing desired foreign asset allocations.’
‘Funds can play an important role in financing domestic long-term investment and contribute to financial sector development.’
PNG’s two major super funds, Nambawan Super and Nasfund, have more diversified investment portfolios – in terms of investing in different types of assets – than other funds in the Pacific.
But, because they invest predominately in PNG, they are not diversified in terms of investment location, which carries a risk (any lack of diversification increases the investment risk).
Important role
The study says PNG’s super funds, as others in the Pacific, can play an important role in improving their countries’ financial infrastructure.
‘Funds can play an important role in financing domestic long-term investment and contribute to financial sector development through investing in unlisted companies, commercial property, and long-term debt. There are strong risk-return reasons for doing so.’
The report says there are also opportunities in the debt markets, with longer-term debt increasingly being treated as a standard asset class for funds in developed financial systems.
‘This type of debt financing, as opposed to consumer loans offered by funds, is very important to the development of the domestic economy, particularly in the absence of corporate bonds issuance and markets, and wider capital markets,’ says the study.
Common characteristics
The report outlines some of the common characteristics of the Pacific super funds:
- Membership is usually compulsory and limited to employed persons.
- Most funds are defined benefits schemes – a pension plan in which an employer/sponsor promises a specified pension that is predetermined by a formula based on the employee’s earnings history, tenure of service and age. As opposed to a fund where the superannuant receives the accumulated returns.
- Employee contribution rates vary, with most in the 5–8 per cent range. In the majority of cases, employers are required to match employee contributions.
- Most funds provide non-retirement benefits. Typically, these include a lump sum withdrawal upon death or permanent disability; and early withdrawal entitlements, for example when emigrating. Insurance protection – typically life insurance – is offered by many of the funds, and general insurance and health insurance are increasingly being offered.
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