Mellvile Brown, the Deputy Chief Executie Officer of the Non-Banking Financial Institutions Regulatory Authority’s (NBFIRA) 2013-2016 Strategic Plan, emphasizes commitment to greater stakeholder engagement and implementation of the Risk-Based Supervision Model (RBSM) for all regulated entities.
Speaking on a “Risk-Based Supervision of Pension Funds” during the Botswana Pension Society Annual Conference held in Gaborone recently, Brown said the biggest challenges are that NBFIRA operates within a weak and overburdened regulatory framework with unclearly defined parameters. A legacy of financial and personnel restraints, poor understanding of risk management issues and start-up problems delay the development of an adequate human resources base.
“There is need to educate public pension fund participants on the concept of long-term savings for retirement needs. Based on the Conference’s 2012 theme: ‘Maximimizing Retirement Savings’, high priority should strengthen Botswana’s contractual savings industry, almost as large as the commercial banking sector in terms of assets employed.
“Employer based pension funds mobilize most of Botswana’s household savings and long-term funding, constituting a potential source of financial instability risk.
“For instance, as of September 1, 2012 there were 97 pension funds registered in Botswana, with a total membership of 153,766. Locally managed pension funds constitute over 30 percent of all financial sector assets with pension assets totalling P45.3 billion. Reported total pension funds assets increased 20.5 percent year-on-year (y-o-y), since September 2011.”
He said of this total the Botswana Public Officers Pensions Fund (BPOPF) accounts for some P34.6 billion or 76.4 percent of total pension assets. As the current national social security system is severely underdeveloped, the safe and prudent management of contractual savings in the existing pension fund system is considered to be of national importance.
The broad objectives of the Government’s retirement policy founded on the principles of improved standards of fund governance should encourage individuals to provide adequately for their own retirement and dependants’needs; urge employers and employees to provide for retirement funding as part of the remuneration contracts, ensuring they are cost-efficient, prudently managed, transparent, fair and hedged against the effects of inflation.
NBFIRA’s nascent and ongoing risk-based pension fund operations supervision (RBS) initiatives should balance the overall risks and prioritize mitigating the inherent systemic issues.
NBFIRA was established as an independent regulatory agency in 2008 for overseeing 23 different types of non-bank financial institutions, representing over P57 billion in financial assets at risk, requiring new regulations and prudential rules.
Regulated NBFIRA’s include to name some, pension fund and insurance companies, reinsurers, securities exchanges & depositories, non-bank microlenders Botswana Stock Exchange (BSE) as well as a wide range of market intermediaries such as brokers, financial advisors, fund administrators and trustees. Medical Aid Schemes and pawnshops comprise future NBFIRA operations within its scope.
NBFIRA’s mandate represents a sophisticated, and technologically advanced financial operations requiring a high level of specialization and competency from a limited base of human resources.
The NBFIRA pension fund strategy focuses on strengthening the pensions’ legislative and regulatory framework, developing appropriate risk-based supervision systems, and safeguarding consumer protection. The three broad categories of risk faced by the retirement benefits sector in Botswana include systemic, portfolio and agency risks.
Administrative costs and fees in Defined Contribution Plans (DCP) reduce accumulated balances and generated retirement income.
“As an example, it has been calculated that an annual management charge of 1percent of funds under management may lead to a reduction of the accumulated assets by as much as 20 percent, over a 40-year period,” he said.
Competition should, theoretically, drive down costs, but market mechanisms do not always work and costs often remain high. NBFIRA should ensure cost structures are not excessive and fully transparent.
