Sunday, July 3, 2022

High level of household debt of great concern to IMF

The extremely high level of household debt, which has far outstripped very low savings rates in Botswana and has reached ‘socially dangerous’ levels, has now become a concern to the International Monetary Fund (IMF), said Melville Brown, the Deputy CEO of the Non-Banking Financial Institutions Regulatory Authority (NBFIRA).

Brown said in Gaborone recently that, based on this alarmig statistical revealation, restructuring pension funds to avoid IMF fiscal repercussions and promote savings benefits the overall structure of Botswana pension funds. Moreso, for the best outcomes, the restructuring needs to be reformed and further reviewed to develop programmes that incentivize individual long-term savings and discourage heavy cash withdrawals too easily before full retirement age of aroud 60 is attained.

“There is a cultural aspect to the negative cycle of high debt versus low savings that is driven by a very short-sighted ‘I want it now’ consumer mentality that has become pervasive in Botswana.

“In retrospect, NBFIRA has implemented rule changes limiting the ability of employers and third-party creditors to directly debit individual pension payouts. The Authority will intervene, based on its mandatory powers, whenever there is a case of abuse of members’ rights or a breach of supervisory rules involving the financial soundness and protection of fund assets,” he pointed out.

Brown said NBFIRA will promote further measures to promote savings and preserve pension funds benefits through risk-based directives and coordinated initiatives involving all entities under its mandate. Particular emphasis will be given to limiting abuses in microlending activities and curbing excessive fees that erode pension fund assets, such as restructuring pension funds to promote savings and preserve benefits.

Although NBFIRA has a limited role in the basic policy decisions regarding pension fund structures, the Ministries of Labour and Home Affairs and Finance and Development Planning would be the lead policy makers on pension fund reform.

The Authority intends to recommend and promote policy measures and education programs that will improve the preservation of individual retirement savings, promote long-term retirement savings with tax incentives, alter the cycle of excessive consumer debt and low savings, reform and improve the structure of life annuities available, and ultimately; reduce retirees’ dependence on the state and other family members.

NBFIRA annual licensing fees and supervisory levies reflect the costs centralized risk management regulations and are not directly related to the amount or ownership of the financial assets involved.

Restructuring pension funds to promote savings and preserve benefits Pension funds are an important and fundamental part of personal savings in Botswana.

“However, there is a fundamental conflict in the structure of pension funds which allow early cash withdrawals versus the promotion of savings for retirement purposes. It has been well publicized this important source of savings is generally not well preserved as most people opt to receive their pension benefits in cash as early as possible.

“The unique early retirement system at age of 45 (primarily for government workers but many private sector plans have adopted the same structure), which allows for up to one-quarter of an accrued pension to be withdrawn in cash incentivizes a short-term outlook and promotes the negative cycle that is leading towards poverty in old age.

“This so-called ‘leakage’ of retirement savings happens when people change jobs and both before and after full retirement. Also retirement funds are often debited without option to reinvest in order to pay off third-party debt,” he said.

Brown revealed NBFIRA is authorized to collect P30 as an annual Supervisory Levy from each Pension Fund member. Based on September 2012 statistics Pension Fund members had paid a totaal of P 4,632,380 at the going rate. The NBFIRA levy as percentage of total pension fund assets at risk amouts to a paltry 0.01 percent.
Annual supervisory levies to Investment (asset) Managers at 0.035 percent of pension assets under management amounted to P15, 846,602; an expense not passed on to the pension fund members. Since the current NBFIRA levy schedule does not directly include pension fund administrators, they act as capital market intermediaries as their activities, they are subject to NBFIRA levies.

Total NBFIRA levies earned on pension fund supervision activities since April 1, 2012, billed through October 2012, are P5,106,090. Notwithstanding, total levy payments received from pension funds to date are P3,118,168. Although the total levies to investment managers, billed through October 2012 are P 15,500,005, total levy payments received from asset managers to date have reached P4,226,885. The actual NBFIRA levy totals also include levies for non-pension fund assets under management.


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