Mobilising domestic savings for economic development

The recent world-wide growth in the mobilisation of financial resources outside the traditional banking sector, channeled through capital markets, is posing new challenges for both investment managers and regulators in emerging and developing markets, says Finance Minister, Saara Kuugongelwa-Amadhila.
Speaking at the 6th annual conference of the Retirement Funds Institute of Namibia on Wednesday, Kuugongelwa-Amadhila said although a multi-faceted financial system, which includes non-bank financial institutions can protect economies from financial shocks; these non-bank institutions can exacerbate the fragility of the financial system in countries that lack coherent policy frameworks and effective regulation.
The minister noted that the retirement fund sector in particular, which has grown rapidly during the past decade, is one sector that was heavily affected by the recent global financial crisis. During the crisis, there was a decline in pension assets at about US$45.4 trillion at the end of 2008,  resulting in a severe blow to members of defined contribution plans close to retirement, denting confidence in many defined contribution systems.  ‘The lesson learnt was that Funds Management are not all about achieving high fund growth but also about the sustainability of investments and trying to make a development impact with domestic savings,’ said Kuugongelwa-Amadhila.
With combined assets of around US$40 trillion, pension funds, along with other institutional investors, constitute a large segment of the institutional investor space and are therefore considered important for the financial system’s stability. Pension funds in particular play a major role in fixed income markets and act as providers of long-term funding to banks and the public sector. Pension funds therefore not only plan a smooth consumption over the life course for individuals and households but at the same time also provide insurance against contingencies, which may otherwise adversely affect household consumption.
The minister emphasised that even though insurance from pension/retirement funds is important, the insurance properties of the fund plan are often not well understood especially in developing economies and as a result, greatly undervalued.
“This is one area where I think retirement/pension funds should become more transparent by reducing the amount of “small print” in their rules and contracts,” she said.
Pension funds, according to Kuugongelwa-Amadhila, play a key role in developing the financial sector of a country. The development of retirement/pension funds, the minister says, leads to increasing demand for long-term financial assets, thus promoting financial market development and improving the capacity to manage financial risks. In the Namibian context, she highlighted the fact that in 2002, the assets under management by pension funds totaled an estimated N$16.3 billion, which is equivalent to 46% of the Gross Domestic Product. This clearly illustrates the importance of pension funds in the Namibian financial sector.
“In my view, there are no compelling reasons why pension funds should not invest more on productive capital. They can play a much more active role in the financing of long-term, productive activities that support sustainable growth such as cleaner energy, infrastructure projects and venture capital,” she said.
The minister is of the opinion that some degree of prescriptive investment regulation is still necessary in Namibia especially with lessons learnt from the financial crisis. She maintains that pension funds and other institutional investors cannot function properly in an environment of high inflation, unstable monetary development and unsustainable fiscal conditions, hence government backing is required.