The value of pension assets under the control of fund managers fell by $15 billion in the span of three months, amid aggressive interest rate hikes in Jamaica and foreign markets that have served to carve yields off bonds and other investment securities.
It also served to dampen the performance of stock markets.
In Jamaica, stocks lost eight per cent of their value last year, and are currently down by a further eight per cent, so far this year, as of Wednesday. That puts the market on the path towards a correction, which is defined as a 10 per cent decline, amid investor uncertainty.
At September 2022, which is the most recent data released by the regulator, the Financial Services Commission, FSC, reported that the stock of private pension assets had dipped to $691 billion.
That’s a 0.82 per cent decline relative to September 2021.
But worse than that it also reflects a $15 billion, or over two per cent drop in the quarter, relative to the $705 billion under management as at June, that the FSC said was largely due to the reduction in the value of eight of 13 asset classes and reflected the volatility within the Jamaican capital markets.
In its most recent industry review, the regulator said the two per cent decline was the highest quarterly reduction in assets reported since the start of 2022. December data is still outstanding.
Bucking the trend were investments in leases and real estate. The value of those holdings increased as funds hedged against volatility and sought long-term gains, the FSC said in its report. Additionally, there were gains in repo investments and deposits, but a fifth asset class, derivatives, had no recorded activity.
The number of pension plans experiencing asset growth also decreased in the September quarter. Only 264 plans grew their holdings, down from 314 in the June quarter.
Still, both analysts at the FSC and private fund managers are optimistic about a medium- to long-term turnaround.
The FSC’s analysts said “a certain amount of normalcy” was expected to return to the Jamaican capital markets.
“Despite heightened interest rates which have been used by global central banks to battle inflation, concerns are being tempered and Jamaica’s major trading partners have recorded growth after months of recession concerns,” the regulator said in its report.
The bank failures this month in the United States, however, have changed the calculus, somewhat.
On Wednesday, Reuters, for example, reported that the recession fears that had ameliorated were back due to the two US bank failures and rescue, and the rescue of Credit Suisse in Switzerland, which was done via its takeover by UBS.
Marie James, director of the Pension Industry Association of Jamaica, PIAJ, says pension fund holdings are typically affected by market cycles but tend to recover with time.
“Pension funds are long-term investing and deliberately so, as the assets are impacted by market cycles, but over the long term they will recover, as shown by the growth in the assets in the industry over the last 10 years,” James said.
She reiterated that the Bank of Jamaica’s interest rate adjustments to contain inflation ended up impacting the price of bonds, saying that “as interest rates rise, bond prices fall”, and that fixed-income securities account for one of the largest asset categories under management by pension funds, along with equities.
“The stock market also performed poorly during the period, as rising interest rates would attract investors to pursue bonds and money market securities, instead of riskier asset class like equities. As a result, the stock market saw lower market trading volumes and value, and overall negative returns,” said the PIAJ director.
“Similar to fixed income, equities account for a large portion of overall pension assets, and also explains the decline [in portfolios].”
The value of stocks and shares held by pension funds dropped by 5.4 per cent to $152.13 billion. The asset class accounts for 22 per cent of portfolios. Its decline was the largest among the top three asset classes, FSC said.
The number of investment managers in the private pensions industry was 25 up to last September. They include 15 securities dealers, two life insurance companies, and six other investment managers.
Security dealers continued to manage more than 50 per cent of the pension assets, with $383 billion in funds under management.
Private pension coverage increased marginally by 0.09 per cent during the quarter, the first increase since March 2021, but FSC said this was largely due to the reduction in Jamaica’s employed labour force, which was estimated at 1.268 million at July 2022.