Kristen Gyles | Keep Miss Bev’s pension safe

The finance minister opened the budget debate by announcing some interesting reforms to the financial sector. These were largely regulatory reforms intended to widen the universe of investable assets for pension plans and life insurance companies.

For example, the Minister announced an increase in the foreign asset investment limit from 10 per cent to 15 per cent for pension funds and life insurance companies, with the additional five percent being reserved for investment in foreign currency denominated assets issued by local issuers. The minister also announced a simplification of the insurance legislation to allow insurers to invest in a wider range of corporate debt securities.

Overall, the reforms are timely and fulfil the need for legislation to evolve with the rapidly changing parameters of the financial sector. Especially since the passage of that brutish Hurricane Melissa, there has rightly been an eagerness to unlock more long-term financing for businesses and capital projects. That is expected. At the same time, we can’t throw caution through the window.

One reform that caught my interest relates to the investment of pension assets in private equity.

Currently, pension plans are legally empowered to invest no more than five percent of total assets in private equity. The government intends to increase this limit to ten percent by April of next year. The idea here is that of the pension industry’s more than $847 billion worth of total assets, increasing the private equity investment limit to 10 percent will free up an additional $42 billion that can be invested in private companies across a myriad of sectors, stimulating economic growth.

The approach of using pension assets as a financing tool for economic recovery is … interesting.

Private enterprises are not subject to the same monitoring and disclosure requirements that publicly listed companies are subjected to. A pension plan’s investment in a private company could therefore be going south and yet easily go undetected for considerable time due to a lack of regulatory oversight and minimal public attention.

Furthermore, pension plan trustees are typically lay people who take on the voluntary role of governing the affairs of a pension plan. They are often neither interested nor available to give the level of attention that is needed to oversee investments in risky assets. And many private companies are risky.

By and large, what makes investments in private entities so attractive is the fact that they have higher growth rates because, well… many are going through their own little growth spurts. In many cases, these entities are private precisely because they are not yet at the stage of maturity and stability to become publicly listed. The problem is not that they are young and maturing. The problem is that many die an early death before they ever reach adulthood, and along with them are buried the hopes, dreams and savings of investors.

To make matters worse, private equity investments are much more illiquid than publicly traded shares. Pension plans have an obligation to pensioners who must receive their pension payments on time and in full without question, but if significant amounts of money are tied up in private equity, pension plans might be forced to sell their private investments prematurely at a discount, reducing returns. In the worst case, there might be a very unwelcome discovery that the plan simply cannot liquidate its investment when it needs to.

Such a situation would only increase the risk of pensioners not getting their due benefit when they are ready to retire.

For context, the average pensioner is living no life of ease. A full NIS pension as of April 1, 2025 amounts to $4,620 per week or just under $20,000 per month. Although private pension payments are far-ranging in quantity, at the lower end of the spectrum are countless people, particularly those collecting benefits from defined contribution plans, who are taking home even less than this amount as their private pension benefit.

Another truth that we need to contend with is that private equity investing requires specialized analysis. It is easy for an investment manager to misjudge the real value of an investment in private equity and to misdiagnose the true nature and magnitude of the investment risk.

Yes, the risk of such professional failure increases when the investment manager lacks sufficient understanding of the private equity market and lacks overall expertise. The problem is that trustees are often in no position to properly assess the skills of an investment manager. Instead, they rely on the investment manager’s sworn testimony that they are the best in the field. So, under the new regime, an optimistic trustee ends up putting their trust in an optimistic investment manager who puts their trust in an optimistic private entity which is happy to receive funding for their enterprise. But pensioners do not have the luxury of optimism. They need safety, security and guarantees.

To increase or liberalise the limit for investment in private companies by pension plans is to encourage more creativity in the investment of assets that need to be critically guarded. Creativity is great. But not necessarily with the money Miss Bev has been saving over the past 30 to 40 years of her backbreaking working life, that she now needs to finance her throughout retirement.

One might say it’s only 10 per cent, and that workarounds can be employed to keep Miss Bev’s pension safe and secure. Great. The point is that a prudent investment manager must still recognize the need to exercise caution.

The financial sector reforms are well-intentioned and are poised to help finance the budget in light of increased expenditure, especially after the hurricane. It is still hard to accept that pension assets should be the source of that financing. We wait and watch.

Kristen Gyles is a free-thinking public affairs opinionator. Send feedback to kristengyles@gmail.com and columns@gleanerjm.com