In 2022, the proposed suspension of interest payments for domestic bondholders sparked an outcry within the pensions industry in Ghana. Pensioners, who had relied on the stability and returns of government bonds, were suddenly faced with a bleak financial outlook.

The government and, in fact, the President of the Republic of Ghana initially assured the public that private pension funds would be excluded from the debt restructuring. However, developments later showed that these promises were short-lived, with the funds not excluded.

Once again, pensioners find themselves caught in another crossfire of fiscal policy, this time involving the USD 13 billion Eurobond restructuring programme, raising renewed concerns about the future stability of private pension funds and the wider pensions industry.

Private pension funds are significantly exposed to government securities, with 81% of the total assets under management (AUM), valued at GHS 36.95 billion, invested in Government of Ghana (GoG) securities as of December 31, 2023. In contrast, Eurobonds make up just 1% of the total AUM for private pension funds, amounting to GHS 421.86 million (USD 26.46 million).

This 1% exposure represents less than 0.01% of the total USD 13 billion Eurobond restructuring programme. Given this insignificant stake, exempting private pension funds from the restructuring would not undermine the overall restructuring goals, but it would protect pensioners from unnecessary financial distress.

While this proportion is insignificant, the impact on private pension funds could still be substantial. Exempting them would not harm the restructuring plan, but including them would significantly hurt pension schemes and pensioners.

This article examines the potential impact of Ghana’s USD 13 billion Eurobond restructuring programme on private pension funds. It highlights the financial and operational strain that the restructuring could impose on these funds, which are still recovering from the recent domestic debt exchange. The article argues that, given the negligible exposure of private pension funds to Eurobonds, they should be exempted to safeguard pensioners’ livelihoods and protect the stability of the pensions industry.

IMPACT ON PRIVATE PENSION FUNDS AND THE PENSIONS INDUSTRY

The restructuring of Ghana’s Eurobonds introduces several measures, including extended maturities and reduced coupon payments.

Although Eurobonds represent only a fraction of private pension fund assets—approximately 1% of the AUM or 0.03% of the USD 13 billion being restructured—the consequences for private pension funds and the pensions industry could still be significant. This is because private pension funds have already been included in the recent domestic debt restructuring, which severely impacted their liquidity and growth prospects.

The cumulative effect of the domestic debt restructuring has placed substantial financial strain on these funds. Including even a small exposure to Eurobonds in this second round of restructuring would further exacerbate liquidity challenges and slow long-term fund growth.

Given this existing pressure, exempting private pension funds from the Eurobond restructuring would prevent disproportionate harm and allow the funds to recover and continue safeguarding pensioners’ future livelihoods. The following key areas outline the immediate and long-term impacts:

Reduced Income from Coupon Payments

Private pension funds rely heavily on consistent coupon payments from government bonds to maintain liquidity and fund their operations. While the direct exposure to Eurobonds is minimal, the restructuring will likely extend bond maturities and reduce coupon rates.

This would diminish the immediate cash inflows that these funds depend on. With delayed or reduced coupon payments from domestic bonds already putting strain on liquidity, even a small shortfall from Eurobond investments exacerbates an already tight cash flow situation for pension funds. This will affect their ability to meet both short-term obligations and long-term growth targets.

Operational Strain on Corporate Trustees

Corporate Trustees face a dual challenge: reduced fee income from bond investments and rising operational costs. Typically, trustees rely on bond coupon payments to cover operational expenses and management fees.

If the Eurobond restructuring results in delayed or reduced coupon payments, Trustees may be forced to draw their fees directly from pension contributions, rather than earned interest. This approach would weaken the overall growth of private pension funds and add pressure on Trustees to balance their operational expenses with reduced revenue. In the long term, this could reduce their capacity to manage private pension portfolios effectively, leading to underperformance and potential reputational risks.

Compounded Effect on Fund Growth

Private pension funds operate on the principle of compounding interest, reinvesting income from bonds to generate long-term growth. A delay or reduction in coupon payments interrupts this cycle, preventing private pension funds from taking full advantage of the compounding effect.

Even a small reduction in returns from Eurobonds, when compounded by ongoing domestic bond issues, can significantly slow the growth of the fund. Over time, this stunted growth could hinder the private pension funds’ ability to meet future liabilities and negatively impact the retirement incomes of pensioners.

Loss of Investor Confidence:

Although the exposure to Eurobonds is small, the restructuring sends a negative signal to investors. Pensioners and other stakeholders may perceive this restructuring as, yet again a broader threat to the reliability of government-backed securities.

Exempting private pension funds would not only safeguard pensioners but also restore investor confidence in government-backed securities, a critical factor for future fiscal policy and borrowing efforts. This erosion of confidence could lead to wider implications for future fundraising efforts by the government and could potentially destabilize the financial health of the pensions industry.
The perception that government securities once considered safe are subject to unpredictable restructuring further undermines trust in these instruments. The uncertainty is, what next?”

Impact on Portfolio Diversification:

Private pension funds are heavily concentrated in government securities, with approximately 85% of their total assets under management (AUM) invested in domestic bonds, Local Government & Statutory Agency bonds, and Eurobonds.

This high exposure to government-backed securities creates a significant vulnerability in the private pension funds’ portfolio. While the direct exposure to Eurobonds is only 1%, it still plays a role in diversifying the portfolio’s income sources. Any reduction in returns from Eurobond investments further amplifies the risk by increasing the reliance on domestic bonds, which have already been restructured and are facing delayed or reduced coupon payments.

This lack of diversification heightens the portfolio’s susceptibility to market volatility and fiscal shocks from government securities. As a result, the private pension funds are left with limited options to hedge against potential losses, making it increasingly difficult to protect the financial interests of pensioners.

Although their exposure to Eurobonds is small, the cumulative effects of reduced income, operational strain, and stunted portfolio growth could significantly harm the financial health of private pension funds. This, in turn, would impact the retirement security of pensioners. In light of these considerations, it is crucial to exempt private pension funds from the Eurobond restructuring.

SYSTEMIC RISK TO THE FINANCIAL SECTOR

The repercussions of this restructuring extend beyond the pensions industry. The financial sector in Ghana has experienced significant upheaval in recent years, with the clean-up of the banking sector still fresh in the minds of investors and stakeholders.

The potential collapse of pension funds due to liquidity challenges would add to the systemic risk, potentially destabilizing the entire financial ecosystem. It is imperative that policymakers recognize the interconnected nature of the financial system and the role that private pension funds play in maintaining stability and confidence.

CONCLUSION

Ghana’s Eurobond restructuring has once again brought to the fore the vulnerability of private pension funds during times of economic crisis. With 85% of private pension fund assets tied to government-backed securities, the impact of delayed or reduced coupon payments from these securities, including Eurobonds, is too severe to ignore. Although the exposure to Eurobonds is small, the cumulative effects of the restructuring on private pension fund growth, liquidity, and investor confidence could be catastrophic for pensioners’ financial security.

If the proceeds from these bonds were being directed towards productive sectors of the economy—such as infrastructure, job creation, or other development projects—the restructuring might have long-term benefits for the economy and ultimately for private pension funds.

Investments in these areas would spur economic growth, create jobs, and enhance the government’s ability to repay its debts, making the bonds a more viable investment for the future.

However, the reality is that much of the borrowing has been focused on refinancing existing debt, essentially recycling financial instruments without adding any real value to the economy. This lack of investment in productive sectors only worsens the risks for private pension funds, as the bonds fail to contribute to long-term economic stability and growth.

Given their marginal contribution in Eurobonds, exempting private pension funds from the restructuring process is a low-risk yet high-impact decision that will safeguard the financial future of pensioners and preserve confidence in government-backed securities. Moreover, such an exemption would have little to no impact on the overall Eurobond restructuring.

It would at least maintain liquidity within the pension schemes, allowing them to continue meeting their obligations and preventing further strain on their operations. These are the very funds expected to lay the golden eggs of patient capital for the development of the economy, as seen in other jurisdictions, and must therefore be protected. It is imperative that private pension funds be exempted from the Eurobond restructuring.