Pension Funds, Capital Markets and the Housing Sector

Housing development is an expensive business and like all economic activities in a free market economy, it is influenced by the law of supply and demand. This means all things being equal an increase in demand should lead to a correspondent increase in supply and vice versa. This should normally result in price equilibrium but in a free market economy this tug of war between supply and demand sometimes creates imbalances.

The principle explained above also affects the supply and demand of housing in Ghana. The demand for accommodation or houses far outweighs the supply of houses in the country. As a result house prices are far above the price the average person can afford. Unfortunately high interest rates have prevented others from using monthly instalment plans to acquire housing. Hence this week we discuss pension funds and capital market, the two factors that also influences the demand and supply of housing in Ghana.

Housing and real estate development is best achieved through short term capital investment. However a pension fund is a long term investment product into which scheme members pay contributions in order to build up a lump sum to provide an income in retirement. The contributions paid by these members are invested by the Fund Managers in secure investment for a return. In most countries, these pension funds are turn into mortgage products for potential and existing home owners to secure their properties. Therefore the housing sector and pension funds both depend on each other to secure long term return on investments.

The relationship between the two is that pension funds sponsor housing development, and return on housing investments create pensioners retirement income. Judging from workers personal experiences it is regrettable to say that the benefits from pension funds hardly favoured the contributors in the long term. If the symbiotic relationship between pension funds and home ownership via mortgages were leverage efficiently, Ghanaian workers would own a house at the beginning of their working life and not at the end. Unfortunately workers have left the Government, Employers and Fund Managers to police the performance of their pension funds’ on their behalf. Workers must now act to police and ensure their pension funds are serving their long term interest. They should scrutinise and challenge the stewards of their funds and not just accept whatever is written in annual reports.

The National Pensions Regulatory Authority (NPRA) growth report at the end of 2015, shows total assets under the private pension schemes increased to over GHS 4.6 billion (3.3% of GDP) compared to the GHS 2.5billion recorded in 2014. This upward trajectory continued in 2016 with total assets increasing to GHS 6.7billion (4.5% of GDP) which was equivalent to US$1.6billion. Though outdated, SSNIT’s 2015 reports also stated total assets as GHS 8.8billion (i.e.US$2.1billion). Together these are significant financial resources that can be invested to transform the housing sector. See the NPRA growth statistics below.

Directly linked to pension funds investment and management is the Capital Market. The function of the Capital Market is to gather funds from those who have and make them available to entities that need the funds. The core function of the market is to improve the efficiency of transactions so that each individual entity does not need to conduct extensive search and analysis before they obtain the funds they require for their business.

The Capital Market also consists of suppliers and users of funds.The suppliers of funds include households, institutions such as pension funds, insurance companies, religious institutions and non-financial companies generating cash beyond their needs for investment. Users of funds include potential and existing home owners, motor vehicle purchasers, non-financial companies and governments financing infrastructure investment. In a financial services industry context, capital markets are considered primary offerings of debt and equity supported by investment banks through underwriting. As we know there are a number of entities in Ghana looking for opportunities to invest their excess funds. Could a Debt Capital Market be the ANSWER?

The efficient working of Pension Funds and Capital Markets creates an opportunity for local funds to be mobilised from diverse sources to fund housing development. The proposed National Housing and Mortgage Fund requires an efficient Capital Market to keep the housing investment cycle flowing. Let us hope the Ministry of Finance, Securities and Exchange Commission, Bank of Ghana and Commercial Banks will use their statutory powers to setup a Debt Capital Market to facilitate capital flow into the housing sector. This can be achieved by leveraging the link between the Pension Funds and Capital Markets.