Eswatini's Financial Regulator Probes PSPF's E1bn CBE Deal

The Financial Services Regulatory Authority (FSRA) in Eswatini is examining whether a E1 billion asset swap transaction between the Public Service Pensions Fund (PSPF) and the Central Bank of Eswatini (CBE) complies with the country's retirement fund regulations. This follows a query by Mbabane East Member of Parliament, Welcome Dlamini, during a portfolio committee debate. Minister for Public Service, Mabulala Maseko, confirmed that the FSRA is addressing the matter through the regulatory process.

The PSPF and the Central Bank signed a Private Placement Agreement for an Equity-Linked Note on September 26, 2024. Under the agreement, the PSPF transferred E1 billion in cash from its offshore assets to the Central Bank's account at the South African Reserve Bank in exchange for a note valued at E1 billion, issued by the Central Bank. The transaction was referred to as an asset swap because the fund exchanged one financial asset for another.

The arrangement did not amount to the fund giving away its money, as it continued to hold an investment registered in its name and whose value is assessed annually in its audited financial statements. The transaction involved the PSPF exchanging offshore cash for a financial instrument whose returns are linked to the performance of global equity markets. The minister explained that the transaction was undertaken against the background of the country's foreign-exchange reserves being below the level considered adequate by the International Monetary Fund (IMF) in 2024.

The placement of E1 billion into the reserves held by the Central Bank was intended to strengthen the country's foreign-exchange position. The reserves are important in supporting the Lilangeni-Rand peg, which also has implications for the purchasing power of the local currency and the real value of pension benefits paid to members in Emalangeni. The agreement has a five-year term and is expected to mature in September 2029.

However, it contains a three-year lock-in period, which will end in September 2027. In terms of returns, the note is linked to the performance of the MSCI World Index, measured in Rand, with the return payable at maturity. In addition, the fund receives a fixed annual coupon of 1.5 per cent. The agreement also makes provision for the fund to access liquidity before the investment matures.

The Central Bank had initially proposed that the fund invest E2 billion in the transaction, but following negotiations, the two institutions eventually agreed on an investment of E1 billion. The investment is not capital-protected, meaning its value can fluctuate depending on the performance of global equity markets and movements in the Rand. The minister explained that this risk was similar to that associated with the offshore assets which the fund had exchanged for the note.

The PSPF has submitted its response to the FSRA, defending its position that the instrument qualifies as a security issued by the Central Bank in its own name. The fund respects the role of the regulator, and the matter is being addressed through the proper regulatory process. A Parliamentary Motion on the matter is expected to follow, suggesting that the E1 billion arrangement could be subjected to further scrutiny in the House of Assembly.

Key points

• The FSRA is investigating whether the E1 billion asset swap transaction between the PSPF and the CBE complies with Eswatini's retirement fund regulations.
• The transaction involved the PSPF exchanging offshore cash for a financial instrument whose returns are linked to the performance of global equity markets.
• The investment is not capital-protected, meaning its value can fluctuate depending on the performance of global equity markets and movements in the Rand.