Jamaican pension funds have been given more room to invest in foreign currency assets. With effect from June 1, 2026, the Bank of Jamaica (BOJ) increased the foreign asset limit for pension funds from 10 per cent to 15 per cent of total assets. The increase has been welcomed by the pension industry and represents another step in a process of gradual liberalisation which has seen the limit move from 5 per cent to 7.5 per cent, then 10 per cent and now 15 per cent.

Pension funds invest for the long term. In many cases, they are investing today for benefits which will not become payable for decades. Pension funds’ ability to diversify is therefore important. Jamaica has a relatively small capital market, and as pension assets have grown, funds have increasingly had to invest substantial sums within a limited domestic investment universe. Greater scope to hold foreign currency assets, including through access to international markets, allows funds to diversify risk across countries, sectors, currencies and asset classes. Without that access, the bulk of members’ retirement savings remains exposed to the fortunes of a single economy.

The BOJ’s 2026 Directions recognise that reality, while maintaining the bank’s concern about the possible effects of significant foreign currency outflows on the local foreign exchange market.

The BOJ has also moved away from the previous approach of specifying particular categories of foreign assets which pension funds could hold. Under the 2026 Directions, the approach is more principles-based. In practical terms, a pension fund can consider the full range of foreign assets defined under the Bank of Jamaica Act, once the conditions in the directions are satisfied.

The first condition concerns credit quality. Where the foreign asset is a foreign currency instrument, it must be investment grade. The BOJ has also clarified that the required rating can attach to the instrument itself, the issuer or an entity guaranteeing the instrument.

Investments through collective and pooled funds are treated somewhat differently: At least 50 per cent of the underlying foreign assets must be investment grade when the investment is first acquired, and the BOJ has indicated that managers of portfolios that fell short when the directions took effect must submit a plan to achieve compliance within a reasonable period.

The second condition is liquidity. There must be an active secondary market for the asset, or it must otherwise be an asset which can be readily traded or for which the risk of illiquidity is low. This is important because a foreign asset need not be a conventional listed bond or security to fall within the framework. The subsequent BOJ guidance expressly refers, for example, to real estate where there is an active market, as well as cash and central bank securities.

The result is a regime which gives pension fund trustees and investment managers considerably more flexibility than before. It also places greater responsibility on them to assess the particular investment, its liquidity, credit quality and suitability for pension funds.

There are a few other points under the updated directions worth noting. Government of Jamaica global bonds continue to receive special treatment and will not be included in determining the percentage of foreign assets held by a pension fund. The BOJ has confirmed that pension funds may continue to hold those bonds even though they are currently below investment grade, given that they are readily traded.

The 15 per cent limit also does not automatically require a fund to dispose of assets simply because market movements take it above the limit. Fair value movements and exchange rate changes continue to be excluded when assessing compliance. However, where a fund is otherwise above the permitted limit, it cannot acquire additional foreign assets until its position is back within the limit.

There is, however, one aspect of the application of the foreign asset limit on which the pension industry and the BOJ remain apart.

While the 2026 Directions and the Guidance Note do not state that income earned on foreign investments, such as interest, coupons and dividends, is to be counted in calculating a fund’s foreign asset exposure, the BOJ has separately communicated to the industry that such income is to be included. The Pension Industry Association of Jamaica (PIAJ) has consistently disagreed with this approach.

The PIAJ’s concern is that the original investment and the income subsequently earned on it are quite different from a foreign exchange perspective. A pension fund that wants to purchase US$1 million of foreign securities may need to acquire the foreign currency to make that investment. That transaction can create demand in the domestic foreign exchange market. If that same US$1-million investment subsequently earns a US$50,000 coupon, the US$50,000 has been generated by an asset the fund already owns. No Jamaican dollars have been converted and no additional foreign currency has been purchased in Jamaica to generate that income.

If the income is retained in foreign currency or reinvested, the fund increases its foreign asset holdings, but without creating additional demand for foreign currency in Jamaica. If the income is converted into Jamaican dollars instead, it adds foreign currency to the local market.

The effect of counting both the original investment and the income it subsequently earns towards the 15 per cent limit is treating earned income in the same way as a fresh purchase of foreign assets.

Research undertaken by the PIAJ and reflected in its submissions to the BOJ examined the treatment of foreign investment income in Malaysia, Iceland, Ghana, Chile, and Botswana. No two regimes are identical. Across those jurisdictions, the regulatory focus has been on principal outflows rather than treating interest, coupons and dividends earned on existing holdings as new capital outflows. Malaysia and Iceland, for example, restricted capital movements while permitting income flows to continue.

That difference is important in Jamaica because of the potential pressure that new foreign asset purchases can place on the domestic foreign exchange market. Income earned on assets already held does not involve a new purchase of foreign currency in Jamaica.

The PIAJ also modelled the impact of the two approaches using industry data. The analysis found that the foreign currency income earned by pension funds is relatively small compared with the normal daily foreign exchange market turnover. The association’s position is, therefore, that including those earnings in the foreign asset limit unnecessarily reduces the amount that pension funds can actually invest in foreign assets, without providing a commensurate benefit to foreign exchange market stability.

Increasing the foreign asset ceiling from 10 per cent to 15 per cent gives pension funds additional capacity, but that capacity will gradually be reduced if income earned on existing foreign assets is also counted towards the limit.

The PIAJ hopes to continue its dialogue with the BOJ on this issue and to make the case again for reconsidering the treatment of income earned on foreign assets.

That issue aside, the 2026 changes are good news for pension funds and their members. Jamaica’s pension system cannot be considered in isolation from the growth of the funds themselves or from the relatively limited size of the domestic capital market. Sensible foreign asset diversification gives pension funds access to opportunities which do not exist locally and allows retirement savings to be spread across a broader range of economic and investment risks.

Of course, 15 per cent is a limit, not a target. Each pension fund must determine the appropriate level of foreign exposure having regard to its own membership, liabilities, cash flow, investment objectives and risk profile.

The gradual increase in the limit is encouraging. Jamaica has moved cautiously from 5 per cent to 15 per cent over several years, while the BOJ has retained the ability to respond to changing foreign exchange and financial market conditions. The next step should be to ensure that the way the limit is calculated does not unnecessarily reduce the additional diversification the increase was intended to provide.

Sanya Goffe is a partner at Hart Muirhead Fatta, Attorneys-at Law and President of the Pension Industry Association of Jamaica. She can be reached at smgoffe@hmf.com.jm

Sanya Goffe.