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NSSA invests to safeguard contributors’ future benefits

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Nobody likes to be compelled to part with money, no matter how little it may be. Benefits they may derive from contributions they are obliged to make, particularly when the benefits will only be realised in many years to come, should not be parted with easily. That probably explains why so many people become emotional […]

Nobody likes to be compelled to part with money, no matter how little it may be. Benefits they may derive from contributions they are obliged to make, particularly when the benefits will only be realised in many years to come, should not be parted with easily.

That probably explains why so many people become emotional when they talk about the national pension scheme, to which everyone in formal employment, apart from domestic employees, is obliged to contribute.

The contribution is not substantial. It is currently 3% of monthly income up to a maximum contribution of six dollars per month, meaning that anyone earning $200 or above pays six dollars and anyone earning below $200 pays less.

However, one would think it a fortune, when workers and journalists, whom one must remember are also contributors to the scheme and so subject to the same emotions as other employees, talk about workers’ hard-earned contributions.

When these emotions are coupled with a disregard by some media of any need to verify the truthfulness of published and unpublished allegations, then it is perhaps hardly surprising that some pretty outrageous opinions about National Social Security Authority (NSSA) are published as if those opinions and allegations were fact.

The retirement benefit to be derived from employees’ contributions is only payable to the contributor on reaching normal retirement age, which is either 60 or 65 years of age, depending on whether or not the individual is still in employment between those ages. It may be paid at a retirement age of 55 if the person has been working for seven of the 10 previous years in a job categorised by NSSA as arduous.

How large the benefit is depends on the individual’s contribution period and the insurable income on which the monthly contribution was based at retirement.

Since many employees will only be eligible for their benefit in 20, 30, 40 or even more years time, the bulk of the pension scheme contributions NSSA receives has to be invested.

The need to gain extra income for the pension fund from investments is particularly clear when one considers that NSSA currently receives no more than $12 at the most per employee per month, but is paying out monthly retirement pensions that range from $40 to more than $1 000, depending on the pensioner’s insurable earnings at retirement and contribution period.

NSSA has clear criteria on how best to invest contributor money for their ultimate benefit. From the way some journalists write, frequently citing nameless sources in order to give a semblance of credibility to their assertions, one might gain the impression that NSSA has no proper investment criteria and no risk assessment and protection measures in place.

This obviously is not the case. NSSA has laid down criteria for its investment decisions. It also has appropriate risk assessment and investment protection procedures in place.

With any investments, some do better than others. NSSA, like any other investor, has to assess the potential gains and risks involved in particular investments and put in place measures to ensure, as far as is possible, the security of its investments. In terms of its investment policy, NSSA is required to develop a balanced investment portfolio that optimises returns and plays a prominent role in national development.

The investment guidelines specify that the structure of the investment portfolio should take actuarial advice into account. The rate of return should match or exceed prevailing market standards to enable the authority to meet the ongoing needs of its members and beneficiaries.

In analysing different investment options, factors that NSSA has to take into account include the need to preserve an asset’s real value, the need to ensure there will always be adequate assets to meet current liabilities, the profitability of an investment, the need for a spread of investments in order to spread the investment risk, security and the need to match assets with liabilities, taking into account actuarial valuation reports.

While NSSA is expected to ensure that funds are invested in areas, securities and instruments that are viable and earn an optimal return, the authority is also expected to invest in areas that generate productive employment, higher productivity and export competitiveness and in the provision of residential accommodation and other social amenities. It is also required, in deciding upon investments, to support empowerment initiatives.

NSSA has, therefore, to balance the twin objectives of obtaining maximum returns from investments and investing in areas that support economic and social objectives that will benefit contributors, communities and the nation as a whole.

To achieve this it employs investment analysts and experts who manage the authority’s investments under the authority of NSSA’s management and board.

With large investments, the investment analysts make recommendations to a management committee, which in turn makes recommendations to NSSA’s board investment committee, which makes its own recommendations to the board.

In order to minimise the risks involved in investments that promote employment, higher productivity and empowerment, NSSA does not lend money directly to companies, but lends funds to financial institutions for on-lending to businesses.

It is the banks that are the borrowers and responsible for repaying the money with interest. However, NSSA insists on the end borrower signing an acknowledgement of indebtedness to NSSA so that, in the event of a bank collapsing, it can still recover its money from the end beneficiary. It also insists on collateral as security for loans.

NSSA utilises a computerised risk assessment programme to decide on how much to invest in this way with each bank.

Because it is banks that are the primary debtors, NSSA has to allow them to use their own risk assessment criteria when on-lending the funds. However, it has, since August last year, restricted interest and charges that banks can make for loans in order to ensure they are affordable and promote rather than hamper business development and hence employment retention and creation.

Talking Social Security is published weekly by the National Social Security Authority as a public service. Readers can email issues they would like dealt with in this column to [email protected] or text them to 0735 041 278. Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706517-8 or 706523 5.