EVERY pension scheme has to invest the money that is paid into it in order to ensure funds are available to pay members of the pension scheme when they become eligible for their benefits.
There is always a risk with any investment. To minimise that risk, pension scheme managers try to spread it by ensuring they have a balanced investment portfolio.
Some of their investments are in property, others are stock exchange investments, while others may be money market investments.
Sometimes they lose money on an investment that fails to meet their expectations.
They may, for instance, have invested in a company that goes into liquidation or have placed money with a bank that collapses.
Whenever a bank collapses, there are inevitably a number of pension funds with investments or deposits in it that are adversely affected.
Sometimes the returns on an investment exceed expectations. The hope of every pension scheme is that overall there will be more gains than losses.
NSSA, which operates the national pension scheme, as well as the Workers’ Compensation Insurance Fund, has to deal with the same risks as any other pension fund or indeed any other investor.
The only difference is that whereas other pension schemes look exclusively at investments that will give them a good return, a small percentage of NSSA’s investments is directed at investments with a social or economic objective.
Moreover, NSSA may sometimes have to make investments that are considered in the national interest.
For instance, NSSA provided funds to a local bank for loans to local authorities, when requested by its parent ministry to do so in order to help these local authorities avert a possible typhoid or cholera epidemic.
NSSA also deposits funds with banks at a below market interest rate on the understanding that the banks will use these funds to provide loans to businesses at below market interest rates.
It does this to help businesses remain viable and grow in the interests of retaining and expanding employment.
When contributors to the national pension scheme lose their jobs, it affects their benefits, since their contribution period affects the size of their retirement pension or even whether they receive a pension.
However, NSSA insists that its loans are secured, with banks being required to provide collateral security for the money advanced to them.
Even though the funds are intended for on-lending, the banks are required to take responsibility for repayment of the loans on maturity.
NSSA’s overall investment portfolio is expected to provide a rate of return that at least matches or exceeds market standards.
Most of its investments are intended to generate average or above average market returns in the interests of those whom its social security schemes are intended to benefit.
Because of the risk inherent in any investment, NSSA structures its investments carefully to ensure a balanced investment portfolio. As with any other investor or pension fund, some investments may not perform as well as expected, while others may exceed expectations.
In deciding on where best to invest contributors’ funds, so that contributors can be assured of a respectable pension when they retire in several decades time, NSSA is guided by International Labour Organisation (ILO) guidelines on the investment of social security funds and International Social Security Association guidelines.
It is also guided by its own investment policy and actuarial advice, as well as its own internal procedures.
The structure of its investment portfolio is based on actuarial advice, which currently is that 65% to 70% of its investments should be in real assets, with the balance in non-real assets.
The actual allocation of assets, which falls within those percentages, is sent for approval each year, along with NSSA’s capital expenditure budget, to the Ministry of Public Service, Labour and Social Welfare and the Ministry of Finance. Once approved, NSSA abides by the approved allocations.
A shareholding of 10% or more in any one equity counter has to be approved by both ministries. Likewise, all real estate investments have to be approved by both ministries.
Money market investment approvals are handled by management, with the exception of investments with Prescribed Asset status.
Proposed investments have to be approved at various levels within NSSA before recommendations are sent to the ministries.
Prospective investments are first considered by investment analysts within NSSA, who make recommendations to NSSA’s investment director.
He in turn makes recommendations to the management investments’ committee, which makes its recommendations to NSSA’s board investment committee.
The board investment committee, after considering the management investments committee’s recommendations, makes its own recommendations to the full board, which makes the final decision or, where the investment requires ministerial approval, makes its recommendation to the Minister of the Public Service, Labour and Social Welfare, who in turn consults with the Minister of Finance.
Figures published recently by NSSA show that while some of its investments highlighted in the media in recent weeks have not done well, others have done well, with the overall result being that they have added value to contributors’ funds.
Investments with a total actual cost of almost $662 million as at January 31 this year had a market value at the same date of more than $701 million.
NSSA’s investment portfolio is, therefore, doing well overall, despite the losses experienced with some of them. Contributors’ funds are secure and have grown. They continue to grow.