pension fund management: implications for sound financial and economic management by m. k. ahmad...
TRANSCRIPT
Pension Fund Management: Implications For Sound Financial
And Economic Management
By
M. K. AhmadDirector General
National Pension Commission
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Outline
Characteristics of Pension Funds Pension Fund Management Impact on Financial and Economic
Management Lessons from Nigeria
Characteristics of Pension Funds
• Sponsorship of Pension funds contribution by employers and/or employees wholly by employers
• Pension Funds as Institutional investors: collect, pool and invest funds for future pension
entitlements of beneficiaries ensure sound financial and economic
management through financial intermediation, which affect financial markets in particular and economic activity in general
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• Returns to members of pension plans may be purely dependent on the market or may be
overlaid by a guarantee of the rate of return by the sponsor
• Portfolio diversification to mitigate against risk: spread of domestic securities international investment
• Pooling of risk for small investors Long term liabilities allowing holding of long-
tenured and high yielding instruments4
Characteristics of Pension Funds …Cont’d
Ability to absorb and efficiently process information on capital market operations
Large size and thus economies of scale, which result in lower average cost for investors
The countervailing power of pension funds that is often used to reduce transaction costs and custodial fees
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Characteristics of Pension Funds …Cont’d
Pension Fund Management
Pension Funds are managed by: Pension Fund Administrators – take investment
decisions In some jurisdictions, pension fund management can
be by asset management and insurance companies Some management decisions may be the responsibility
of Boards of Trustees in some corporate organisations Pension Fund Custodians – keep custody of pension
funds Custodial services may be provided by Central Banks in
some jurisdictions In the UK, Pension Protection Fund provides
compensation to contributors where employers become insolvent
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Pension Fund Investment... Cont’d
Regulations required to promote both the performance and the financial security of pension assets
Regulations of pension funds require the appointment of a custodian, depository
institution or trustee standards of conduct and minimum suitability
of the operators of pension funds the rights of investors to withdraw funds the right of investors to full, timely and
accurate information disclosure7
• The main goals of pension investment are to: Ensure adequate, affordable and
sustainable benefits to contributors Secure safety & security of funds Ensure adequate liquidity to pay all
pension benefits of contributors as and when due
Achieve an optimal trade-off of risk and return through strategic asset allocation
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Pension Fund Management … cont’d
Pension Fund Investment … cont’d
Risk Management for pension assets established on Quantitative limits: maximum limits for
individual, class or class of mix assets Principle of Prudent Man - the preservation of
capital, while obtaining a reasonable income Benchmark: indicator of market, sub-market
or a mix of assets commonly traded and used as a point of reference
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Pension Fund Management... Cont’d
In practice, 60% of pension funds invested in local markets Foreign investment might not overcome
collective systemic risks to world capital markets
Investment of pension funds in international market International diversification may reduce risk
since shocks to equity markets tend to be country specific
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Impact on Economic Management
Pension funds can have positive impact on the economy through: generation of savings that leads to capital
accumulation and hence promotes investment transfer of resources in favor of long-term assets
would have significant impact on GDP growth Shift to long-term assets tend to reduce the cost
of capital and increase the availability of equity and long-term debt financing to companies, and hence promotes growth
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Impact on Economic Management ... Cont’d
Increase in capital investment and labour productivity
Development of labour intensive, low productivity “informal sector” to a capital intensive, high productivity “formal sector”
Availability of long-term financing will simplify government deficit financing through the issuance and purchase of government securities
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Promotion of infrastructural development
Development of other institutions Insurance
Annuity Life insurance
Rating Mortgage
REITs
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Impact on Economic Management ... Cont’d
Impact on Financial Management
Development of the Capital Market Increased demand for new investment outlets
would stimulate innovation and development of new long term instruments
Increased market integrity/transparency and corporate governance
Re-enforcement of Improved regulation and supervision of the market and its efficiency
Creation of domestic institutional investors (PFAs/CPFAs), with long term focus, would moderate stock market and price volatility
Trigger the modernisation of capital market infrastructure such as clearing and settlement
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Impact on Financial Management ... Cont’d
International portfolio of investment risk reduction to pension funds reduction of volatility of returns
Qualitative developments in the financial markets financial innovation development of corporate bonds market development of indexed instruments better accounting and auditing better information disclosure
Efficient provision liquidity and price formation
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Lessons from Nigeria
Rationale for Pension Reform Defined benefit (DB) – Pay As You Go (PAYG) Largely dependent on budgetary provision for funding Unstainable pension liabilities Weak & inefficient administration Demographic shifts and ageing make DB schemes unstainable
Low compliance ratio due to ineffective control & regulation
Many workers in the private sector were not covered by any form of retirement benefits arrangement
Existence of diversified arrangements which were largely unregulated in the private sector
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PublicSector
PrivateSector
LESSONS FROM NIGERIA … Cont’d
Characteristics of the Contributory Pension Scheme in Nigeria contributory: Contributions by both employer and
employee fully Funded: Funds set aside for retirement individual Accounts: Nature of the account,
portability and withdrawals (Lump sum, Annuity & Programmed withdrawal)
privately managed: by PFAs, CPFAs and PFCs life Insurance Cover coverage and exemptions strictly regulated and supervised by PenCom
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LESSONS FROM NIGERIA … Cont’d
Pension Fund Investments managed by two institutional investors Pension Fund Administrators Closed Pension Fund Administrators
Investment Instruments– subjected to both quantitative and qualitative
regulations– all instruments must have rating grades as stipulated
in the Regulations– rating carried out by Risk Rating Institutions– performance benchmark stipulated for each asset class
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LESSONS FROM NIGERIA … Cont’d
Securitization & Listing Pension fund investments assets must be
securitized and listed for trading on the floor of the NSE or Electronic Platform of MMAN
• Pension Fund Assets: Generated pool of long term investible funds for the
first time in Nigeria The industry has approximately N679.55 worth of
assets as at 31 October, 2007 RSA assets – N159.05 billion CFPA assets – N195.01 billion AES assets – N325.50 billion
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Quantitative limits and performance benchmarks stipulated
Assets invested in various instruments - FGN and State Governments’ securities, equities, money market instruments, mutual funds, corporate debt instruments
Offshore investments and derivatives are future developments
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LESSONS FROM NIGERIA … Cont’d
Development of other institutional operators: Enhancement of the skills of rating agencies Development of mortgage industry Development of insurance industry
Provision of group life insurance policies Developments of annuities market Anticipated fall in premium rates
Provision of statistics for national development National databank Pensioner verification exercise
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LESSONS FROM NIGERIA … Cont’d
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Thank You!
National Pension Commission
Plot 174, Adetokunbo Ademola Crescent
Wuse II, Abuja09 – 4138736 – 40