How current practices in investment policy are implemented

NSSF has invested workers’ savings in constructions like NSSF Building in Kampala. FILE PHOTO 

By Christian Gaya, Business Times

The investment policy is the statement that should be able to identify the potential for the fund to be or to become a dominant force in the domestic market and for that case therefore it should specify how the fund would resolve such a situation. In short investment policy should be explicit about how the pension fund would exercise its voting rights as a shareholder.

 

Investment policy in public pension schemes in Tanzania is set on an ad hoc basis if not in majority cases. Furthermore, survey indicates that non these pension funds attempt to define a coherent strategy that sets targets for acceptable levels of risk, expected rates of return, and asset allocations that match the maturity of liabilities. It is known that with few exceptions, there are no explicit mechanisms to assess and manage risks, and exposure limits in investments are not respected. The resulting existing investment policies are risky, with many pension funds overexposed to explicit and implicit public debt as well as direct investment in companies, which interferes with corporate governance.

Lending to plan members and investments in real estate (and management of real estate property) are also widespread. Clearly, nonexistent or shallow and narrow capital markets constrain investment choices over the medium term. Still, with the exception of the Caisse Interprofessionnelle Marocaine de Retraite (CIMR) and the Caisse de Dépôt et de Gestion (CDG) in Morocco if we take a survey, which outsource the management of reserves, the majority of pension funds in Tanzania remain large players in these markets, which really still discourages private investors. 

In Egypt, all surpluses of the pension funds are invested in the National Investment Bank (NIB). Today, 63 percent of the NIB's liabilities are with the pension funds. By law, the NIB finances the government's capital expenditures. In fact, the government is mandated to borrow from the NIB at a pre-determined interest rate, which is currently above market levels. Interest paid on this debt accounts for 40 percent of revenues of the pension funds

When contributing employer contributions and other transfers are included, the government is basically providing 80 percent of the revenues of the funds, which are generating a surplus of 6 percent of GDP. This surplus is deposited back into the NIB. This practice is contrary to the more common case, where governments consider pension funds to be a low-cost source of funding.

In principle, this situation could be considered ideal for the pension fund, but it is unlikely to be sustainable in the long run. Close to 70 percent of the portfolio of the NIB is made of public debt. Ultimately, the liabilities of the NIB are a direct responsibility of the government.

Given these circumstances, it might be more appropriate to consider the NIB not as an entity with an autonomous balance sheet but rather as a liability line in the general budget. At the same time, any reform program of the Egyptian pension system should aim at keeping the implicit debt of the scheme in the form of explicit government debt 

In the Islamic Republic of Iran, investment policies for the social security schemes are highly complex and risky. Therefore even in Tanzania the social security industry has become a large industrial conglomerate with considerable market power in several economic sectors, which impedes private sector development and several times interferes with corporate governance

The incentives of fund managers are not aligned with the interests of plan members in any of the countries surveyed including Tanzanian pension schemes. The delineation of responsibilities between the governing body and the management team is often blurred

This is evident in the Islamic Republic of Iran, Jordan, and Libya, where the managing director is also the chair of the governing body, which also includes other senior managers. Take an example of Tanzania pension schemes none of the cases does the governing body have the power to elect and remove the managing director, who is appointed directly by the government.  While on the other hand, even remuneration policies are not set by the governing bodies and are not linked to the performance of the management team. Although the currently amendment done by social security regulatory authority (SSRA) insists every director general of any pension schemes including director general of SSRA to become the general secretary of the board of trustees. 

Recently survey performed in Tanzania pension funds shows that mechanisms for rewarding good performance and penalizing bad judgment are lacking. The fact that the governing body does not appoint and remove the director general of the fund also reduces incentives to respond to board investment policies and related board policies.