Pension Fund Management: Implications For Sound Financial And Economic Management By M. K. Ahmad Director General National...
Outline  <ul><li>Characteristics of Pension Funds </li></ul><ul><li>Pension Fund Management </li></ul><ul><li>Impact on Fi...
Characteristics of Pension Funds <ul><li>Sponsorship of Pension funds </li></ul><ul><ul><li>contribution by employers and/...
<ul><li>Returns to members of pension plans </li></ul><ul><ul><li>may be purely dependent on the market or may be overlaid...
<ul><li>Ability to absorb and efficiently process information on capital market operations </li></ul><ul><li>Large size an...
Pension Fund Management <ul><li>Pension Funds are managed by: </li></ul><ul><ul><li>Pension Fund Administrators – take inv...
Pension Fund Investment... Cont’d <ul><li>Regulations required to promote both the performance and the financial security ...
<ul><li>The main goals of pension investment  are to: </li></ul><ul><ul><li>Ensure adequate, affordable and sustainable be...
Pension Fund Investment … cont’d <ul><li>Risk Management for pension assets established on </li></ul><ul><ul><li>Quantitat...
Pension Fund Management... Cont’d <ul><li>In practice, 60% of pension funds invested in local markets </li></ul><ul><ul><l...
Impact on Economic Management <ul><li>Pension funds can have positive impact on the economy through: </li></ul><ul><ul><li...
Impact on Economic Management ... Cont’d <ul><li>Increase in capital investment and labour productivity  </li></ul><ul><li...
<ul><li>Promotion of infrastructural development  </li></ul><ul><li>Development of other institutions  </li></ul><ul><ul><...
Impact on Financial Management <ul><li>Development of the Capital Market </li></ul><ul><ul><li>Increased demand for new in...
Impact on Financial Management ... Cont’d <ul><li>International portfolio of investment </li></ul><ul><ul><li>risk reducti...
Lessons from Nigeria <ul><li>Rationale for Pension Reform </li></ul><ul><ul><li>Defined benefit (DB) – Pay As You Go (PAYG...
LESSONS FROM NIGERIA … Cont’d <ul><li>Characteristics of the Contributory Pension Scheme in Nigeria </li></ul><ul><ul><li>...
LESSONS FROM NIGERIA … Cont’d <ul><li>Pension Fund Investments managed by two institutional investors </li></ul><ul><ul><l...
LESSONS FROM NIGERIA … Cont’d <ul><li>Securitization & Listing  </li></ul><ul><ul><li>Pension fund investments assets must...
<ul><li>Quantitative limits and performance benchmarks stipulated  </li></ul><ul><li>Assets invested in various instrument...
<ul><li>Development of other institutional operators: </li></ul><ul><ul><li>Enhancement of the skills of rating agencies <...
Thank You! National Pension Commission Plot 174, Adetokunbo Ademola Crescent Wuse II, Abuja 09 – 4138736 – 40  [email_addr...
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Presentation On Investment Of Pension Funds

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Presentation On Investment Of Pension Funds

  1. 1. Pension Fund Management: Implications For Sound Financial And Economic Management By M. K. Ahmad Director General National Pension Commission
  2. 2. Outline <ul><li>Characteristics of Pension Funds </li></ul><ul><li>Pension Fund Management </li></ul><ul><li>Impact on Financial and Economic Management </li></ul><ul><li>Lessons from Nigeria </li></ul>
  3. 3. Characteristics of Pension Funds <ul><li>Sponsorship of Pension funds </li></ul><ul><ul><li>contribution by employers and/or employees </li></ul></ul><ul><ul><li>wholly by employers </li></ul></ul><ul><li>Pension Funds as Institutional investors: </li></ul><ul><ul><li>collect, pool and invest funds for future pension entitlements of beneficiaries </li></ul></ul><ul><ul><li>ensure sound financial and economic management through financial intermediation, which affect financial markets in particular and economic activity in general </li></ul></ul>
  4. 4. <ul><li>Returns to members of pension plans </li></ul><ul><ul><li>may be purely dependent on the market or may be overlaid by a guarantee of the rate of return by the sponsor </li></ul></ul><ul><li>Portfolio diversification to mitigate against risk: </li></ul><ul><ul><li>spread of domestic securities </li></ul></ul><ul><ul><li>international investment </li></ul></ul><ul><li>Pooling of risk for small investors </li></ul><ul><ul><li>Long term liabilities allowing holding of long-tenured and high yielding instruments </li></ul></ul>Characteristics of Pension Funds …Cont’d
  5. 5. <ul><li>Ability to absorb and efficiently process information on capital market operations </li></ul><ul><li>Large size and thus economies of scale, which result in lower average cost for investors </li></ul><ul><li>The countervailing power of pension funds that is often used to reduce transaction costs and custodial fees </li></ul>Characteristics of Pension Funds …Cont’d
  6. 6. Pension Fund Management <ul><li>Pension Funds are managed by: </li></ul><ul><ul><li>Pension Fund Administrators – take investment decisions </li></ul></ul><ul><ul><li>In some jurisdictions, pension fund management can be by asset management and insurance companies </li></ul></ul><ul><ul><li>Some management decisions may be the responsibility of Boards of Trustees in some corporate organisations </li></ul></ul><ul><ul><li>Pension Fund Custodians – keep custody of pension funds </li></ul></ul><ul><ul><li>Custodial services may be provided by Central Banks in some jurisdictions </li></ul></ul><ul><ul><li>In the UK, Pension Protection Fund provides compensation to contributors where employers become insolvent </li></ul></ul>
  7. 7. Pension Fund Investment... Cont’d <ul><li>Regulations required to promote both the performance and the financial security of pension assets </li></ul><ul><li>Regulations of pension funds require </li></ul><ul><ul><li>the appointment of a custodian, depository institution or trustee </li></ul></ul><ul><ul><li>standards of conduct and minimum suitability of the operators of pension funds </li></ul></ul><ul><ul><li>the rights of investors to withdraw funds </li></ul></ul><ul><ul><li>the right of investors to full, timely and accurate information disclosure </li></ul></ul>
  8. 8. <ul><li>The main goals of pension investment are to: </li></ul><ul><ul><li>Ensure adequate, affordable and sustainable benefits to contributors </li></ul></ul><ul><ul><li>Secure safety & security of funds </li></ul></ul><ul><ul><li>Ensure adequate liquidity to pay all pension benefits of contributors as and when due </li></ul></ul><ul><ul><li>Achieve an optimal trade-off of risk and return through strategic asset allocation </li></ul></ul>Pension Fund Management … cont’d
  9. 9. Pension Fund Investment … cont’d <ul><li>Risk Management for pension assets established on </li></ul><ul><ul><li>Quantitative limits: maximum limits for individual, class or class of mix assets </li></ul></ul><ul><ul><li>Principle of Prudent Man - the preservation of capital, while obtaining a reasonable income </li></ul></ul><ul><ul><li>Benchmark: indicator of market, sub-market or a mix of assets commonly traded and used as a point of reference </li></ul></ul>
  10. 10. Pension Fund Management... Cont’d <ul><li>In practice, 60% of pension funds invested in local markets </li></ul><ul><ul><li>Foreign investment might not overcome collective systemic risks to world capital markets </li></ul></ul><ul><li>Investment of pension funds in international market </li></ul><ul><ul><li>International diversification may reduce risk since shocks to equity markets tend to be country specific </li></ul></ul>
  11. 11. Impact on Economic Management <ul><li>Pension funds can have positive impact on the economy through: </li></ul><ul><ul><li>generation of savings that leads to capital accumulation and hence promotes investment </li></ul></ul><ul><ul><li>transfer of resources in favor of long-term assets would have significant impact on GDP growth </li></ul></ul><ul><ul><li>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 </li></ul></ul>
  12. 12. Impact on Economic Management ... Cont’d <ul><li>Increase in capital investment and labour productivity </li></ul><ul><li>Development of labour intensive, low productivity “informal sector” to a capital intensive, high productivity “formal sector” </li></ul><ul><li>Availability of long-term financing will simplify government deficit financing through the issuance and purchase of government securities </li></ul>
  13. 13. <ul><li>Promotion of infrastructural development </li></ul><ul><li>Development of other institutions </li></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><ul><li>Annuity </li></ul></ul></ul><ul><ul><ul><li>Life insurance </li></ul></ul></ul><ul><ul><li>Rating </li></ul></ul><ul><ul><li>Mortgage </li></ul></ul><ul><ul><ul><li>REITs </li></ul></ul></ul>Impact on Economic Management ... Cont’d
  14. 14. Impact on Financial Management <ul><li>Development of the Capital Market </li></ul><ul><ul><li>Increased demand for new investment outlets would stimulate innovation and development of new long term instruments </li></ul></ul><ul><ul><li>Increased market integrity/transparency and corporate governance </li></ul></ul><ul><ul><li>Re-enforcement of Improved regulation and supervision of the market and its efficiency </li></ul></ul><ul><ul><li>Creation of domestic institutional investors (PFAs/CPFAs), with long term focus, would moderate stock market and price volatility </li></ul></ul><ul><ul><li>Trigger the modernisation of capital market infrastructure such as clearing and settlement </li></ul></ul>
  15. 15. Impact on Financial Management ... Cont’d <ul><li>International portfolio of investment </li></ul><ul><ul><li>risk reduction to pension funds </li></ul></ul><ul><ul><li>reduction of volatility of returns </li></ul></ul><ul><li>Qualitative developments in the financial markets </li></ul><ul><ul><li>financial innovation </li></ul></ul><ul><ul><li>development of corporate bonds market </li></ul></ul><ul><ul><li>development of indexed instruments </li></ul></ul><ul><ul><li>better accounting and auditing </li></ul></ul><ul><ul><li>better information disclosure </li></ul></ul><ul><li>Efficient provision liquidity and price formation </li></ul>
  16. 16. Lessons from Nigeria <ul><li>Rationale for Pension Reform </li></ul><ul><ul><li>Defined benefit (DB) – Pay As You Go (PAYG) </li></ul></ul><ul><ul><li>Largely dependent on budgetary provision for funding </li></ul></ul><ul><ul><li>Unstainable pension liabilities </li></ul></ul><ul><ul><li>Weak & inefficient administration </li></ul></ul><ul><ul><li>Demographic shifts and ageing make DB schemes unstainable </li></ul></ul><ul><ul><li>Low compliance ratio due to ineffective control & </li></ul></ul><ul><ul><li>regulation </li></ul></ul><ul><ul><li>Many workers in the private sector were not covered by </li></ul></ul><ul><ul><li>any form of retirement benefits arrangement </li></ul></ul><ul><ul><li>Existence of diversified arrangements which were largely unregulated in the private sector </li></ul></ul>Public Sector Private Sector
  17. 17. LESSONS FROM NIGERIA … Cont’d <ul><li>Characteristics of the Contributory Pension Scheme in Nigeria </li></ul><ul><ul><li>contributory: Contributions by both employer and employee </li></ul></ul><ul><ul><li>fully Funded: Funds set aside for retirement </li></ul></ul><ul><ul><li>individual Accounts: Nature of the account, portability and withdrawals (Lump sum, Annuity & Programmed withdrawal) </li></ul></ul><ul><ul><li>privately managed: by PFAs, CPFAs and PFCs </li></ul></ul><ul><ul><li>life Insurance Cover </li></ul></ul><ul><ul><li>coverage and exemptions </li></ul></ul><ul><ul><li>strictly regulated and supervised by PenCom </li></ul></ul>
  18. 18. LESSONS FROM NIGERIA … Cont’d <ul><li>Pension Fund Investments managed by two institutional investors </li></ul><ul><ul><li>Pension Fund Administrators </li></ul></ul><ul><ul><li>Closed Pension Fund Administrators </li></ul></ul><ul><li>Investment Instruments </li></ul><ul><ul><li>subjected to both quantitative and qualitative regulations </li></ul></ul><ul><ul><li>all instruments must have rating grades as stipulated in the Regulations </li></ul></ul><ul><ul><li>rating carried out by Risk Rating Institutions </li></ul></ul><ul><ul><li>performance benchmark stipulated for each asset class </li></ul></ul>
  19. 19. LESSONS FROM NIGERIA … Cont’d <ul><li>Securitization & Listing </li></ul><ul><ul><li>Pension fund investments assets must be securitized and listed for trading on the floor of the NSE or Electronic Platform of MMAN </li></ul></ul><ul><li>Pension Fund Assets: </li></ul><ul><ul><li>Generated pool of long term investible funds for the first time in Nigeria </li></ul></ul><ul><ul><li>The industry has approximately N679.55 worth of assets as at 31 October, 2007 </li></ul></ul><ul><ul><li>RSA assets – N159.05 billion </li></ul></ul><ul><ul><li>CFPA assets – N195.01 billion </li></ul></ul><ul><ul><li>AES assets – N325.50 billion </li></ul></ul>
  20. 20. <ul><li>Quantitative limits and performance benchmarks stipulated </li></ul><ul><li>Assets invested in various instruments - FGN and State Governments’ securities, equities, money market instruments, mutual funds, corporate debt instruments </li></ul><ul><li>Offshore investments and derivatives are future developments </li></ul>LESSONS FROM NIGERIA … Cont’d
  21. 21. <ul><li>Development of other institutional operators: </li></ul><ul><ul><li>Enhancement of the skills of rating agencies </li></ul></ul><ul><ul><li>Development of mortgage industry </li></ul></ul><ul><ul><li>Development of insurance industry </li></ul></ul><ul><ul><ul><li>Provision of group life insurance policies </li></ul></ul></ul><ul><ul><ul><li>Developments of annuities market </li></ul></ul></ul><ul><ul><ul><li>Anticipated fall in premium rates </li></ul></ul></ul><ul><li>Provision of statistics for national development </li></ul><ul><ul><li>National databank </li></ul></ul><ul><ul><li>Pensioner verification exercise </li></ul></ul>LESSONS FROM NIGERIA … Cont’d
  22. 22. Thank You! National Pension Commission Plot 174, Adetokunbo Ademola Crescent Wuse II, Abuja 09 – 4138736 – 40 [email_address] www.pencom.gov.ng

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