Investment of Social Security and National Insurance Funds in the context of developing countries

1. Investment of Social Security Funds
By Gregory E. Hinkson
This topic of investment of Social Security (National Insurance) Funds has increasingly become an
important point for discussion as the size of Social Security Funds continue to grow and are viewed as a
significant source of capital for investment by both the private and the public sector.
Most Social Security Institutions in the Caribbean are financed under what can be described as a “scaled
premium” system, whereby the contribution rate is fixed at such a level that the income from contributions
and investments is expected to exceed the expenditures on benefits and administration for a period of
years, referred to as the period of equilibrium. During this period of equilibrium the excess of income over
expenditure is accumulated in a reserve. This reserve constitutes the resources available for investment.
The investment challenge of Social Security Institutions is to maximize the growth of these reserves by
achieving the best possible rate of return taking into consideration the basic principles that apply to the
investment of social security funds of Safety, Yield, Liquidity, and Social and economic utility. These
principles are however not mutually exclusive.
The Pension Reform exercise undertaken in Barbados during the 1st half of the last decade was to
address the long-term financial sustainability of the National Insurance Scheme. The actuarial projections
for the Barbados Scheme reflect that there will be net positive contributions which should prevail for a
period of time. Following that period of positive contribution, investment income would be expected to
meet any shortfall in contribution, without the capital having to be impacted.
This scenario arises as a result of the expected change in the age distribution of the population when we
look 15 to 20 years out, where the number of persons then benefiting from the Fund will be
disproportionate compared to the number of persons contributing to the Fund. This changing ratio, is
primarily due to two factors: a decline in the birth rate and increased life expectancy
The performance of the investment portfolio can have a significant impact on the long-term financing of
the Social Security Institution. A good rate of return on the investment portfolio can reduce the extent of
increases in the contribution rate necessary to fund the Social Security Institution, beyond the period of
equilibrium. While mutual funds, corporate and other pension plans are generally forward looking, for
Social Security Institutions the concept of “Long-term,” involves a horizon that is generally measured in
decades. With a long-term investment horizon, Social Security Institutions should be able to invest in less
liquid, higher yielding investments, such as infrastructure and real estate, as well as increasing
investment in equities.
In addition to the conditions of safety, yield and liquidity, a rather unique factor among social security
schemes globally is the concept and consideration of the economic and social utility of investments
undertaken with Social Security Funds. While Social Security Institutions are established with a primary
mandate of providing benefits, the funds accumulated within the schemes may grow to be quite
significant, essentially representing a pool of funds, which can be used to assist with national, economic
and social development through Socially Responsible Investing and Economically Targeted Investment.
It is in the interest of the Social Security Institutions that the funds are invested in such a way that they
contribute to improve the health and education conditions or the standard of living of the insured persons.
Investments in the productive sector of the economy can essentially contribute to economic growth and
improvements in the standard of living, by generating employment and providing further investment
opportunities. Increase employment and economic growth will not only result in an increase in contribution
and investment income, it may also reduce the financial impact on the unemployment fund.
Social Security Institutions must be conscious of the broader role they can play in national development
and can be directly, and indirectly involved in the development thrust of the economy as well as the wider
financial system.