MANDATORY CONSTITUENT FUNDS IN PRIVATE PENSION FUNDS INVESTMENT IN GHANA: TIME TO PUT A HOLD ON IT

 I published an article captioned “New pensions guidelines likely to put private pension funds at unnecessary risks” in the Business and Financial Times on March 01, 2022. This was to highlight the unnecessary risks the new Guidelines on Investment of Tiers 2 and 3 Pension Scheme Funds that was gazetted on September 14, 2021 was going to expose private pensions funds to. Investment guidelines are supposed to be risk management tools to protect Contributors from a universe of investment risks especially product, repayment and concentration risks by giving Contributors safe and fair returns whilst allowing pension funds to impact on the development of the economy. The new Investment Guidelines looks more like a product development tool that intends to be used to develop the capital market and property market and allow dormant investment banking products that were not attracting funds for whatever reason to be activated. The capital and property markets must be thinking of how to attract the private pensions funds and not how the private pensions funds can be used to develop those markets which is what this new guideline seems to be doing. Private pensions funds are not to be treated as social or solidarity funds or free money just because the funds can be available for a relatively long term. There should be value proposition.

The paramount interest for private pension funds is adequate retirement income for the worker through safe and fair returns and not just to collect contributions from workers to help develop either the stock market, investment banking products and to support Governments fiscal policy and projects. If the stock market is doing well and investment products have safe and fair returns with Government projects having good cash flows, private pension funds will naturally flow into them to support the economy. In effect it is more of what the economy can do to attract private pension funds and not what private pension funds can do for the economy.

In my earlier article on March 01, 2022, I raised particular concern about the introduction of  Mandatory Constituent Funds (MCF) and recommended for it to be scrapped for now and kept as an option in the” spirit” of the framers of L.I. 1990 as a portfolio risk management immunization tool for the schemes. This article is to reiterate the need to put this introduction of Mandatory Constituent Funds on hold; more especially in the current uncertain economic and investment climate.

My approach will be to give a general appreciation and understanding to Constituent Funds, when they are used and the considerations that go into their use. For the purposes of this article there will also be the need to summarise the guidelines relating to Constituent Funds as given by the Regulator to interrogate the rationale and associated risks in line with the standards. I would then attempt to justify why the introduction of Mandatory Constituent Funds is not in the interest of the private pension funds at this moment, more so at the present state of high interest rates and inflation. Let us look at what Constituent Funds are and why they are used.

THE USE OF CONSTITUENT FUNDS

Constituent Funds are Default Funds meaning the Contributor is by default “boxed” into a pre-determined allocated class of investment assets. They are also called Life Cycle Funds since the categorization is mostly done according to age brackets with the assumption that certain age brackets have similar risk appetite, tolerance and loss capacity. By this, all things being equal, those in the younger age brackets are more disposed to riskier investment products that, all things being equal, have the capacity to give higher returns over a longer period. Basically, multiple funds are created where each age bracket become a “constituent” fund with a basket of investment products with de-risking of the investment products as one ages.

On the face of it, generally, such Constituent Funds are useful where the Contributor/employee does not opt for the occupational pension plan of the employer which is not the case in our jurisdiction. In this case, they would be automatically enrolled into the appropriate Constituent Fund depending on the age, income and other homogenous risk factors of the person with others. In any case, certain conditions still need to also be present for Constituent Funds to be fit for purpose. 

In Constituent Funds, the risk appetite and risk profile of the members have been pre-determined and a Statement of Investment Policy (SIP) mapped to that class, with the risk/return profile of the fund pre-determined by the Investment Manager according to the mix of prudential principles of security, profitability and liquidity. Hence this is used when the Contributors lack sufficient expertise to make fully informed decisions and there is little or no investment advice to be given by the Trustee.

In the three tier pension scheme, we have the Trustee who has the fiduciary duty to the Contributor with knowledge in pensions, and the Fund Manager who is the expert in investments to provide the Trustee with the needed investment advice so the Contributor can be given the best risk/return mix. Constituent Funds are portfolio risk management immunization tools and rightfully so, under the Regulations to the National Pensions Act 2008 (Act 766), Regulation 22 of L.I. 1990, a registered scheme MAY consist of a single constituent fund or two or more Constituent Funds which shall be approved by the Authority (emphasis mine). Once a scheme decides to have multiple constituent funds, each fund is to have different investment policies.

The decision to use single Constituent Funds, as is now being practiced or multiple Constituent Funds as is being mandated by the new Investment Guideline, was left with the Trustee as a portfolio risk management immunization tool for the schemes. This means the Trustee with the advice of the Fund Manager MAY set up multiple Constituent Funds according to the distinctive risk profile of the members of a particular scheme to minimize risks and give a fair risk/return mix. To do this, the Trustee was to seek approval from the Regulator with justifications. There should therefore be a compelling need at this point for Trustees to be directed to set up mandatory funds by way of default options. 

We will now look at the factors that need to be considered before setting up default options in pensions as suggested by the International Organisation of Pension Supervisors (IOPS), Working Papers on Effective Pensions Supervision, No.18 Supervising Default Investment Fund.

FACTORS TO CONSIDER WHEN SETTING UP AND ASSESSING CONSTITUENT FUNDS

I will take each factor and try to understand what could have informed the directive by the new Investment Guideline of having mandatory Constituent Funds/Default Funds and its relevance by asking a few questions.

·       Purpose of the default

There is the need to consider the nature of the pension system as a whole with respect to income levels and understanding of pensions.

In an environment of low incomes with no social protection and high interest rates, the capacity to temporarily absorb loses are low, hence fixed income investments are a better investment vehicle. Where incomes are high and there exist forms of social protection with low interest rates, the capacity to temporarily absorb loses are high, hence riskier asset allocations can be invested in for a better return over a longer period. It therefore requires more than simple age brackets to set up Constituent Funds.

What analysis of the private pensions system that just started paying out in 2020 was done to inform this decision to have Mandatory Constituent Funds? What risk/return mismatch was detected? What life cycle research was done to inform setting up such life cycle fund? What were the Trustees not doing right by way of risk management that necessitated this directive? What is the profile of income levels for the age brackets that informed the choice of asset allocation?

Default options are set up when there is some homogeneity in the risk profile, income levels and other financial behaviours and sophistication of a class of members in their understanding of pensions. It is therefore easy to group them under a common “default” fund. What informed the groupings in the new Investment Guideline?

·       Demographic nature of the membership /Risk Appetite

The demographic nature and risk appetite of membership of schemes need to be considered in setting up Constituent Funds. Hallahan et al found that gender, education, income and wealth, age, number of dependents and marital status are significantly related to risk-tolerance assessments. It therefore requires the Trustee to have an in-depth understanding of the characteristics of particular members of a scheme to be make an informed determination in setting up Constituent Funds.

Using age brackets alone is not likely to take into consideration the demographic nature and risk appetite of the members of the scheme. The fact that two people are of the same age does not necessarily mean they have the same risk tolerance since they may have different income levels. It is even possible that gender can determine risk tolerance to inform groupings in a scheme and for that matter a Constituent Fund for married women of mixed ages can be set up if they are deemed to be risk averse. It all depends on the Trustee understanding the particular needs of the members.

What is the demographic nature of the members of the various schemes across the pensions industry that informed the Mandatory Constituent Funds? Were other factors aside age considered in the categorization of the funds?

·       Investment Objective / Investment Risk Tolerance

Given the membership of a scheme, Default Funds are to be assessed on its likelihood to achieve a set target taking into consideration the most appropriate risk level. This is most determined through stochastic modeling (forecasting the probability of various outcomes under different conditions, using random variable).

What modeling was done by way of forecasting the probability of various outcomes under different conditions, using random variables? What is the intended target for each Constituent Fund? How was the appropriate risk level ascertained for the membership of each scheme across the whole industry? Is it that the age brackets across the Contributors in the entire industry is homogeneous by way of investment risk tolerance? Is it the same for public sector and private sector workers?

It is possible that should the option be left to the Trustees; schemes would choose different age brackets based on an informed stochastic modeling. To have an industrywide categorization will require a lot of data mining and analysis which I doubt is readily available. Was the categorization therefore just done based on the fact that the funds of the younger members of a scheme can be risked in assets such as Equities despite the economic conditions?  Having now boxed the younger members compulsorily in riskier assets such as Equities and Alternative Investments on the proviso that over a longer investment period the returns are supposed to be better, how do they take advantage of this high interest rate regime? When interest rates are high who plays the stock market as economic beings?

·       Liquidity and Cash Flow Requirements

A Default Fund is required to consider the liquidity needs of the pension plan by way of the age profile of members and the forecast of inward contribution and outward benefit payments. A balance needs to be maintained between remaining and exiting fund members, new and retiring contributors.

Such balance is so specific to individual schemes and the type of membership profile they have. The Trustees are therefore best placed to make the determination of the age of its membership, the rate of lump sum payments and the quantum of contributions being received, taking into consideration the option of members to port to other schemes. Each scheme would in no doubt have different liquidity profile and cash flow requirements of a match between assets and liabilities.

How was the liquidity and cash flow requirements determined across the whole private pension industry to determine the age brackets for the Mandatory Constituent Funds? Was the categorization based on the need to develop certain markets and products, hence a match has to be made with age brackets that have longer investment periods to allow those products to go through their development life cycle?

·       Diversification

Constituent Funds should be able to allow portfolio diversification both within a risk category, for example Equities of different companies on the stock market and between risk categories for example Equities and Bonds. The investment portfolio of each fund should be adequately diversified and excessive reliance on any specific asset, issuer, counterparty, group, or market avoided to mitigate any excessive concentration risk.

On the face of it, it makes sense to allow funds of a younger age bracket to invest more in Equities since, all things being equal, they have the luxury of time to benefit from such investments and recover from any downturn. Realistically however, the stock market in Ghana is made up of a few performing stocks in the financial, telecommunications and energy sectors with most being foreign owned. MTNGH alone has historically been responsible for about 80% of trades on the Ghana Stock Exchange (GSE). The fall out of the e-levy negatively affected the share price of MTNGH by 18.9% which eventually brought the whole market down.

There is limited room for diversification within the performing shares on the GSE to allow mandatory investment in Equities. Also, if it is to impact on the development of the stock market, is it local or foreign companies that the pension funds will be supporting? It is not the fault of private pensions funds that Equities are not attractive in these times of high interest rates and inflation. Forcing investment in them is not in the best interest of the members of the schemes. Private pension funds are not product development funds and should be allowed to gravitate towards safe, fair and maximum returns in any economic environment as pure economic funds.

·       Cost

In setting up a Constituent Funds, consideration should be given to cost and fees associated with managing the fund. It has been estimated that an annual management charge of 1% of funds under management can reduce accumulated assets by as much as 20% over a 40 year period and therefore the amount of retirement income which can be generated.

The investment risk management decisions needed in managing Constituent Funds is not as complex as that of a composite fund since the risks pertaining to a class of members have been pre-determined/pre-programmed and appropriate assets allocated to them. All it takes is for the Trustee to identify the age of the member and by default let them join the appropriate age bracket fund.

If the younger age brackets are to be subjected to riskier asset classes but with the potential of a higher return, then to compensate that risk, it makes reason for the fees to be reduced. Why were the fees not reduced for the lower age brackets if the protection of the Contributor was the main consideration? Instead an additional switching fee is to be charged should a member of a scheme decide to switch between Constituent Funds more than once in a year. Who is the Investment Guideline protecting? The Contributor or the market?

·       Market / Economic conditions

Constituent Fund needs to be considered in light of macroeconomic factors since market and economic conditions differ across countries and across time. An economy dealing with high inflation levels, will require some inflation protection and Default Funds relatively lack enough flexibility to deal with changes in market conditions.

What economic environment was considered in making Constituent Funds mandatory? Are we saying the investment and economic experts could not predict or forecast the present economic conditions? When did the COVID-19 start? Was its impact not anticipated? Now that we now have the Russian-Ukraine war with its impact on the economy, not forgetting the present uncertainties of inflation, high interest rates and depreciation of the cedi, this is the time to put on hold the implementation of this Mandatory Constituent Funds in the private pensions landscape. There is the need to give flexibility to the funds in this uncertain economic climate and not box them to pre-determined asset classes to increase their risk exposure.

·       Communication

A lot of information needs to be given to members of Constituent Funds especially when they are mandatory;  and for which members have the option to opt out of a particular fund to join another based on individual risk tolerance and investment objectives. The information should be simple enough for members to understand to make informed investment decisions. As Byrne et al (2007) points out: “Put simply, well-chosen default funds will benefit members, and poorly chosen default funds will impose a cost on uninformed members.”

Currently there is information asymmetry in the private pension space. Scheme statistics and average rate of returns are not being published to have industry benchmarks, to know the large pension funds by way of concentration risk and the allocation of funds according to the asset classes as given by the Investment Guidelines. These are needed to help not only in porting decisions by the Contributors but the most critical tool for investor empowerment once Mandatory Constituent Funds are being introduced.

It would be inappropriate to introduce Mandatory Constituent Funds if there is not going to be communication of industry wide information on scheme performance. This information should provide the value and percentage of pension fund holdings by Trustees, their rates of return as well as the Assets Under Management of the Fund Managers together with regulatory compliance issues and investment market performance. Contributors need a lot of industry information to make informed switching choices.

Having gone through the broad considerations for setting up Constituent Funds to enquire into what considerations were given in making them mandatory, I now intend to take specific features of the Mandatory Constituent Fund (MCF) to determine their relevance and appropriateness in just about twelve years of private pensions in Ghana vis-a-vis the present economic conditions. 

 

 

SPECIFIC FEATURES OF THE CONSTITUENT FUNDS AS IN THE INVESTMENT GUIDELINE

Under Regulation 22 of L.I. 1990, a registered scheme may consist of a single Constituent Fund or two or more Constituent Funds which shall be approved by the Authority. Once a scheme decides to have multiple Constituent Funds, each fund is to have different investment policies. It is under this that multiple Constituent Funds have been mandatorily introduced. The tier 2 schemes are now to classify their existing composite fund into a Constituent Fund Structure on the basis of age differentials with members being elected into particular age brackets as follows:

Type of Fund	Age Bracket
Fund   1 –  Moderately Aggressive Portfolio	Default –  15 to 44  years
Fund  2 – Moderately Conservative Portfolio	Default –  45  to 54 years
Fund   3 – Conservative Portfolio	Default –  55  to 60  years
Fund   4 – Aggressive Portfolio	By formal request

 

The Investment Guideline defines Constituent Fund as a  “A sub fund or Portfolio under a Pension Scheme with a defined investment policy statement”. Hence as in the table above there are four sub funds, 1, 2,3 and 4 which differ according to their exposure to variable income instruments with respect to listed Equities and Alternative Investments. Each MCF has been given minimum allocations in Equities and Alternative Investments.

Alternative investments per the guidelines include a) Real Estate Investment Trusts (REITs); b) Private Equity Funds; c) Private Debt Funds; d) External Investment; e) Project Finance (Syndication of Pension Funds for Projects); f) Direct Property Investments; and g) Infrastructure Bonds or Funds. It is important to note that in the old guideline, this used to be specifically limited to Real Estate Investment Trusts (REIT), Private Equity Funds (PEF) and External Investment in Securities. The new guideline has added categories of Project Finance, Private Debt and Direct Property Investments and investment in them have been made mandatory with minimum allocation in three of the four funds.

 

 

The allocation of funds are as follows:

 

Type of Fund	Minimum Allocation in Equities & Alternative Investments	Maximum Allocation in Equities & Alternative Investments	Minimum in Government of Ghana Securities	Maximum in Government of Ghana Securities
Fund 1	15%	40%	N/A	75%
Fund 2	5%	20%	40%	75%
Fund 3	N/A	N/A	60%	100%
Fund 4	20%	60%	N/A	75%

 

Contributors have the option to choose the type of Fund in which they desire, subject to the following rules:

       i.          Make a formal application to the Trustee.

     ii.          Can switch between Funds once in a year without paying fees.

   iii.          Any additional switch within the year to attract a fee not less than a minimum value, to be determined by the Regulator.

   iv.          A Contributor below fifty-five (55) years shall not be allowed to choose Fund Type 3.

     v.          A Contributor who is fifty-five (55) years shall only choose Fund 3

 

Having put up the features of the Mandatory Constituent Funds Guideline, I am going to raise my concerns for it to be put on hold and eventually returned as an option for the schemes as in L.I. 1990 since the economic and investment conditions are not enabling at this point.

 

CONCERNS WITH MANDATORY CONSTITUENT FUNDS

 

My concerns will be on the aggressive portfolio of Fund 4 and the mandatory allocation to Equities and Alternative Investments as they pose an unnecessary risk to the private pension funds. I would be using Constituent Funds and Default Funds as well as Contributor and Scheme Member interchangeably where appropriate.

 

·     FUND 4 (AGGRESSIVE PORTFOLIO)

Fund 4 which is the “Aggressive Portfolio” is by formal request from a Contributor. Under what expertise is the Contributor supposed to make that election to make the request to the Corporate Trustee to join Fund 4? Are we trying to move to the American type of Self-directed Individual Retirement Accounts (IRA) where members are responsible for their own investment decisions and must rely on financial advice from licensed third parties? We cannot be operating a mix of two systems without a proper governance structure. I have no doubt the Presidential Commission on Pensions having analysed various pension schemes, opted for the present three tier pensions scheme structure being operated with roles being given to Corporate Trustees, Fund Managers and Custodians as the best model to protect the Contributor. In their wisdom, Constituent Funds was made optional to be used by the Corporate Trustee when it deems fit as a portfolio risk management tool.

Someone must owe a fiduciary duty to the scheme member who is advised to elect to Fund 4 or switch between the Constituent Funds and must be able to be sued for wrong advice. I foresee Fund Managers now directly engaging Contributors, advising them to switch funds, attempting to get powers of attorney from such Contributors who opt to switch funds to manage their account for them for a fee. What a complex arrangement? Now between the Corporate Trustee and the Fund Manager who becomes the principal and agent? In Ghana, Corporate Trustees are not licensed to give financial investment advice hence this falls back to the Fund Managers. Does the National Pensions Act 2008 (Act 766) allow Fund Managers to give direct investment advice to Contributors?

How financially sophisticated are the scheme members to take such decisions? Contributors by this arrangement will need independent financial advice in making such decisions and Corporate Trustees should have been mandated before accepting such an election to get an undertaking to this effect to protect themselves. Once a scheme member makes that election, what will be the role of the Corporate Trustee towards the member? Can the Corporate Trustee say no? Does it change from a trust relationship to financial advisory or an administrator? Whose responsibility is it to inform the Contributors of poor performance, when they made the election at their own volition? Is it the Corporate Trustee or the Fund Manager? What is the legal framework governing this election by scheme members with respect to role, responsibility, duties and risk management between the Contributor, Corporate Trustee and the Fund Manager? It is not that simple to just ask the scheme member to apply to the Corporate Trustee to switch between funds. What complicated hybrid system are we trying to put in place when financial investment literacy is that low amongst the general working class?   

·       EQUITIES

 

Equities and Alternative Investments are not in themselves bad investments under an enabling favourable economic and investment climate especially where interest rates and inflation are in the single digit; and one wants a higher risk for higher returns. In such environments, these variable income instruments will naturally attract private pension funds. In times of high interest rates and inflation as being experienced in the country, they have to be treated with a lot of caution. The mandatory minimum investment allocations of private pension funds to these risk assets puts the funds at greater risk with uncertain returns.

The Equities market in the country is not vibrant with a few performing/trading stocks. The funds will be exposed to concentration risk on a few stocks such as MTNGH which in recent times constitutes on the average over 90% of traded volume and value. There will be little room for diversification within the Equities asset class, meanwhile a minimum allocation has been set so the funds will be forced to still play in that asset class even if the whole market is not attractive.  A little shock from these few stocks drags the whole market down. MTN shares experienced a fall of about 18.9% due to a political risk associated with the E-levy brouhaha which dragged the GSE down with it. Ordinarily the Stock Markets are insulated from excessive political risk but on the GSE the few performing stocks which are in the critical sectors of the economy such as Banking, Insurance, Telecommunication and Energy sectors are highly exposed to Government decisions or unguarded statements by Government Appointees without regard or awareness of its impact on the GSE.

From the period Jan-July this year the GSE Composite Index (GSE-CI) has dropped by 9.7% with the 91-Day T-Bill going up from 12.63% to 26.34% (13.71 percentage points increase).  It is not the fault that pensions funds are not playing on the GSE as expected, the impact of political risks are too high and the pensions industry is still in its formative age and must be treated with caution. Contributors must be given the comfort and assurance of consistent, stable and good returns to boost confidence in the three tier pensions scheme in the short term before it is made to impact aggressively on the economy as this new Investment Guideline is trying to do. Twelve years in a pensions scheme is still formative and I do not think the private pension funds should be forced to support a market that is politically sensitive. The Fund Managers should be made to take responsibilities for their own decisions to play in the Equities market and not protected by a mandatory asset allocation if without the compulsion, they would ordinarily not give such investment advice to the Corporate Trustees to invest in Equities in these times of such high interest rates.

What if a scheme has only one member between the age bracket of 15-44 years contributing only GHS200 a month? Does this mean GHS30 (15% minimum allocation) should be used in Equities? This means irrespective of the performance, shares of companies should be purchased with the GHS30 to be within the guideline. Private pension funds are “private” and “capitalist” funds looking for safe and fair returns. As a company, be financially attractive with high growth and profitability potential and the pension funds will help you expand but when you are dying they will not stay to revive you. As I keep saying these funds are not “stimulus” or “solidarity” funds. Workers are not putting money aside for the sake of reviving and supporting businesses or markets, they are looking for retirement income security. Have a good value proposition since private pension funds have permanent interests not permanent partners.

·       ALTERNATIVE INVESTMENTS

An alternative investment (AI) is a financial asset that does not fall into traditional or the conventional investment asset classes of equity/income or money market categories. Comparably, AIs are complex, not heavily regulated and come with higher degree of risk and for that matter higher returns. They come with high fee structures as well and require a longer investment period for any material gains to be realized.

Though in terms of risk categorization in the Investment Guideline it has the highest risk, the investment allocation to AI has been increased from 15% to 25% with new risk assets of Project Finance, Private Debt and Direct Property Investments added. It is not difficult to realise that the Guideline is to allow the private pension funds to be channeled into these areas.

The concern is with the governance of these risk assets and the possibility of abuse with respect to conflict of interest and related party transactions in our present investment climate for which the laws do not seem to bite. I will take these new risk assets that have been introduced in turn.

Project Finance: This has been defined by the guideline as a funding/financing of infrastructure, industrial projects and public services using a non-recourse or limited recourse financial structure.

Non-recourse projects will entitle the scheme to the profits of the project being financed and no other assets of the borrower can be seized upon default or be used as a secondary source of repayment should the project fail. By the guidelines, all Project finance must have Government or Government Agency participation. Under normal circumstances this should give some comfort to the pension funds as an investor but with the recent political climate where a change in government brings most Government related projects to a halt even if temporary, it rather poses a risk to the pension funds more so when it is on non-recourse basis.

Financing of industrial projects can be complex especially once Government is involved with real political risk. Once not completed, the pension fund is stuck with a “white elephant”. Since the only collateral is the project, once started there is the likelihood of cost overruns which the scheme has no choice but to keep on investing more funds till it is completed, else there is no security. It is not easy cutting your losses or disposing off such projects that may be specialised in nature with no alternative uses. For example, building a new stadium, who are you going to sell it to?

In terms of governance, the challenge is whether the Corporate Trustees have the expertise in project finance risk evaluation and management. Hence, this asset is faced with real governance and political risks aside the other inherent project financing risks not forgetting that Project Finance normally have distant repayment prospects and uncertain returns. This is not the time to experiment with private pension funds especially on non-recourse basis. Why non-recourse? Who is to be protected? The Contributor/investor or the Government/owner.

Private Debt Funds: These are investment pools that extend debt to privately owned companies as a form of debt financing or source of capital. On the face of it, it looks like promoting private sector businesses to support the economy, create employment and its inherent benefits which is great but “Ghana we dey”.

If we want pension funds to support private businesses, which is acceptable, the risk will be minimized if the money is channeled through the banks as long term investment, for the banks to on lend to the businesses since they have the expertise to assess the credit risk. The risk can be transferred to the banks by way of direct investment for syndicated long term loans to the businesses. At the end of the day the pension fund will not directly be taking up the risk of a company but would get the funds back from the bank with a fixed known return even if the business is not doing well due to economic downturns. Private Debt Funds may be introduced later but not at this time when COVID and Russian-Ukraine has added another layer of risk to businesses and made the economy unpredictable. Private pension funds like I keep saying are not social or “stimulus” or emotional” funds to be used to kick start private businesses in an ailing economy.

Worst case scenario, Government must guarantee such investment if it believes in the enabling economic environment it has created since it is Governments business to support local business to grow. It is not personal. All things being equal the funds should be able to find itself outside the country if better returns exist.

In any case, the beneficial owners of these companies must be known otherwise, private pension funds will be used by some rogue Fund Managers and Corporate Trustees to finance their companies and that of family and friends. There is even the possibility of replacing their existing stakes in distressed companies with the pension funds and walking away as long as they are within the NPRA guidelines. 

Direct Property Investment : This is defined by the guideline as real estate property purchased or developed through direct investment by a scheme.

Unlike REITs, where the schemes invest in real estate without owning or managing the properties, this is directly buying and owning of residential and commercial properties such as office buildings, industrial parks, retail complexes and shopping malls which must be for economic returns. Somehow the guidelines, requires that all direct investments in Real Estates to have Government or Government Agency’s participation which should ordinarily give some comfort. Are Governments into economic real estate development? I just hope we are not looking at affordable housing social schemes by Governments.

In as much as private pension funds are to impact the economy, again they are not welfare or social funds. There should be economic value and good cash flows for such investments.

The caution is not to allow private pension funds to be used to off load locked up funds of real estate developers in properties they are not able to get the needed rental incomes or buyers. Just satisfying the conditions laid down in the guidelines to transfer risk to the private pension funds should be a concern. Example is releasing equity in some non-economic SSNIT projects for liquidity purposes which can then be used by a Government as they please.

What about governance risk? Do the Corporate Trustees and the Regulator have the expertise to evaluate and take such decisions or approve such Direct Property Investments? Are we ready for this in just twelve years of introducing private pensions?

CONCLUSION

 

The three-tier pension scheme is just about twelve years which is still in its infancy when it comes to pensions, with the decumulation period having just started in 2020. It will take some good data analytics and financial risk management to make Constituent Funds mandatory and must be based on some compelling identified risks in the present system that is putting Contributors retirement income at risk.

There are both legal and operational challenges with the mandatory requirement. Legally, the law makes it optional for the Corporate Trustees to make that choice but the guideline is making it mandatory. Operationally, investment decision that require such “immunization or liability matching strategies” depends on the risk profile of the members of the particular scheme as well as the value of assets under management, but the guideline is making it mandatory with a one size fit all approach and strangely with additional fees for switching more than once a year.

The Equities and Alternative Investment markets cannot be “jump started” with private pension funds because they are available for longer terms. They are not public, social, welfare, solidarity, sympathy or emotional funds. As the name stands they are “private” and always seek economic returns, immediate or potential.

The present uncertain economic challenges do not present an enabling environment for the introduction of Mandatory Constituent Funds and high risk products such as Direct Property Investment, Private Equity Funds and Project Finance in the private pension space. Let us avoid a “self-fulfilling prophesy” that the three tier pensions scheme has not been successful by killing the goose that will lay the golden eggs. Ghana in my opinion, has one of the best pensions scheme structures in the world.  Pension funds being “patient” capital, also needs patience for it to be ready to impact on the economy as in other jurisdictions.

On this note, Constituent Funds should be kept as an option in the” spirit” of the framers of L.I. 1990 as a portfolio risk management immunization tool for schemes and not made mandatory yet.