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pension funds

Smart investments? The costs of choice and excessive switching in pension funds

Alvaro Enrique Pedraza Morales's picture

Pension funds are rightly viewed as an important source of long-term capital in many countries. Following the global financial crisis of 2008, the theme of long-term investment and the role of institutional investors as providers of domestic capital for economic development has been high on policy makers’ agendas. Despite generally positive findings linking pension system development and economic growth, there are also plenty of disappointments. In too many countries, pension fund investments remain highly concentrated in bank deposits and traditional government bonds. This lack of diversification can be explained by many factors, for instance, unsupportive macro conditions, shortage of investment instruments, poor governance, limited investment knowledge, and regulations with restrictive asset class limits and excessive reliance on short-term performance monitoring.

Pensions, power & development performance

Elias Masilela's picture
Woman who works in the daycare kitchen of a local farm in Milnerton, South Africa


The investment of pension fund assets has moved from an obscure topic for actuaries, to an issue which raises political attention at the highest level.

This is for the simple reason that it directly touches the social and economic livelihoods of people.

Since the 2008 global financial crisis, developed economies have been looking for additional sources of long-term capital to fill the gaps which bank and government balance sheets can’t fill. This is a search that has engulfed the developing world for much longer if not for as long as they exist. Younger developing economies are starting to see their pension funds grow, side by side with an increasing awareness of the impact which productively invested assets can have on economic growth both today and tomorrow. If invested for the aligned intensions of social impact and financial return, pension funds can improve people’s lives today and secure their income in future. However, this isn’t a general phenomenon – applying only to larger funds which have invested in the intellectual capacity of their Trustees, and in countries which have understood and embraced the strong relationship between the macroeconomic performance and asset performance.

Redirecting pension investments from short-term assets (government paper, bank deposits) to investments with a long-term impact is key to delivering, not only improved, but sustained returns. Private equity (PE) - equity capital not quoted on a public exchange – is one such asset class. PE investment is increasingly in vogue as such capital is the foundation of all economies, and indeed leads to the development of robust stock markets. If structured with pension investors’ risk-return consideration in mind, it can deliver the diversification benefits which these investors need.  If properly targeted, such investments will be vital in meeting the Sustainable Development Goals, considering that 15 of the 17 SDGs have a focus on growth, development and sustainability (the last two being on implementation and capital resource origination). Active participation in investee companies by shareholders such as pension funds will be vital for ensuring a future sustainable and shared economy. In turn, for this to work optimally, requires conscientious and capable Trustees.

3 hindrances to expanding pensions in Kenya

Rose Kwena's picture



Did you know that in Kenya less than 15% of the population is covered with old age security? This means that many Kenyans are facing a vulnerability of retiring into poverty. But this is not accidental since established factors identified in studies commissioned by Retirement Benefits Authority (RBA) necessitate this situation.  

However, Kenya is starting to tackle some of these factors and to help increase pensions coverage to reach more Kenyans to help reverse the state of affairs.

1. A chief factor limiting pension growth is that the formal sector is creating fewer jobs. Despite the positive economic growth registered in the country, employment growth in the formal sector is slow. For example, only 128,000 out of the 841,600 new jobs created in 2015 were formal. This has a direct effect on the pension services since the structure of the industry is still highly biased towards the formal employment model.
Transactions that facilitate employers and employees to contribute are generally conducted from the pay slip, and formal employers adhere more to the regulations and legislation on the issue compared to those who operate informally. As a result, millions of citizens have been cut off from the pension system.   

Luckily, this gap is slowly being narrowed by Individual Pension schemes that are specifically targeting the informal sector workers. An example of this is the Mbao pension scheme. The Plan is an inventive idea that adapts a savings product to marginal population groups and contributes to their improved social and economic security.

Can developing countries increase pension coverage to prepare for old age?

Gloria M. Grandolini's picture


While many of us work hard to postpone growing old, ageing populations as a whole are inevitable, predictable and something countries can prepare for.

As developing countries prosper, their citizens will live longer and, hopefully, healthier lives. By 2050, the number of people in the world 65 and older will have doubled from 10% to 20%. By then 80% of the world’s elderly –nearly 1.3 billion people - will live in low-income countries.
 
Are these countries set up to care for these forthcoming senior citizens and ensure they have the resources to live in dignity in old age? Will countries be able to ensure fairness between the generations and resources?
 
Current pensions systems leave many pockets of society uncovered:
  • As countries become more urbanized and families have fewer children, traditional family-based care for the elderly is breaking down, without adequate formal mechanisms to replace it.   
  • Traditional employment-based pensions systems don’t cover most informal sector workers in developing economies. In some regions, these workers account for two-thirds or more of the working age population. Even for those with formal sector jobs, pension coverage has been declining for people who’ve entered the workforce since 1990 in terms of years contributed over lifetime, according to World Bank Pensions Database. This has a major impact on the amount of retirement income they will eligible to receive.

Retreat from mandatory pension funds in Eastern and Central Europe

Agnieszka Chłoń-Domińczak's picture
Over the next few decades, the consequences of an ageing population will be particularly visible in Central and Eastern Europe. These developments were behind the multi-pillar pension systems reforms at the end of 1990s and at the beginning of the century. After the financial and fiscal crisis of 2008, these reforms were slowed down and partially or fully reversed. In our recent study of this retreat from mandatory pension funds in Central and Eastern European countries, we look at the causes and consequences of these changes.
 

A bond for climate solutions

Laura Tlaiye's picture

Why would a group of large investors care about climate change when their primary concern is ensuring adequate returns for their investment portfolio to meet their future financial obligations? This group includes pension funds, insurance companies or foundations. Pension funds alone are estimated to hold over US$25 trillion globally

 

As Alan Miller indicated in his recent blog, a report published by Mercer (a well-known investment advisor) estimates that uncertainty around climate policy could contribute as much as 10% to overall portfolio risk for investors to manage over the next 20 years. So, investors are beginning to pay attention. Choosing to support investments that help address climate change or increase climate-resilience also helps reduce the exposure of portfolios to this risk. 

 

Green bonds issued by the World Bank is one such instrument. Funding raised through green bonds is earmarked for eligible low-carbon and adaptation projects financed by IBRD in its member countries. For example, the money could be used for funding an eco-farming project in China, or improving the solid waste management in Amman, Jordan. On the mitigation side, eligible projects could include solar and wind farms. On the adaptation side, it could be protection against flooding or droughts.

 

Earlier, this month, a 'Green Bond Summit' gathered about 110 representatives of the investment community. The event was hosted by State Street Global Advisers -- an asset manager with over $2 trillion under management in different asset classes. The goal was to discuss how green bonds could attract greater participation from large investors to scale-up financing of climate solutions through the capital markets. The World Bank, a pioneer of the green bond, and other issuers such as ADB, EIB, and IFC deliberated with the participants on prospects for common green bond standards, the financial characteristics investors expect, and the policy issues that underlie the demand for climate investments.