Where are your Pension contributions invested?

The investment of pension scheme assets is the most important activity that grows pension funds to provide retirement benefits. 

As the benefits from the 2^nd and 3^rd tier schemes are not guaranteed, there is the need to take actions that optimise returns to the scheme while keeping the funds safe. This is where pension scheme investments come in.

This is the responsibility of the pension trustees. Pension trustees are expected to earn returns for the schemes well above inflation while effectively managing the risk.  It is also good for contributors to have an idea of how their funds are being invested.  This information is available during annual general meetings (AGMs) of the schemes and if requested from trustees.

ALSO, READ THIS: The 12 Thieves of your Pension Benefits

NPRA’s Investment Guidelines

The pensions regulator, National Pensions Regulatory Authority (NPRA), through the law, provides guidelines on how contributions and investment returns must be invested.  The essence is to guide pension trustees to achieve their mandate; that is earn returns above inflation while minimising the risk of losses of both contributions and investment returns. 

The risks, among other ways, are averted by way of;

• ensuring that trustees, advised by the pension fund managers, invest in instruments with reasonable risks
• ensuring best practices when investing pension funds
• ensuring trustees invest in diverse instruments to balance the risks inherent in the various instruments (diversification)

The regulatory guidelines have however gone through various stages. The intention is to optimise investment returns into the 2^nd and 3^rd tier schemes, within the prevailing environment. 

In 2021, the NPRA revised the guidelines that had been in existence since 2016.  A previous guideline had been existing from 2010 to 2016.  The changes to the 2016 investment guidelines had the aim to increase the allocation of funds into investments in government instruments and in the same breath introduce new and relatively riskier assets.

Pension Investment Guidelines – Major Changes

This article will only highlight on some of the specific changes and may not describe all the adjustments.

Pension Investment Guidelines – Government of Ghana Treasury Instruments

From 2016 to 2021 the limit for pension schemes investments into government instruments was 70% of the total pension assets.  However, in the newly revised guidelines, this is now increased to 75%.  It means pension trustees can invest 75% of any scheme’s funds into the different types of government instruments namely, treasury bills, treasury notes and treasury bonds (these have longer-term than 2 years).  Investments in government securities are relatively safer but may not yield high returns above inflation. 

Alternative Investments

These are investments that are derived from other core assets and/or are directly invested into entities.  The regulator had earlier in 2016, introduced an asset class called private equity which permitted pension funds to be invested in potentially profitable businesses that are not listed on the stock market but have the potential to yield very high returns for the scheme.  However, most trustees have stayed off patronising this asset class due to the negative experiences in the Ghanaian entrepreneurial space as well as the volatilities in the environment.  Despite the hold-offs, this asset class is a viable option.

In revising the pension investment guidelines, the regulator now permits pension funds to be invested into private debt and directly into real estate.

Over the long term, these are the assets that have the potential to grow pension funds well beyond the inflation levels in the country.

It should however be noted that the NPRA has laid down stringent conditions for investing in these alternative investments.

Age Category

Another significant change in the pension investment guidelines is the provision for investments based on the age categories of contributors.  For instance, funds of contributors above the age of 55 years cannot be invested in any of the risky assets labelled as variable income* in the asset allocation guidelines.  The variable asset category includes listed equities and Alternative Investments (AI).    The reason is that as you get closer to retirement, you don’t have too much room to take risks that have the potential to erode the value of the funds.  If those risks materialise, there is little time to regain the lost assets. 

For younger contributors under the age of 44, however, the regulatory guidelines provide 60% of funds to be invested into government instruments.  It, therefore, frees up to 40% of funds for investment in relatively riskier assets that have the potential to give higher returns. Due to the relatively long time to retirement, the riskier assets can have room to regain value should the risk materialise and funds lose value.  It should be noted that over the long horizon, these risky assets could give returns much higher than the government instruments.  This is typically how equities or shares behave.

Therefore, there should be little panic if such assets seem not to perform so well in the short term.  Over the long term, the overall contribution to the value of the fund will be much higher than the relatively low-risk assets.

Right to Choose

Another provision of the new pension investment guidelines gives contributors of the lower age category the right to choose if they want their funds to be invested in relatively aggressive portfolios.  The more aggressive (and riskier) portfolios have higher allocations for the variable income assets*.  This is for younger contributors below the age of 50 who have a higher appetite for risk.  Contributors aged 55 and above are not permitted to choose portfolios which have variable income investments.  There are terms and conditions associated with such choices.  In making these choices trustees should educate contributors on their options and the risks associated with them.  Contributors can therefore seek these details from their trustees.

Pension funds in the Economy

The added advantage of the new guidelines is to create room for pension funds to be invested in the private sectors of the economy for growth.

 *Variable income investments include listed equities, private equity, private debt, project financing, direct property investments, and infrastructure bonds/funds, as defined by the investment guidelines

Yaw is a Pensions and Management Consultant with M-DoZ Consulting, Email:korankyaw2@gmail.com, Follow on Facebook and YouTube