PUBLIC PENSION
FUND MANAGEMENT IN
MENA
Dimitri Vittas
FSD, World Bank
INTRODUCTION
• Difficult to undertake because of lack of
detailed data, especially on performance.
• Need to take regional and country
context into account.
• The structure and approach of the paper
is to set out context, assess institutional
record, highlight obstacles, and indicate
prospects.
CONTEXT 1
• Focus of paper on Egypt, Jordan,
Morocco, Tunisia and Saudi Arabia.
• All countries effectively have mono-pillar
systems. Non-state provision is limited
and not well documented.
• Basic reliance on funded “scaled
premium” public pillars.
CONTEXT 2
• Most countries have young populations,
young systems, weak capital markets.
• Accumulation of large reserves in some
countries because of high contribution
rates.
• Many arguments in favor of mixed multipillar systems. Strong emphasis on
“empirical agnosia”.
“EMPIRICAL AGNOSIA”
• Pension contracts span 60 years or more.
Data covering as long as 200 years are
needed for empirical verification of any
system. Over such long periods, there are
massive changes in production, information,
financial and medical technology. Multipillar systems allow risk diversification in
the face of uncertainty.
INSTITUTIONAL RECORD
EGYPT 1
• Large social insurance system with
extensive coverage and high contribution
rate (26% for pensions).
• Large SIS reserves correspond to 38% of
GDP.
• Total contractual savings amount to 45%
of GDP. Mutual funds 2% and equity
market capitalization 36% (1999).
INSTITUTIONAL RECORD
EGYPT 2
• Poor investment performance.
• In June 2000, 92% of assets placed with
National Investment Bank (NIB), 1% in
equities, 6% in bank deposits.
• NIB is a unit of Ministry of Planning,
supporting public utilities, public works,
and social projects.
INSTITUTIONAL RECORD
EGYPT 3
• Interest rate on reserves was fixed at 6% for
the 1980s and early 1990s. With high inflation,
that reached 25% at its peak, the average real
rate of return was -11%. Treasury payments
mitigated this effect.
• Interest was raised to market levels on new
funds and reinvested reserves. With declining
inflation, real returns reached 7% in late 1990s.
INSTITUTIONAL RECORD
EGYPT 4
• No impact on capital market development.
Limited entry into equities.
• NIB is suffering huge losses and a growing
financial deficit.
• Private pension funds are small, invest 60% in
traded government bonds, and are actuarially
weak.
• Insurance companies also are small but invest
35% in equities.
INSTITUTIONAL RECORD
JORDAN 1
• Social Security Corporation (CSC) assets
amount to 25% of GDP.
• Insurance company assets amount to
3.5% of GDP. No detailed data on
provident funds but assets estimated at 23% of GDP.
• Total contractual savings: 30%. Equity
market capitalization: 49%.
INSTITUTIONAL RECORD
JORDAN 2
• SSC invests 19% in equities and 10% in
bonds. Loans represent 11% and bank
deposits 52%. Marketable securities rose
from 19% in 1996 to 29% in 2000.
• Significant and persistent reverse
maturity transformation.
• Positive annual cash flow and positive
real returns. Modest contribution rate.
INSTITUTIONAL RECORD
JORDAN 3
• SSC is largest institutional investor. It is
constrained by absence of instruments
and prohibition of overseas investments.
• Strong support for the development of
mortgage refinancing and securitization.
• Limited impact on capital market
development.
INSTITUTIONAL RECORD
JORDAN 4
• Efforts to modernize investment
approach have yet to bear fruit.
• Insurance companies invests 50% in
securities, 30% in bank deposits and 20%
in accounts receivable.
• Insurance industry is highly fragmented
despite creation of modern regulatory
agency.
INSTITUTIONAL RECORD
MOROCCO 1
• There are several pension funds. 6 cover
employees of public corporations, 2 are for
civil servants, and 3 for private sector
employees.
• The total assets of these institutions amount
to 12% of GDP (1999). Insurance company
assets add another 12% of GDP, mutual
funds 7% and postal savings 2%, totaling
33%. Equity market capitalization: 40%.
INSTITUTIONAL RECORD
MOROCCO 2
• Caisse de Dépôt et de Gestion (CDG), public
sector agency, is responsible for managing the
assets of several of the pension funds. Its assets
represent 7% of GDP.
• CDG has traditionally invested in government
bonds (over 50% and tourism) but has recently
started to diversify into equities.
INSTITUTIONAL RECORD
MOROCCO 3
• CDG deducts a significant spread and pays a
lower return to its captive clientele of pension
funds.
• It is currently improving its asset management
capabilities and is likely to adopt a more
modern approach in the future, while its client
funds may be allowed to hire other asset
managers.
• The real returns of one of the funds (RCAR)
have been high.
INSTITUTIONAL RECORD
MOROCCO 4
• The complementary fund for private sector
employees, known as CIMR, uses
guaranteed investment contracts from local
insurance companies and also invests in
equities, including some foreign ones.
• Its returns have been relatively high but it
faces serious actuarial problems because it
is not fully funded and company
participation is voluntary.
INSTITUTIONAL RECORD
TUNISIA 1
• 2 main pension funds for public and private
sector employees. Supplementary company
schemes undocumented. Total assets equivalent
to 9% of GDP. Insurance companies add
another 5% and mutual funds 5%. Total
institutional savings: 19% of GDP.
• Equity market capitalization: 14% of GDP.
INSTITUTIONAL RECORD
TUNISIA 2
• Assets of pension funds mostly in money
market instruments (57%). Bonds (19%)
and loans (12%). Equities represent only
4%.
• Reverse maturity transformation.
• Improvement in recent years, move away
from subsidized rental housing and low
interest housing loans.
INSTITUTIONAL RECORD
TUNISIA 3
• Insurance companies invest mostly in
bonds 32% and equities 17%. Claims
account for 33%.
• Mutual funds are basically bond funds.
Only 6% in equities, rest in money
market instruments and government or
corporate bonds.
INSTITUTIONAL RECORD
TUNISIA 1
• Shortage of instruments.
• Policies to encourage recourse to market
finance.
• Prohibition on investment overseas.
• Ambitious reform program in regulation,
supervision, accounting, and governance,
but impact is still small.
INSTITUTIONAL RECORD
SAUDI ARABIA 1
• Saudi Arabia has 2 very large pension
funds with assets reaching 165% of GDP
(based on estimate of WB study). Mutual
funds add another 7% of GDP. Equity
market capitalization is 45% of GDP.
• Large size of pension funds is explained
by young age and structure, high
contribution rates, and high returns.
INSTITUTIONAL RECORD
SAUDI ARABIA 2
• Asset allocation of the two funds
combined is 48% government bonds and
loans, 18% bank deposits, 4% local
equity 4% real estate, and 26% foreign
bonds and equities.
• Overseas assets correspond to 43% of
GDP. Local financial markets are too
small for the size of the pension funds.
INSTITUTIONAL RECORD
SAUDI ARABIA 3
• Management of foreign portfolio is supported
by reputable international advisors.
• They help in setting long-term investment
strategies, selecting experienced asset
managers, drafting investment guidelines, and
monitoring performance.
• Objective is to earn modest excess returns over
the World Index.
INSTITUTIONAL RECORD
SAUDI ARABIA 4
• Saudi Arabia shows benefits of international
diversification.
• Shortcomings are lack of transparency and
high concentration of financial power.
• Limited impact on developing local markets
because of holding nontraded government
bonds and absence of pluralistic structure.
OBSTACLES AND
CONSTRAINTS 1
• Most, if not all, MENA countries suffer
from:
• Weak financial markets and shortage of
financial instruments.
• Weak fund and corporate governance.
• Widespread public mistrust of financial
institutions and markets.
OBSTACLES AND
CONSTRAINTS 2
• Prohibition of overseas investment
complicates fund management but there is
very weak political support for international
diversification.
• Shortage of skilled professionals and
experienced regulators.
• Weak custodial services.
• Lack of transparency and external scrutiny.
OBSTACLES AND
CONSTRAINTS 3
• Extensive second-guessing of public
sector agencies.
• Difficulty of ensuring insulation from
political interference.
• No historical precedent of positive impact
on capital market development by
dominant public sector agency.
“IMPACT” PRECONDTIONS
•
•
•
•
Critical Mass
Conducive Regulations
Optimizing Behavior
Pluralistic Structure
PROSPECTS 1
• Need to emphasize primary objective of
pension systems: payment of secure,
affordable and adequate pensions.
• Underscore advantages of mixed multipillar systems.
• Financial markets exhibit persistent
deviations from trend over prolonged
periods.
PROSPECTS 2
• Develop depth and efficiency of financial
markets to instill confidence and trust.
• Strengthen regulation and supervision.
• Enhance transparency and external
scrutiny.
PROSPECTS 3
• Establish independent investment committees.
• Set objective criteria for selection of asset
managers, including foreign experts.
• Hire efficient custodial services for safekeeping
of assets and monitoring of performance.
• Set guidelines for asset allocation.
• Emphasize diversification and market returns.
• Use asset swaps for international
diversification.
PROSPECTS 4
• Encourage pluralistic structure,
competition, innovation and efficiency.
• Decentralize asset management.
• Authorize contracting out of employers
and/or employees, for part of benefits.
• Create robust regulation and proactive
supervision.