FINANCIAL GOVERNANCE AND RISK MANAGEMENT OF SOCIAL SECURITY

OUTLINE OF A PRESENTATION BY MR KWASI OSEI, DIRECTOR GENERAL, SOCIAL SECURITY AND NATIONAL INSURANCE

TRUST (SSNIT)

1.0 The Ghanaian Experience

The Social Security and National Insurance Trust, SSNIT, the administrators of Ghana’s national pension scheme has a 14 Member Board of Directors representing government, employers and workers constituted as follows:

• A Chairman and three other persons

• Two representatives nominated by Employers’ Association

• Two representatives nominated by the Trades Union Congress.

• The Director General

• A Representative of the Ministry of Finance

• A Representative of the Ministry of Manpower Development/Social Welfare

• A Representative of the Bank of Ghana (Central Bank)

• A Representative nominated by the Civil Servants Association and

• A Representative nominated by the Ghana National Association of Teachers.

1.2 Members bring to the board varied

professional training and experience

1.3 Political Interference

– Board has sub-Committees including an Audit Committee

– The Trust has an Internal Auditor who reports directly to the Director General. The Internal Auditor is to a large extent very independent.

– There are External Auditors who are appointed by the Auditor-General of Ghana.

- Reports of the External Auditors and other reports are put before Parliament through the sector Ministry, Ministry of Finance. The external auditors audit the Trust’s accounts on the average three years and are replaced.

The Trust has in-house Actuarial team who do internal valuations annually.

- Additionally, the Trust engages external actuaries every three years. Some have come from the US Social Security Administration, the UK Government Actuary Department and the International Labour Organisation.

- In terms of public reporting, we are planning to: a) To hold an Annual General Meeting with

all stakeholders. b) Publish the Audited Accounts in the

newspapers. c) Have open discussion with stakeholders

on investments

– The Trust consults External Investments Advisors before undertaking major investment decisions.

– The Trust prepares monthly financial reports for the board.

2.0 Actuarial Reviews

2.0 Actuarial Reviews

2.1 Internal Valuation done annually whiles External Valuation

done every three years.

2.2 Actuarial Review focuses on the scheme’s long-term financial

viability – the review covers a 50- year period.

2.3 There is no interference in both internal and external reviews.

2.4 The review reports are part of the

reports made available to the

sector Minister.

2.5 The reviews are normally

discussed with in-house actuarial

staff and other Management staff

some of whom are consulted or

provide input in the review

exercise.

2.6 In terms of standards, the Trust complies with the International Labour organisation, (ILO) valuation standards. These are essentially social insurance validation standards.

2.7 The review reports draw Management’s attention to areas to focus on i.e. administrative expenditure, and investment returns; demographic changes.

3.0 Governance of Investment

Processes

3.1 There is an Investment Committee

3.2 Consult External Investment Advisors.

3.3 Appropriate feasibilities are carried before major investment decisions are taken.

3.4 The Trust has developed investment policy guidelines that incorporates comprehensive asset allocation guidelines/investment portfolio mix.

• Benchmarking and targets which are monitored

• These guidelines are reviewed periodically in response to changing economic environment.

4.0 Risks – Management of

Risks

Operational Risk4.1 Strict Compliance systems, including prosecution of

defaulting employers.

4.2 Contributions are credited to individual accounts, current performance rate is about 80%.

4.3 Members’ Account Unit established in branches to ensure accurate crediting of contributions.

4.4 Programme to issue periodic statement of accounts to all members to take off soon.

4.5 Assets are registered and their movements monitored

5.0 Liquidity Risk

5.1 Scheme is solvent, current fund ratio is 6.96

5.2 Has enough cash to pay benefits

5.3 Treasury assets (securities) can all be redeemed.

6.0 Liability Risk

6.1 Scheme is still young. Membership not growing as fast to offset the aging contributors

6.2 High expenses levels which have to be managed

- expensive field operations- inadequate automation

6.3 Appropriation of 2.5% of 17.5% of contributions for health insurance reduces reserves available to the scheme.

6.4. Being a partially funded scheme, it

has an unfunded liability. The unfunded liability as of December 2003 was ¢7.2 trillion. ($800m)

7.0 Economic Risk

7.1 Low growth in the formal sector

employment and effect on membership

7.2 Large number of contributors stopped

contributing due to down-sizing of

enterprises. Effect is inability to

accumulate enough years to qualify for

a pension.

7.3 Experiences of weak contribution income –

Low salaries, under reporting of income;

High benefit expectations, unrealistic

minimum benefit guarantees.

7.4 Inflation and interest rates have been

declining over past three years and hope

that such manageable levels as single

digits can be established and maintained.

8.0 Investment Risk

8.1 Failure to deliver expected returns

» Investment in risky ventures, leading to large non-performing portfolios

» Pension Fund looked upon as primary source for venture capital funds

» Source of cheap funds for governments

8.2 Poor individual investments» Poorly conceived and executed

projects» Poor project execution leading to huge

cost over runs making projects uneconomical

8.3 Inadequate diversification» Capital markets not well developed

8.4 Mismatch of assets/liabilities» Over dependence on Treasury Bills

and short term money market instruments

9.0 Political Risk9.1 Structural Changes

Addition of new benefits without

commensurate increase in contribution rate.

9.2 Over generous promisesPressure to provide unrealistic benefits not

related to contribution bases.

9.3 Political interferenceIn management

In investment decision-making

END OF PRESENTATION