FINANCIAL GOVERNANCE AND RISK MANAGEMENT OF SOCIAL SECURITY

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• FINANCIAL GOVERNANCE AND RISK MANAGEMENT OF
  SOCIAL SECURITY

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• OUTLINE OF A PRESENTATION BY MR KWASI OSEI,
  DIRECTOR GENERAL, SOCIAL SECURITY AND NATIONAL
  INSURANCE TRUST (SSNIT)

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• 1.0 The Ghanaian Experience
• The Social Security and National Insurance
  Trust, SSNIT, the administrators of Ghanas
  national pension scheme has a 14 Member Board of
  Directors representing government, employers and
  workers constituted as follows

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• 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

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• 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

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• 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.

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

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• 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.

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• - In terms of public reporting, we are
• planning to
• To hold an Annual General Meeting with all
  stakeholders.
• Publish the Audited Accounts in the newspapers.
• Have open discussion with stakeholders on
  investments

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• The Trust consults External Investments Advisors
  before undertaking major investment decisions.
• The Trust prepares monthly financial reports for
  the board.

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• 2.0 Actuarial Reviews

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• 2.0 Actuarial Reviews
• 2.1 Internal Valuation done annually
  whiles External Valuation done every three
  years.
• 2.2 Actuarial Review focuses on the schemes
  long-term financial viability the review
  covers a 50- year period.
• 2.3 There is no interference in both internal
  and external reviews.

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• 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.

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• 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 Managements
  attention to areas to focus on i.e.
  administrative expenditure, and investment
  returns demographic changes.

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• 3.0 Governance of Investment
• Processes

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• 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.

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• Benchmarking and targets which are monitored
• These guidelines are reviewed periodically in
  response to changing economic environment.

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• 4.0 Risks Management of
• Risks

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• Operational Risk
• 4.1 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

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• 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.

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• 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

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• 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)

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• 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.

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• 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.

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• 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

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• 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

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• 9.0 Political Risk
• 9.1 Structural Changes
• Addition of new benefits without
• commensurate increase in contribution rate.
• 9.2 Over generous promises
• Pressure to provide unrealistic benefits not
• related to contribution bases.
• 9.3 Political interference
• In management
• In investment decision-making

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• END OF PRESENTATION