Pension Management

The end of the 5%: Hedge funds get institutional inflows straight from equity portfolio, managers say

 New York, June 29 2009 — Opalesque has published the 2009 Opalesque New York Roundtable.

In each Roundtable, Opalesque unites some of the leading hedge fund managers as well as representatives of the local investor base to gain unique insights into the local industry.  The 2009 New York Roundtable is the 19th issue of the popular Opalesque Roundtable Series, an unique catalog of intelligence on the global investment landscape.

 The Opalesque New York Roundtable can be downloaded here for free: http://www.opalesque.com/RT/RoundtableNY2009.html. 

All other previously published Opalesque Roundtable Scripts can be accessed in the Roundtable archive: http://www.opalesque.com/index.php?act=archiveRT

 On 33 pages, the New York Roundtable delivers a detailed update on current issues and developments within the U.S. hedge fund industry.  One of the foremost developments refers to  fundamental changes in asset allocation of public and corporate pensions, who have started to allocate to alternatives straight out of their equity portfolio, rather than putting hedge funds into a “5% niche bucket”.

 The following eminent New York-based hedge fund managers, investors and advisers participated in the 2009 Roundtable:

 1. Ed Robertiello, Managing Director, head of the fund of hedge funds Americas at  Credit Suisse

 2. Tim Schuler, CFA, Senior Vice President & Investment Strategist, Permal Group

 3. Carrie McCabe, CEO and Founder of Lasair Capital

4. Chris Acito, Founder of Acito Advisory Group, former Managing Director and Global Chief Operation Officer for Investcorp’s Hedge Fund Group

5. John M. Bader, Co-Chairman and Chief Investment Officer of Halcyon Asset Management6. Bill Geisler, Portfolio Manager, Malbec Partners

7. Christopher Pucillo, Chief Investment Officer and Portfolio Manager, Solus Alternative Asset Management

8. Katherine S. Kim, Senior Analyst, Affirmed Capital

Further, the Round discusses various important aspects like:

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The Opalesque New York Roundtable can be downloaded here for free: http://www.opalesque.com/RT/RoundtableNY2009.html.  All other previously published Opalesque Roundtable Scripts can be accessed in the Roundtable archive:

http://www.opalesque.com/index.php?act=archiveRT

About Opalesque:

Matthias Knab, Director of Opalesque Ltd, moderates the Opalesque Roundtables. Matthias Knab is an internationally recognized expert on hedge funds and alternatives.

In 2003, with the publication of its daily Alternative Market Briefing, Opalesque successfully launched an information revolution in the hedge fund media space: “Opalesque changed the world by bringing transparency where there was opacity and by delivering an accurate professional reporting service.” – Nigel Blanchard, Culross. This hybrid financial news service, which combines proprietary industry news stories and filtered third party reports, has been credited by many industry insiders with delivering precise, accurate, and vital information to a notoriously guarded audience.

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As financial worries increasingly prompt Britons to attempt to review their finances and reduce their debts, one aspect that may be overlooked is the pension. With various surveys demonstrating the extent to which people are finding themselves having to cope with mounting credit card bills and loan payments, thoughts about saving for retirement could be pushed to the back of minds.Yet it could well be that the current economic problems highlight just how important careful financial planning is. This is certainly the view of the Association of British Insurers (ABI), which has produced a guide aimed at addressing the issues and concerns consumers may have.Simply entitled ‘People need pensions’, it intends to make just that point. The ABI observed that confidence is the most important factor in pulling through the recession, but investments and long term savings have taken a knock due to stock market falls.Director of consumer strategy at the organisation Maggie Craig explained that pensions remain an excellent prospect, particularly as savers can benefit from “free money” – both from the government and employers.”Saving for retirement is crucial both for individuals, as it helps to ensure they will have a more comfortable retirement, and for society, as it reduces the burden on future generations of taxpayers,” she remarked.And the importance of having a nest egg in place has been emphasised by a recent study by Help the Aged and Age Concern. Beginning early could be the key, as nearly half of those over the age of 50 told the charities that they are less confident their pension and savings will be enough to fund retirement than they were six months ago. The organisations also cited Office for National Statistics figures showing that the number of unemployed people in this group has risen nearly 50 per cent over the last year, which could mean even more people are relying on their investments.One provider that has recognised the need for investments to be made is Scottish Widows, which has announced the launch of two new multi-manager funds. Through these, customers are being offered the chance to see their money spread across a range of assets – including equities, commodities, bonds and property.This particular approach may not be to everyone’s liking, but the advice from various quarters does appear to be clear – consumers should not forget about pensions despite the economic problems currently taking hold around the world. To this end, Ms Craig stated: “In these difficult economic times, it is especially important that people make the right decisions about their finances, now and in the future.”

When it comes to pension planning exercising choice and making active decisions is almost as important as the simple act of saving in the first place. Having choice and not using it can be worse than not having any choice at all. I am currently working with a campaign called Pensions Income Choice, which is looking at ways to make it easier for pension investors to shop around with their pension fund at retirement. The idea is to ensure than when investors reach retirement and need to convert their accumulated pension fund into an income, they get the best possible value from their savings. The only way to make sure this happens is to encourage everyone to stop and look around at their various options, before committing themselves to a particular income arrangement, such as an annuity (remember, with most annuities, once you have bought it you are then locked into it for life). This principle of choice extends beyond annuities. Some pensions offer a default investment fund and perhaps a default contribution rate as well. This is all very well and these defaults can be useful for getting people started on saving for retirement in the first place; however I believe they are almost invariably going to be a less-than-perfect choice for most investors. Default options are lowest common denominators – they are the option which is going to be least wrong for most people. As a result most investors can get better value by tailoring their retirement savings to meet their own needs. If you’re happy making your own investment decisions, the Vantage SIPP puts you in control. You can manage your pension online and choose from more than 2,000 funds, shares, investment trusts, gilts, corporate bonds, exchange traded funds, and cash. Find out more about the Vantage Self Invested Personal Pension. We believe this low cost, easy to manage SIPP is one of the best on the market, and we aren’t the only ones, After studying more than eighty different SIPPs, I’ve plumped for the award winning HL Vantage SIPP from Hargreaves Lansdown – If you can find a cheaper SIPP, then please let me know…Cliff D’Arcy, The Motley Fool – personal finance website At the point of retirement it is almost impossible to have a default retirement income solution. The best way to get the most out of the pension that you have worked so hard saving for is to shop around. If you opt for an annuity then it is likely the income offered by your pension provider will be less than you could get by shopping around – you could get up to 30% more. Actions speak louder than words and so we are not just campaigning on this we do not have a default annuity for our SIPP, clients choose whatever suits them best and gives them the highest income.Our free online annuity search engine allows you to get quotes from the most competitive annuity providers quickly and easily. See how much income you could get.Personally, I would like everyone to be making active and informed decisions about all aspects of their retirement savings, not just at retirement but right from the outset.

 OVERVIEW:

 

The NASSIT Act, 2001 established a virtual state-monopoly in the NASSIT for the management and investment of pension funds in Sierra Leone. However, as is generally the case with monopolies and especially quasi governmental monopolies in Sierra Leone, we must continue to be vigilant and guard against inefficiencies in management and oversight, politically-driven investments, political interference, nepotism and a blotted bureaucracy which have in the past become hallmarks and recipes precipitating their subsequent failures and demise.

 

It is thus against this backdrop that the continued viability of the current retirement system remains to be seen especially as we continue to await the second statutory actuarial evaluation report and the failure by the Trust since 2006 to post an annual report encompassing the Trust’s operational performance and audited financial accounts for the fiscal years 2007 and 2008 (NASSIT website: www.nassitsl.org). Management and the Trustees must be reminded that pursuant to Section 16(1) of the NASSIT Act No.5 of 2001, the Trust is by law required to submit and publicly file such annual reports.

 

LONGEVITY RISK:

 

Despite the still very low life expectancy rate currently estimated at 41.24 years (CIA World Fact book Report March, 2009) and high infant mortality rate of 154.43 deaths per 1000 live births (UNDP Human Development Report, 2008) in Sierra Leone, the past few years have witnessed positive, though minimal movements in data reflecting a decrease in the nation’s longevity risk. This is borne from a comparative analysis of life expectancy figures of 35.4 years from 1970 to 1975 to 41.0 years in the period from 2000 to 2005 to the current 41.24 years estimated for 2009. Generally, the longevity risk in retirement is the hazard of aging and uncertainty of knowing how long one will live and how long social security retirement benefits, such as provided by the National Social Security and Insurance Trust (NASSIT) can go before one runs out of retirement funds prior to death. The focus of this article is thus how can one minimize the risk of running out of money in retirement through the use of annuities and retirement funds?

 

The Society of Actuaries in a survey report entitled “Key Findings and Issues: How Americans Understand and Manage their Retirement Risks” identified the following retirement risks viz: outliving assets; loss of spouse; decline in bodily function; healthcare and medical expenses and inflation. These retirement risks are not unique only to Americans as the same basic risks confront retirees in Sierra Leone as they seek to understand and manage their retirement options. Generally the most common retirement risks are categorized as follows:

 

According to the latest published data by NASSIT (NASSIT at a Glance Facts & Figures as at June 2008), the monthly average retirement pension payable currently in Sierra Leone is a paltry SLL108, 504.72 (One hundred and eight thousand five hundred and four Leones and seventy two cents). This amount represents a fraction of retirement income required by employees for basic sustenance in the current economic environment in Sierra Leone, where even a bag of rice costs more than the average monthly retirement provided by NASSIT. A retiree with even a modest family, not to mention our extended family system, would be hard pressed to provide and maintain a household based solely on the pension currently provided by NASSIT.

 

With a majority of the participants either at average or below average income earnings and hence contributing at the average and below average rates, it stands to reason that most of the scheme participants will not be eligible to receive pensions at even the modest average amount as currently computed by the NASSIT actuaries.  Thus, the goal of a comfortable retirement envisaged by the architects of the NASSIT risks becoming a fleeting illusion, unless other new retirement options and vehicles are incorporated into the nation’s retirement and social safety network.

 

As postulated by Kerry Pechter in her book “Annuities for Dummies”, “many people confidently walk the financial high wire of life without a safety net. Others, especially those who are approaching retirement, feel more secure when a net is there to catch them-just in case the tightrope snaps”. In the Sierra Leonean context however the social protection and safety net is needed by all and not just a few, thus my continued passion in ensuring that the Trust is professionally run and maintains accountability consistent with actuarial, retirement and insurance principles.

 

REPEAL THE NASSIT MONOPOLY:

 For with the inability of the NASSIT to provide the requisite financial safety net, based on the current actuarial projections, it is but prudent that government seeks to break up the NASSIT’s near monopoly over pension fund management in Sierra Leone to allow not only life insurance and annuity companies but more so retirement funds to establish and manage employer-sponsored retirement plans.

 

The NASSIT model is akin to the Social Security system in the United States which as a hybrid defined contribution and defined benefit plan, establishes and sets a fixed percentage both employees and employers contribute and also defines the benefit formula participants receive at retirement. As a result of conservative projections and outright ill-advised investments with little or no redeemable value-added equity to be realized in some investments even in the long term, the NASSIT cannot be solely relied on by Sierra Leonean workers for their retirement needs.

 

With the repeal of the NASSIT monopoly, employer sponsored retirement plans and annuities, with an investment and insurance component will be established and marketed to allow employees to save and invest in their own retirement.  

 

THIRD SCHEDULE RETIREMENT FUNDS: What are they?

 

What I have elected to dub “Third Schedule Retirement Funds” emanates from provisions in the third schedule of the Sierra Leone Income Tax Act, 2000, which provides for the establishment of complying retirement funds with the approval of the National Revenue Authority (NRA) Commissioner.

 

This little known provision in our tax code already provides the legal and regulatory framework for the establishment of individual retirement accounts managed by these so-called Third Schedule Retirement Funds in Sierra Leone. These are intended to augment and provide other guaranteed income during retirement separate and aside from the NASSIT pension. Moreover, these retirement plans allow employees to save and invest for their own retirement by the employee authorizing the employer to deduct a certain percentage of his/her wages to be invested in the employer-sponsored plan.

 

Tax incentives and deferrals are usually provided by governments to encourage retirement planning, savings and participation.  Amounts contributed by employees into such plans are not taxable resulting in a larger carry home paycheck monthly. Moreover, as an employee benefit, employers also contribute a percentage into their employees’ retirement accounts, with a concomitant tax savings by the employer.

 

However, the provisions of The First Schedule Part IV of the Income Tax Act, 2000 which requires a 15% withholding from payments on pensions and annuities needs to be repealed as it is regressive and discourages retirement savings. It is also envisaged that employee contributions are on a pre-tax basis so that employees participating in these retirement funds can take advantage of favorable tax brackets and rates.  As an example, the tax rate for individuals with incomes over 480,000.00 Leones is 25% per annum while the tax rate for individuals earning over 7,500,000.00 Leones is 40%.

 

The United States based African-focused reinsurance consultancy company, Saddleback Re, in California managed by the author has over the past few months designed annuities and retirement policies to be introduced in Sierra Leone and managed under the provisions of the Sierra Leone Tax Code. Additional information on these retirement vehicles can be addressed to admin@saddlebackre.com.

 

ANNUITIES:  

 Annuities, whether fixed or variable, immediate or deferred are generally retirement tools or vehicles designed to supplement an employee’s retirement income and guarantee pension-like income over the life of the annuitant or beneficiary. These are only issued by insurance companies and have both a hybrid insurance contract and investment features.

 An income annuity generally provides for conversion of a large sum of cash into monthly, quarterly or an ann ual payout wherein an insurance company agrees to pay the annuitant or beneficiary an income over a certain period of time.

 According to the Sierra Leone Insurance Commission (SLICOM) 2006 Annual Report, the Life Insurance business sector is serviced by only 3 insurance companies, with a net industry wide premium of 1,323,640,000.00 Leones; with Aureol Insurance Company dominating with a 104% share of the market. Thus annuities which are principally life insurance contracts still have a long way to penetrate the Sierra Leone insurance marketplace.

 THE SOCIAL SAFETY NET PROGRAM AS AN ANNUITY:

 The Social Safety Net Program currently managed by the Ministry of Employment and Social Security represents a program that should have better been managed as an annuity. During the program’s launching in 2006, President Kabbah stated that “NASSIT has been able to pay back over 5.3 billion towards the establishment of the Social Safety Net Scheme. Additional support to the scheme amounting to 5.0 billion Leones will be made by government”. The program launched by President Kabbah in 2006 with paid up capital of 5.7 billion Leones and additional 5.0 billion investment pledged by government was designed to be administered by NASSIT, without any administrative costs and projected to reach an estimated 16,000 extremely vulnerable households, as a component of the country’s 2005 to 2007 Poverty Reduction Strategy Paper (PRSP).

 

However, since the Social Safety Net pilot adopted a cash transfer scheme the following has been expended, according to Ministry of Employment and Social Security presentation at the Regional Experts Group Meeting on Social Protection in Dakar, June 2008:

 

From the above figures the program as managed and supervised by the Ministry of Employment and Social Security clearly lacks long term sustainability, is too short term and lacking an entrepreneurial oriented vision. For with the amount of the initial seed money having been used to purchase annuities for all the participants in the targeted groupings, the benefits of retirement income and savings that annuities provide would have been made available to some of the most vulnerable members of our society. Rather the decisions of transferring management of the program from NASSITT, where the funds would have been better managed and invested to a Ministry program was a recipe for failure.

 

OVERVIEW:

As the nation awaits the second actuarial evaluation of the National Social Security & Insurance Trust (NASSIT), a thorough analysis and understanding of the initial actuarial valuation report conducted by Canadian based actuarial firm Regie Des Rentes Du Quebec (RRQ) for the period ending December 31, 2004, is instructive in assessing the performance and future viability of the nation’s pension scheme.

Pursuant to Article 47 of the National Social Security & Insurance Trust Act, 2001 an actuarial evaluation of the pension scheme is by law required every 3 years during the first ten years of the pension scheme and once every five years thereafter. The scheme was initially implemented in 2002 with the first actuarial valuation performed in 2004. The second statutory valuation should therefore be conducted by 2007/2008 and an actuarial report issued soon thereafter.

The 2004 RRQ actuarial studies report while acknowledging the general good financial condition of the scheme, as expected of start-up schemes without pension payment liabilities, however highlighted areas of concern and deficiencies that both Sierra Leonean policymakers and pension participants must be made aware of and requisite steps taken to address in order to forestall the Trust’s failure and potential bankruptcy.

Aside from the need for growth in the insured population and the need for more scheme experience data, the actuarial report paid especial focus on the exorbitant administrative expenses and costs and the management of investments, as areas of concern requiring corrective measures.

ADMINISTRATIVE COSTS

 

An analysis of the pension scheme’s administrative costs, according to the actuarial report, reveals that NASSIT’s “administrative expenses compared to insurable earnings were higher than the level expected in the inception report ”.

It is worth noting that at inception of the scheme an industry best practice expenditure for administrative costs was pegged at 1% of insured earnings as recommended by the International Labor Organization (ILO).

However, since 2002 when administrative costs were at 1,691 billion Leones, the administrative costs have progressively increased to 3,250 billion Leones in 2003 and to a whopping 6,407 billion Leones in 2004. As noted in the RRQ actuarial report, the 2004 costs exceeded the ILO recommended 1% for the scheme’s administrative costs by a proportion of 230%.

In the recently published annual report for 2006, NASSIT reported general administrative expenses at 15.3 billion Leones while the Trust’s payments in pensions amounted to a paltry 1.9 billion Leones. The 15.3 billion Leones in administrative costs represented an increase from 14.4 billion Leones in the previous 2005 fiscal year. Thus as of the year 2005, administrative costs represented 5 percent of the insurable earnings of the scheme. Such a ratio glaringly is economically untenable as even when compared with other African countries 1.5% for administrative costs, the trajectory of NASSIT’s administrative costs remains one of the highest in the world.

The amoebic growth in the Trust’s administrative costs has continued to balloon as figures for the year ended 2007, revealed that the stratospheric sum of 22.1 billion Leones was expended as administrative costs and expenses.

While acknowledging that nascent pension schemes generally have higher administrative costs at beginning than matured schemes, and factoring that the “initial seed money of 4.5 billion Leones provided by the government for setting up of the Scheme was fully refunded by the end of the third year”, the continued growth in administrative costs with no apparent oversight or checks and balances by the Trustees / Board of Directors reflects a lack of good governance controls and potential inefficiencies that must be addressed and corrected.

For should this trend continue, the Trust will be rendered bankrupt and the country, the statutory guarantor of the pensions will be saddled with unfunded pensions by the time the equilibrium period ends and pension liabilities are at their peek. As fiduciaries, the board members must be seen as exercising their fiduciary duties on behalf of the pension scheme’s participants- the workers of Sierra Leone.

 

STAFF COSTS

Staff costs represent a large percentage of the administrative costs and were estimated to consume more than 55% of total expenditures of the pension scheme. For example, payroll costs increased from 5.1 billion Leones to 8.2 billion Leones from 2005 to 2006. As at the period ending December 2006, the scheme employed 227 employees representing a net employee increase of 6 from the prior year. In 2005 the scheme reported a total of 221 employees on its payroll. The 6 new employees the scheme employed in 2006 in addition to whatever cost of living increases in salary paid the existing employees could most certainly not explain the exorbitant increase in the wage bill of the scheme.

As of the second quarter of 2008, the Trust reportedly has a total of 275 employees, an increase in its employee rolls from 227 in 2006.

Moreover, in addition to staff costs, the remuneration of key management personnel salaries and allowances substantially increased from 1.6 billion to 2.2 billion Leones from 2005 to 2006.

According to the NASSIT staff matrix, the scheme has 8 executives and 13 senior management positions. If “key management” refers to only these positions, it thus represents 21 personnel who over a one year period received as salaries and remuneration an additional humongous sum of 2.2 billion Leones from the Sierra Leone workers pension fund.

GENERAL COST

Aside from staff costs as reviewed above, the amorphous category of “General Costs” represents about 30 percent of the scheme’s expenditures. Whilst initially at 543 million Leones in 2002, general costs expenditure had ballooned to 963 million Leones in 2003 and to an exorbitant 2.1 billion Leones in 2004.

It should be noted that while administrative costs by the year 2004 represented 95.4 percent of total benefit expenditures and 24.0 percent of contribution income of the entire pension scheme, the continued fiscal viability of the pension scheme is greatly at stake as an inordinate amount of contributions of workers hard earned wages seem to be spent on the scheme’s management and staff expenses.

ANALYSIS OF INVESTMENT PORTFOLIO

Since a major source of financing for the Trust is investment income, which derived from the right investment mix and returns determines and ensures the scheme participants level of pension benefits, this article will not be complete without an analysis of the NASSIT’s current investment strategy.

The scheme’s investment strategy policy has been adjudged in the actuarial report as economically and actuarially well designed. The devil however is in the implementation of this well designed policy. Especially as relates to stocks in companies, the absence of an adequate financial infrastructure where shares and stocks can easily be traded to free up cash flow exposes the Trust to additional investment risks.

Despite this shortcoming in the country‘s financial environment, the Scheme has poured over 39 billion Leones into equity investments, even though the country does not have a functional stock exchange.

A review and analysis of the types of businesses and ventures the Scheme’s equity investment has been directed into causes risk concerns for achievement of the expressed strategic objectives of the investments portfolio and for the continued viability of the scheme.

The Scheme in 2006 increased its equity asset mix from 11.4% in 2005 to 20% in 2006. This category represented, aside from Treasury Bills, the largest percentage investment by the Scheme.

LONG TERM INVESTMENTS

As of 2006, the Scheme’s long term investment portfolio totaled 39.6 billion Leones, comprised of equity investments in the following:

1) Debentures in SierraBlocks of 8.2 billion Leons.

2) Equity investment in SierraBlocks of 7.1 billion Leones.

3) Equity investment in Barock Investment of 7,268,000

4) Equity in Regimanual Gray SL Limited of 6,000,000.

5) Equity in Gouji Property Investment of 9,129,992.

6) Equity investment in Eco Bank of 3,033,917 Leones.

7) Equity investment in Kimbima Hotel of 5,296,414.

Equity investment in Sierra Leone Brewery of 7,005.

The scheme’s investment liability exposure in the cement block making company, SierraBlocks represents a 60% ownership shares with a concomitant 60% of liability. Such exposure of the scheme’s capital and considering the high costs of the homes Regimanuel Gray is selling in Goodrich must serve as a warning signal that returns from this venture are likely to fail to conform to minimization of costs and risks associated with investments-a core objective of the scheme‘s investment policy.

The scheme’s experience with the Gouji Property Investment when it prematurely recalled its equity investment and reportedly only received a portion of the Trust’s initial capital investment is highly instructive.

Currently, contribution accumulation represents the main source of asset increase in the scheme’s portfolio. Since the scheme is young and growing this trend will continue. However, the laws of diminishing returns will very soon set in and contributions not only will remain stagnant but will inevitably regress resulting in an adverse impact on the scheme’s investment mix.

CONTRIBUTION DELIQUENCIES

As a mandatory pension scheme all employers and employees are required to contribute into the Trust. However, an alarming trend witnessed over the past five years of the Trust’s existence shows that government departments and parastatals are the greatest delinquents with mounting arrears of contributions owed to the Trust on behalf of their workers. For example, as recorded in the Trust’s 2006 annual report, total contribution delinquency increased from 9.1 billion Leones in 2004 to 12.9 billion Leones in 2006. This amount subsequently increased to 16.2 billion Leones in 2007 and as of the second quarter of 2008, the contribution arrears stood at 19.4 billion Leones.

The main reason adduced for this delinquency is the non-compliance by government ministries, departments and parastatals whose contribution arrears rose from 2.1 billion Leones in 2004 to 5.5 billion Leones in 2006. The trend of non-compliance by parastatals especially continues unabated as recent statistics for the second quarter shows that their non-compliance is currently at 10 billion Leones.

With all the statutory instruments at its disposal, the Trust must be aggressive in ensuring outstanding contributions are immediately recouped. A reduction and elimination of the arrears must be a benchmark in assessing management’s productivity and efficiency. The Sierra Leone landscape is dotted with government services institutions and companies that have failed by their inability to ensure user-service payments are timely collected for services, be it insurance, electricity, water supply and other public services. At this rate and trending, NASSIT is setting itself up for the same demise.

PROPOSAL FOR EXPANSION OF THE INSURED POPULATION

The participation of Sierra Leone’s diasporas in the country’s pension scheme, the NASSIT, represents one such creative and out of the box thinking that management and the government must urgently explore.

Diaspora participation in NASSIT could be achieved by a system of purchase of credits in foreign currencies, into the pension scheme, modeled on the concept of “Diaspora Bonds”; where countries raise financing from their overseas diasporas through a debt instrument .

However, unlike a debt instrument, the sale of credits into the NASSIT pension scheme allows diasporas to participate in the nation’s social security system with benefits inuring to both the diaspora participant and the NASSIT. In the case of the diasporas it ensures:

Patriotism, as participation affords continued connection to the home country.

Satisfaction of contributing to and participating in the home country’s national economic growth.

Protection as a risk management tool, as the survivor’s benefit component of the pension scheme will afford benefits to beneficiaries in the home country, in the event of the death or disability of the diaspora participant.

In the case of the country and NASSIT, it provides:

Extension of the covered population, providing additional private sector capacity, which the scheme desperately needs to meet actuarial projections.

Access to foreign capital remittances, as contributions would be made in foreign currencies.

Risk diversification, as the foreign capital infused into the scheme could be invested in foreign investments and international bonds, stocks and indexes.

Needed capital for developmental programs such as the current NASSIT low cost housing project.

 

CONCLUSION:

The establishment of the pension scheme in Sierra Leone represents a singular achievement in public policy implementation over the past 30 years and if properly executed and managed long-term will serve generations of workers and contribute positively to economic and social development of the country. It is thus in accord with the tremendous expectations for success of the scheme that the above critique and suggestions for curtailing the run away administrative costs of the Trust are been proffered not only to management but especially the Board of Directors.

The current ‘deterministic’ modeling techniques used in standard point of sale illustrations today simply provide predictions of what a pension will offer in terms of an income in retirement based on five, seven or nine per cent average growth rates. They do not provide the odds of success or failure in achieving these predictions or indeed work any variables or inherent uncertainties into these calculations. Presented with three numbers most investors will look at the middle one and think this is broadly where they are likely to end up. They will check the lower one and think that’s about as bad as it will get and then they will glance at the top one and hope!

In this context the current five, seven and nine per cent approach can be very misleading. For example, if the investor invests in equities, the range of outcomes will typically be much wider than five to nine per cent. So the  investor is unlikely to really appreciate his downside risk. On the other hand, if he invests in government bonds at current yields, the range of outcomes is likely to be much smaller than with equities but he is unlikely even to hit the lower, five per cent growth projection figure.

The solution is stochastic (also known as “monte carlo”) modeling.  How is it different?

By analysing the range of answers produced, the stochastic model can predict probabilities to any given outcome. This means we can actually cater for an individual’s risk appetite! For some, their pension income is their only income in retirement. They would want to plan with high certainty for the future. For others, their pension will be in addition to income they generate from other assets. They might be happy to take significant downside risks with the prospect of very favourable outcomes. Stochastic  portfolio planning gives advisors who understands the statistical concepts a tool to give individually tailored, risk sensitive advice.

With Final Salary pensions schemes – where benefits in retirement is guaranteed – becoming very rare, individuals are left to the task to build an investment pot for retirement and do it in a responsible way. Individuals are becoming aware of the need to take personal responsibility for their retirement. For how long will they be happy to accept crude predictions of five, seven or nine percent to make decisions? With this in mind SIPPs (Self Investment Pension Plans) are becoming more and more popular as individuals demand the flexibility to invest in assets tailored to their needs.

I believe its the combination of stochastic models and the flexibility of SIPPs which will give individuals the ability to make individually tailored and responsible investment decisions. The problem is there is not enough financial advisors out there with the skills and tools to offer this service.

‘Stochastic illustrations are still a fledgling area… only a select few technology, investment management and actuarial   firms, currently have the skills to implement them.’Christopher Read, Chairman, Dunstan Thomas

My hope is that more analytical people such as actuaries enter the world of financial advice to serve the public in an increasingly complex financial world where pension reform is still continuing for quite some time to come.

The “confidence crisis” surrounding the British pensions sector is deepening, it has emerged.

According to Alliance Trust’s annual retirement confidence index (RCI), the gap in those failing to put money away for later life is rising as some 26 per cent of consumers are currently without any form of pension – up from 20 per cent noted last year. However, with evermore Britons set to face financial difficulties later in life, it appears that women could be in line for the greatest strife. Just under a third (31 per cent) of females are currently not making any contributions towards a savings fund, an increase from the 23 per cent recorded during last year’s RCI. Meanwhile, 22 per cent of men are without retirement provisions, up from the 17 per cent noted last year. Also the proportion of people that believe they will receive a state pension has dropped form 40 per cent last year to 35 per cent.

It was also revealed by the study that just over half (55 per cent) of Britons aged between 19 and 29 have not made any savings for later life. However, with this in mind, only six per cent of consumers in the age bracket feel “totally unconfident” that they will not be able to put enough money away to fund a “comfortable retirement”. Yet it was consumers in the “prime of their working lives” who could be set for the most retirement trauma as one in ten people aged between 30 and 49 are “totally unconfident” that they will be financially comfortable in later life. Meanwhile, only one per cent of Britons within this age group are “totally confident” about their future.

Hyman Wolanski, head of pensions at Alliance Trust, said: “It is worrying to see that many in the prime of their working lives are most uncomfortable about their retirement prospects. It has been made clear that action needs to be taken to overcome this problem, and to break the trend. Our research shows it is now more important than ever for people to ensure they have a proper pension plan tailored to suit their individual circumstances. For example, locking regular sums into a pension might often be put off in favour of more immediate financial demands but with the range of saving products available today, there is now much more flexibility than ever in how people can save for their future.”

He claimed that a pension is not the only method by which consumers can prepare for their financial future, indicating products such as individual savings accounts as possible options. Mr Wolanski stated “no matter what means are used, it is of the utmost importance that action is taken, and future provisions are made”.

And with millions of consumers struggling to save into pensions, problems managing their money may extend into other areas of their finances such as developing difficulties in paying back loans and credit cards. Consequently opting for a bad credit loan could well be an advisable option for reorganising your monetary situation and getting back on your feet. Earlier this year, James Cotton, mortgage specialist for London & Country, suggested that those who have taken out a bad credit loan may still be able to access mortgages with competitive rates of interest.

Before considering whether it is a good idea, it might be helpful to take a quick look at just what is pension drawdown.
Replace that “drawdown” with “withdraw” and it can perhaps be most readily understood as the ability to withdraw money from your pension fund and leave the balance invested, so that (hopefully) it continues to grow. This ability therefore gives the pension holder an additional option on retirement: instead of using the pension for the one-off purchase of a lifetime annuity, funds can be withdrawn or drawn down for the purchase of an annuity at a later date. And the later the date, of course, the more attractive the annuity should be. Tit does mean, however, that you will probably need an alternative source of income in the meantime.
Clearly, this will give you a much greater degree of flexibility in the use of your pension and preserves the opportunity of a remaining pension fund that you could pass on to your children on your death (provided, of course, that the fund is still a reasonably significant amount).
If the pension fund is sufficiently large, you will be able to draw down income and continue to manage the balance of the fund, making any necessary investment decisions for yourself. In other words, it allows you to stay in control of a significant source of savings and investment.
Pension drawdown could also result in your being able to increase your income when you are older. Obviously, this will depend not only on there still being a sizeable balance in the pension fund, but also that the investments perform well. The opposite is also true, of course. If the investments do not perform well, then the fund can become seriously depleted and the income in your old age could in fact be significantly reduced.
Pension drawdown thus offers a more flexible alternative to purchasing an annuity as soon as you retire. This will suit those people who feel that the one-off purchase of an annuity at too early a stage locks them into an arrangement which might not represent the best deal over the longer-term. They might also be concerned about the relatively limited death benefits that come with many annuities.
From the foregoing, therefore, it can be seen that there are attractions to a pension drawdown. But these attractions come at a price. And that price lies in the risk of things going wrong or you miscalculating a number of factors. In other words, pension drawdown represents a risk. If the worst came to the worst, your decisions could leave your remaining pension fund seriously – if not totally – depleted. This would leave you without a private pension at all in your old age.
The risk is sufficient, certainly, for it to be very unwise to consider this retirement option without first consulting an experienced independent financial adviser, who can warn you of the pitfalls and carefully explain not only the attractions, but also the drawbacks of a pension drawdown.

Everyone knows that the younger you are when you start paying into a pension, the more you’ll receive when it’s time to pay out on your retirement. Nevertheless, there are still many who delay making that start and a frightening number of people who believe that their entitlement to a basic State pension will be enough to see them comfortably through old age. While they might be right about the entitlement to a State pension, they are most unlikely to find that the State pension alone will ensure anything like a comfortable retirement. But if taking care of your own pension arrangements is to be an option, where do you go for the best pension advice?
Even a cursory look at the subject of pensions will tell you that it can become a pretty complicated topic, with a bewildering range of different products, to suit different ends and purposes. For example, you might be aware that your employer runs a pension scheme and, indeed, you believe that the employer contributes to your pension on your behalf. But is this an occupational pension scheme. If it is, do you know whether it is salary-related or whether it is a defined contribution or money purchase scheme?
Alternatively, is your employer offering a stakeholder pension scheme or running a group personal pension scheme? You have heard that it is possible to set up your own stakeholder pension. How would this differ from your having your own personal pension arrangement? Is one or the other – a stakeholder or a personal pension scheme – something you should be setting up for yourself?
These are all perfectly reasonable questions, but how on earth do you go about answering them? It’s very much a specialist subject and the ground rules seem to be changing all the time. You have might also have heard, for example, that the government is introducing changes requiring all employers to offer a pension in the future and to make contributions to the schemes set up. This can be the employer’s own scheme or the government’s new central scheme that is being established.
Yet further changes will affect the minimum age at which you can start drawing your pension benefits. Subject to the rules of your particular scheme, the minimum age is currently 50, but this will go up to age 55 by the year 2010 (though you will no longer need to stop working altogether to be able to draw the pension, provided continued employment is allowed by the rules of your particular scheme). To phase in the higher age level, pension fund managers have been given the period from April 2006 until April 2010 to raise the age limit. Clearly, you will need to know when it applies to you.
All in all, therefore, it is clear that questions about pensions can become quite complicated. They are further complicated by your need to know exactly how your own individual circumstances should affect your pension options and decisions. A pension is a long-term investment, which accumulates many thousands of pounds of your hard-earned cash – it’s important, therefore, that you are guided towards the right decisions.
Given the importance of getting it right, the sensible course of action is to consult an independent financial adviser about your existing and future pension options. This will ensure that your decisions are based on the best, professional and expert, independent pension advice.

Despite the quite considerable contributions individuals are likely to be making to them and the accumulated value they are likely to have, it is surprising how few people keep an eye on how their pension fund investments are doing. The contributions are made on the same monthly basis, come what may, regardless of the investment’s comparative performance. It seems that many people give no thought to the possibility of pension transfers and whether such a move would make sense for them.
Whether a pension transfer is something you should be considering, of course, will depend on the performance of your current pension fund. Together with your home, this is likely to be one of your larger investments and, as with any investment, you will want to make sure that your hard-earned money there is working as hard for you as it possibly can. With the value of your home, for example, you probably follow every twist and turn of local property prices and keep a fairly close watch on just how much it is worth. How many people do the same with their pension investments?
With your pension fund, it is not just the overall value and performance you will be interested in. Have you recently reviewed what management or administration fees you are paying? Could you get a better deal for less?
Ready to transfer?
If you believe it is time for a change, there are one or two things you should definitely do first before committing yourself to a transfer:
- Above all, do not consider transferring your pension without seeking the expert advice of a registered independent financial adviser;
- If you have not done so already, one of the first things your adviser will ask to see is a transfer value analysis. As the title suggests, this is an analysis which allows you to compare the value and performance of your current pension investments with the alternatives. It should include a figure called the “critical yield” (typically somewhere between 7% and 11%) which tells you how fast any replacement scheme would need to grow to match the performance of your present scheme. A good rule of thumb will be a figure of 8%. If your present scheme is returning anything less than this, then you might want to take the idea of a pension transfer further;
- What are your intentions regarding retirement? When do you hope to start drawing on your pension? If you are planning to retire early, for example, you will need to ensure that any replacement scheme to which you are intending to transfer is sufficiently flexible to allow this;
- With the help of your independent financial adviser, you will naturally want to check again the current financial position and performance of your present scheme. In the event that it is showing a surplus, with a higher value on assets than liabilities, then it could well prove worthwhile staying with your present pension fund.
Summary
It is certainly worth reviewing and monitoring your pension fund in the same way that you would any other investment, to consider the potential benefits of a pension transfer:
- Financial performance, management costs and flexibility might be a useful basis for comparison;
- Before doing anything, however, make sure that you seek the services of a reputable, independent financial adviser;
- Get a transfer value analysis of your current pension scheme;
- Take into account your actual retirement plans and any intention you might have to retire early.