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ISSA research maps the investment performance of social security reserve funds

For international financial markets in general, and for the investment performance of many social security reserve funds more particularly, the three-year period 2009–2011 was a volatile one. In spite of the challenges, a survey carried out with ISSA member organizations has found that social security reserve funds maintained positive real investment returns over the period.

Social security reserve funds recorded an average reducing real rate of return from 2009–2011, reaching a low point in 2011 when real returns were close to zero. Nevertheless, the average annualized return over the period remained positive and was 8.1 per cent in nominal terms and 4.6 per cent in real terms.

The ISSA Reserve Fund Monitor survey report, recently made available to ISSA member organizations, looks more deeply at these findings for ISSA institutions operating social security reserve funds, and shows that the average decline masked notable variation across countries.

In looking to understand the factors influencing performance, the report also surveyed ISSA member organizations on asset allocation, use of external managers, net cash flow position and regulatory framework.

Explaining differences in fund performance

Looking back to the period 2009–2011, what were the key shared as well as distinct elements influencing the operational contexts of individual social security reserve funds?

First, performance was influenced by a fall in revenues owing to a stagnation and reduction in the salary base, fiscal transfers, and an increase in benefit payouts.

Second, country-specific factors such as local financial sector regulation, domestic capital market opportunities and access to different investment instruments, the investment mandates of funds, and the funds' liability profile, including cash flow levels, all played a role.

Another relevant factor to be considered is the size of the fund. Fund size appears to have had a bearing on asset allocation, with larger funds more likely to have placed a greater proportion of assets in fixed income investments and a smaller proportion in cash or cash equivalent investments and property.

A role for ISSA Guidelines on Investment of Social Security Funds

The full extent of the lessons to be learnt from the recent past for the investment of social security funds may yet take more time to distil. Nonetheless, one key factor for the healthy management and development of all social security reserve funds is the regulatory framework for the management of assets.

Connected issues to be considered are asset allocation choices, choice of external managers, how to manage external constraints and the key elements of a socially responsible investment strategy.

In this regard, the management of risk and uncertainty is crucial to the creation of long-term value, and well-governed investments make a major contribution to sustainable social security systems. As part of this, the ISSA Guidelines on Investment of Social Security Funds, as a new tool to support decision-making by social security investment managers, will help strengthen longer-term fund values and the securing of positive real investment returns.

The ISSA's periodic mapping of the performance of social security reserve funds is continuing, with the performance of reserve funds in 2012 and 2013 to be published in the Reserve Fund Monitor for ISSA member organizations later in 2014.

The ISSA Centre for Excellence, launched at the World Social Security Forum in Doha in 2013, fosters the transfer of knowledge among ISSA member organizations to achieve administrative excellence. A central role of the Centre for Excellence is to promote the use of ISSA Guidelines on Social Security Administration, internationally-recognized professional standards in social security administration. By defining the benchmark for improvement, ISSA Guidelines support ISSA member organizations to set objectives for achieving – and maintaining – administrative excellence.

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