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New ISSA research: Social Security Reserve Fund Monitor

In a number of countries the assets held by reserve funds represent a significant percentage of GDP. Larger funds often manage assets of over USD 20 billion. The ISSA's Social Security Reserve Fund Monitor: 2012–13 report, covering the performance of reserve funds from 25 social security organizations that manage over USD 3,000 billion in assets, presents new information on returns, asset allocation, use of external managers, and other aspects of these funds' operation.

The ISSA report focuses on the 2-year period up to 31 December 2013, but also considers the longer-term performance of reserve funds that were previously mapped in the inaugural Social Security Reserve Fund Monitor: 2009–2011 report. Data is thus made available concerning asset allocation and changes in asset allocation over the 2012–13 and 2009–2013 periods, with the analysis undertaken according to fund size. It also discusses policies and constraints, including cash flow, which impact asset allocation choices and returns on assets.

Five key findings for social security reserve fund performance:

  • Social security reserve funds recorded positive real returns in 2012 and 2013.
  • Nominal and real returns achieved by the smaller reserve funds that responded to the survey outperformed returns achieved by the larger funds.
  • Over the 2-year period there has been an increase in the proportion of total assets invested in equities.
  • Reserve funds with a greater proportion of assets in equities seem to have achieved better returns.
  • Net cash flows (contributions less benefit payments and expenses) have in general fallen over the period, resulting in less new money for investment and further constraints on asset choices.

Reserve funds returns on assets

The ISSA reports that the average nominal returns on assets (net of fees) in 2012 and 2013 were 8.83 per cent and 7.80 per cent respectively, with average real returns of 6.42 per cent in 2012 and 5.32 per cent in 2013.

As regards the distribution of returns, the median nominal returns on assets in 2012 and 2013 were 8.74 per cent and 8.16 per cent, respectively. The median real returns of 5.73 per cent in 2012 and 4.95 per cent in 2013 show more variance, perhaps reflecting the move from real to absolute benchmarking undertaken by some reserve funds. While maxima and minima varied, the distribution of returns of half of the reserve funds (between upper and lower quartiles) remained relatively constant in both years (Figures 1a and 1b).



Eleven of the 25 social security institutions that provided data for the report also provided data for the inaugural report covering the years 2009–2011. Of these 11, ten provided rate of return figures for the years 2012–13. The average annualized nominal and real returns for these reserve funds over the 5-year period (from 1 January 2009 to 31 December 2013) amounted to 7.52 per cent and 5.07 per cent, respectively. Notably, leaving aside the year 2011, the average real returns achieved across 2009–2010 and 2012–13 lie between 6.35 per cent and 8.41 per cent for these ten reserve funds (Tables 1 and 2).



Asset allocation

Over the assessed 2-year period there was a reduction in the share of assets in fixed income investment and an increase in equity investment. Among large funds (>USD 20 billion under management), medium-sized funds (between USD 1 billion and USD 20 billion) and small funds (<USD 1 billion), the medium-sized funds recorded the largest increase in assets placed in equities, with an average 5 per cent increase in allocation. For all the reserve funds that participated in the survey, the average percentage of assets placed in fixed income reduced from 52.6 per cent to 50.5 per cent over 2012–13, while the share in equities increased from 19.7 per cent to 23.3 per cent (Figure 2a). However these average changes hide larger individual variations which, in turn, appear to vary depending on size of the fund.

The relatively larger pension funds have less fixed income and cash investments, with correspondingly greater proportionate amounts in equity. Specifically, for large funds equities make up a proportionally higher percentage (an average of 33 per cent) of total assets at 31 December 2013, a figure that drops to 23 per cent for medium sized funds and 14 per cent for smaller funds (Figures 2b–2d).


Cash flow constraints

A key driver of performance and asset allocation choices is the cash flow situation of the social security scheme. Stagnation or falls in employee and employer contributions in many systems and the influence of reducing interest rates means that this issue is increasingly important. For a significant number of funds that participated in the survey (37 per cent of funds in 2012 and 42 per cent of funds in 2013), contribution income was less than benefit and expense outflows, resulting in negative net cash flow which influenced asset choices and, in particular, investment in income-generating assets. In addition, the trend is towards a worsening cash flow position, with over 60 per cent of funds having experienced deterioration in net cash flow balances over the 2-year period.

Other key findings

The report collates other information reflecting the environment and regulations impacting investment choices. Some additional findings are:

  • Two-thirds of participating reserve funds used external investment managers, with 62 per cent of those using three or more.
  • Close to 90 per cent of participating reserve funds stated that their investment management was subject to a regulatory framework.
  • Two-thirds of the participating reserve funds have a Socially Responsible Investment (SRI) policy. Such SRI policies, however, vary significantly in their scope.

Although practices change continually, certain trends strengthened over the last years and can be increasingly observed in the operations of social security reserve funds as well as of other large institutional investors. These include but are not limited to:

  • A reassessment of the approaches to risk management.
  • A move to avoid over complex assets, particularly for institutions with limited governance resources.
  • The use of absolute benchmarks.
  • A reduction in the concentration of assets.
  • A move to liability-driven investment.
  • Growing infrastructure investment and other "alternative" asset classes such as hedge funds, commodities and catastrophic risk.

More generally, these findings represent an important contribution to the ISSA's investment-related activities, not least of which are the ISSA Guidelines on Investment of Social Security Funds that support the work of social security organizations in developing governance structures in the area of investment management. The guidelines are supported by relevant reference sources and by other ISSA Centre for Excellence activities, such as the ISSA Academy workshops and the ISSA Academy diploma programme.

Source: ISSA. 2015. Social Security Reserve Fund Monitor: 2012–13. Geneva, International Social Security Association.


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