Managing Savings And Portfolio Investments In a Pension Fund: A Comparative Study Of Nssf and Selected Banks

ABSTRACT

This research study was carried out with the intention of finding out the inefficiencies existing in NSSF savings, investments highlighting the possible elements of Mismanagement. It was aimed at finding the value of returns on investments, the rate of interest on NSSF savings to see if these levels are enough to reward the saving workers adequately or not.

The study made use of secondary data from NSSF Annual reports for the periods 1999-2004, Annual reports of the selected banks namely Orient, Baroda, Crane, Centenary, Stanbic and Nile. It also used data from Bank of Uganda Quarterly Economic Reports for the same period and some information from the Uganda Bureau of Statistics’ Statistical Abstract (2005). The study results show that investments of NSSF are actually inefficient ie 9.1 percent in 2003 and 10.7 percent in 2004 when average for banks in the same period was 37.6 percent in 2003 and 36.7 percent in 2004. Interest payments on savings were found to be 4.3 percent slightly above the rate of inflation which was 3.2 percent. This left a very minute margin to the savers. The rate of savings offered by NSSF was (4.3 %) far below that offered by banks on Time deposits (9.0 %) and this means that savers would have benefitted better if these savings had been made in banks. It was also found that operational costs are too high and they ate into the revenues of the fund in such a way that savers were left with about 50 percent of the income earned which is not a fair figure.

It is recommended here that NSSF should take a bold step of confronting risk byinvesting in lending to the public who are running private business, individuals and also through micro — finance credit. In so doing it is envisaged that NSSF will be able to harvest higher returns, consequently it will be in better position to give the members a higher rate of interest on their savings. The end result is that members will be able to receive better benefits on retirement. NSSF should

TABLE OF CONTENTS:

Declaration

Dedication

Acknowledgements:

ABSTRACT:

CHAPTERONE 1

LU INTRODUcTION 1

Li Background to the Problem: 1

L2 Problem Statement: 2

L3 Source of Inspiration: 3

L4 Purpose of Study: 5

L5 Objectives of the Study: 5

L6 Research Questions: 6

L7 Significance of study: 6

L8 Scope of the Study: 6

CHAPTERTWO: 8

2.0 LITERATURE REVIEW: 8

2d Social Security: Its meaning and origins 8

2.Li Meaning Of Social Security: 8

2~L2 Historical Perspective: 9

2~2 Common concepts: 10

2~2.4 Social security and Poverty: 13

2~3d Efficiency Versus Equity: 13

23.2 Designing Incentives: 15

2.33 Regulation: 16

2.3.4 Supervision: 16

2.3.4.1 Lessons from Banking Industry: 16

2.3.5 Investment of Pension Funds: 17

24 Social Security in Other Countries: 18

2.4.1 Chile 18

2.4.2 USAVsJapan 19

2.4.3 Mauritius: 20

2.5 Social Security in Uganda: 22

2.5.1 Background: 22

2.5.2 NSSF Mission Statement: 22

CHAPTER THREE: 25

3.0 CONCEPTUAL FRAMEWORK: 25

3.1 The saving Concept: 25

3.1.1 Definition of saving: 25

3.1.2 Saving a fixed amount: 25

3.1.3 Annuity saving: 25

vii

3.2.4 Identifying Risks of Pension Funds: .27

3.2.5 Portfolio risks: 27

3.2.6 Agency risks: 28

3.2.7 Systematic risks: 29

3.4 Portfolio Investment: 30

3.4.1 Portfolio return: 30

3.5 Capital Assets Pridng Model — CAPM 32

3.6 Savings and Investments under Inflation: 33

3.6.1 Calculation of the real Interest rate: Fischer Effect 33

CHAPTER FOUR~ 36

4.0 RESEARCH METHODOLOGY 36

4.1 Sources of data: 36

4.2 Data Presentatiorr 37

5.0 DATA INTERPRETATION, ANALYSIS AND FINDINGS: 38

5.1 Investments 38

5.1.1 Investment Inefficiency 38

5.2 Definition: Returns On investments: 44

5.2.1 Returns on Investments for NSSF 44

5.3.1 Efficiency Defined: 47

5.3.2 Definition: Returns on Investments: 47

5.4 Investment efficiency, study results 47

5.5 Sources of Inefficiency: The Investment Mix: 48

5.5.1 Treasury Bills: 48

5.5.2 Investments in Tradable stocks 49

5.5.3 Real Estate Investments 49

5.6 Elements of Mismanagement 51

5.6.1 Management of Inflation: 53

5.7 The Savings Concept: 56

5.7.1 Fixed amount: 56

5.7.2 Annuity savings: 59

5.8 Markowitz Theory of Investment: 60

5.8.1 Expected return under Markowitz 60

5.8.2 Markowitz theory and Risk Determination: 62

5.8.3 Limitations of Markowitz Application: 63

5.9 Capital Assets Pricing Model and Determination of Risk Premium

64

5.9.1 The Model: 64

CHAPTER SIX: 65

6.0 CONCLUSION, RECOMMENDATIONS AND FINAL REMARKS 65

6.1 Research questions revisited: 65

6.1.1 Questionone: 65

6.2 Conclusions: 67

viii

63 Recommendat~ons~ 67

6~4 Study l~mftat~ons~ 68

6~5 Suggested Areas for further Research~ 69

BIBLIOGRAPHY~ 71

Appendices 81