1. FINANCIAL GOVERNANCE AND RISK MANAGEMENT OF SOCIAL SECURITY

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

3. 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:

4. 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

5. 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

6. 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.

7. - 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.

8. 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.

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

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

11. 2.0Actuarial Reviews

12. 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.

13. 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.

14. 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.

15. 3.0 Governance of Investment Processes

16. 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.

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

18. 4.0 Risks – Management of Risks

19. 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

20. 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.

21. 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

22. 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)

23. 7.0 Economic Risk 7.1 Low growth in the formal sector employment and effect on membership 7.2Large number of contributors stopped contributing due to down-sizing of enterprises. Effect is inability to accumulate enough years to qualify for a pension.

24. 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.

25. 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

26. 8.2Poor individual investments »Poorly conceived and executed projects »Poor project execution leading to huge cost over runs making projects uneconomical 8.3Inadequate diversification »Capital markets not well developed 8.4Mismatch of assets/liabilities »Over dependence on Treasury Bills and short term money market instruments

27. 9.0Political Risk 9.1Structural Changes Addition of new benefits without commensurate increase in contribution rate. 9.2Over generous promises Pressure to provide unrealistic benefits not related to contribution bases. 9.3Political interference In management In investment decision-making

28. END OF PRESENTATION