Investment of Public Pension Funds in the MENA Region

Mohammad M.Sartawi,CEO

 The Third Annual Public Pension Fund Management ConferenceWashington, Sep. 20-22,2004

The World Bank

Sartawi Consulting / (Management and Actuarial Consultants)e - mail : mm_sartawy@yahoo.com

www.sartawi-consulting.com

Contents:

- MENA- Jordan- Sudan- Oman- Bahrain

MENA Countries Indicators

- 10 oil exporters. - 7 significant labor exporters. - 6 depend highly on diversified manufacturing and

service industries. - Total population : 306 million (2002).- Average life expectancy = 69 years. - GDP 670.7 billion US Dollars. - GDP Per capita $ 2193 (2002).

MENA

  Population ( m) Life expectancy (Yrs.)

Under – 5 mortalityrate per 1000

MENA 

306 69 54

Algeria 31 71 54Bahrain 0.67 73 --Egypt 66 69 39Iran 66 69 41Iraq 24 63 125Jordan 5 72 33Lebanon 4 71 32Libya 5 72 19Morocco 30 68 43Oman 2.5 74 --Saudi Arabia 22 73 28Sudan 32.8 58.4 --Syria 17 70 28Tunisia 10 73 26West Bank and Gaza 3 73 --Yemen 19 57 114

MENA

Country Pension Expenditures % of GDP

Algeria 2.7

Bahrain 1.4

Iran 1.2

Jordan 2.4

Morocco 2.1

Tunisia 3.4

Djibouti 2.6

Saudi Arabia 0.2

Egypt 2.2

Yemen 0.45

Lebanon 3.7

West Bank and Gaza 0.8

Pension expenditures of major MENA countries in 2003:

MENA

Country Pension Funds Assets % of GDP

Algeria 1.75Bahrain 50.8Egypt 33Iran 6

Jordan 25Morocco 9

Oman 4.2Tunisia 6.5Yemen 4

Saudi Arabia 135Lebanon 9

Sudan 1.3

The size of Fund assets as % of GDP in 2003

MENA

Market Total Market Capitalization (Billion$)Saudi Stock Market 157.3Kuwait Securities Market 59.5Abu Dhabi Securities Market 30.3Cairo and Alexandria Bourses 27.8Dubai Financial Market 14.3Doha Securities Market 26.7Casablanca Bourse 13.05Amman Bourse 10.9Bahrain Securities Market 9.7Muscat Securities Market 7.2Tunis Securities Bourse 2.4Beirut Bourse 1.5Khartoum Securities Market 0.75Algeria Bourse 0.14Total 361.54

Source : Muscat Securities Market (MSM) Internet Data

Total market Capitalization

MENA

Investment Policies (SSIC)

The main investment policies of SSIC include : - Priority to national viable instruments within

parameters and standards ensuring risk management and liquidity requirements.

- Diversification of asset class, sector and time. - Investment decisions are based on economic

fundamentals thus avoiding speculative instruments. - Follow strict guidelines to ensure safety and diversity

of overseas investments.

Jordan

Asset Class 5-years targets Long term targets

Money Market instruments 5% - 25% 10% - 20%

Fixed Income Securities 7% - 30% 15% - 35%

Listed local Equities 17% - 30% 25% - 40%

Non - listed local Equities 8% - 20% 10% - 20%

Loans 7% - 15% 10% - 20%

Real Estate 3% - 15% 10% - 20%

International Fixed Income 0 - 10% 5% - 10%

International listed Equity 0 - 2% 0 - 5%

Asset allocation policy :-

Jordan

Size and Growth of Investment Fund:

Year Size of investment (m.JD) % of GDP

1980 4.2 0.4

1985 121 6.2

1990 357 13.1

1995 744 16.5%

2002 1627 25%

2003 1930 -

2008 3170 -

2023 12533 -

Jordan

Distribution of investments SSCYear Stocks and

SharesLoans and

BondsReal

EstateBank

Deposits Total

1997 176.1(17.8%)

255.1 (25.8%)

51.5 (5.2%)

505.3 (51.2%) 988.0

1998 191.7(17%)

267.5 (23.7%)

52.2 (4.5%)

619.4 (54.8%) 1130.8

1999 235.5(18.3%)

231.3(18%)

57.5 (4.4%)

763.4 (59.3%) 1287.7

2000 346.6(24%)

281.1 (19.4%)

63.6 (4.6%)

756.4(52%) 1447.7

2001 475.8(30%)

232.6 (14.7%)

84.3 (5.3%)

789.8(50%)

1582.5

2002 503.0(30%)

388.4 (23.2%)

92.4 (5.6%)

690.3 (41.4%) 1674.1

2003 714.6(37%)

487.9 (25.3%)

110.7 (5.7%)

615.8(32%) 1929

Jordan

JSSS Revenues, Expenditures and Surplus in million JD(1980 – 2023)

Year Contribution Revenue (1)

Investment Income (2)

Total Revenues (1+2)=3

Total Expenditur

es (4)

Annual Surplus

(3-4)

Size of Investment

Fund

1980 4.7 0.104 4.8 0.309 4.49 4.5

1985 34.4 5.4 39.8 6.24 33.56 121

1990 50.5 25.4 75.9 20.3 55.6 357

2002 200 65 265 142 123 1674

2003 237 72 309 169 140 1929

2008 400 241 641 295 346 3170

2023 1758 939 2697 1788 909 12533

Jordan

Supply of Investment Instruments

- The type and volume of investment instruments available for pension funds and other investment have developed significantly since the beginning of fund accumulation .

Jordan

- Traditionally, the main investment instruments include bank deposits, physical properties, ( lands, buildings and tourist facilities ) loans and ownership in companies.

Types of Instruments

Due to the increasing demand for investment instruments ( by pension funds and others ) and the economic developments in Jordan in general, more instruments were introduced which can be classified as follows :-

- Cash and cash equivalent- Fixed Income securities - Equities - Physical properties

Jordan

A- Cash and cash equivalent :-

- Time deposits - Certificate of Deposits (CD’s)- Treasury Bills - Commercial papers

Jordan

B- Fixed Income securities

- Government bonds - Commercial bonds - Development bonds - Debentures - Commercial loans - Housing loans

Jordan

C – Equities :-

- In listed companies (listed in Amman Stock Exchange – ASE)

- In unlisted companies - Mutual Funds - Overseas instruments ( Global Investments )

Jordan

D- Physical properties

- Land Plots - Buildings - Tourist facilities- Other physical projects

Jordan

Share of SSC investment in the Market   2002 20031. SSC equities in listed companies:    Market value of SSC portfolio (million JD) 517.2 820Market capitalization (million JD) 5029 7772.8Share of SSC equities 10.3% 10.6%2. SSC bank deposits    SSC time deposits (million JD) 671 464.5Total banks deposits in Jordan (billion JD) 9.4 10Share of SSC deposits in total deposits of Jordanian banks 7.1% 4.7%3. SSC Loans    SSC loans portfolio (million JD) 53.5 69.8Total Jordanian’s banks credit facilities and loans (billion JD) 5.1 5.3Share of SSC loans in total credit facilities 1.05% 1.32%4. SSC real estate portfolio:    Value of SSC land and property portfolio 95 111Total value of real estate market (million JD) 1783 1874Share of SSC real estate in total market 5.3% 5.9%5. SSC Bonds    Value of SSC bonds 216 418Total bonds 1345 1525Share of SSC bonds in total bond market 16% 27.4%

Jordan

The Role of SSC Investment in the Market

- SSC investments (as pension funds) has important role in the development of capital market.

- Considered as a reliable source for long – term capital.

Jordan

The role of capital market for SSC investment includes :-

1- Provide a forum to buy / sell securities at ease thus reducing investment costs .

2- Diversification through investment in exiting companies that are subject to control and distribution of investments in various sectors of the economy and several terms (medium and long- term with respect to time of investment).

3- Allow control of decisions through membership in company boards of directors and through general assembly.

4- Allow profit maximization through dividends and capital gains.

Jordan

Sudan Public Pension System

1- The National Social Insurance Fund (NSIF) covers all Private sector workers working for employers with 5 or more workers as will as all government workers in public organizations and institutions.

2- The Public Service Pension Fund (PSPF) covers all employees in the service of the Government .

3- Total contributors are currently 706000.

4- Total cost of the two schemes including administration costs, stands at 9.5 billion SD at present

Sudan

1- Management of Investment Funds

NSIF and PSPF are governed by a unified Board of Directors with Director General of both funds as member of Board .

Sudan

2- Investment Policy

1- Investment objectives :- - Maximize social protection efforts through improving the

living conditions of the retirees. - Preserve the real value of assets of both schemes - Contribute to the social and economical development and

activate the economy.

2- Investment principles :- - Security - Liquidity - Yield - Economic and Social development.

Sudan

3- Priorities and controls :- - Priority to low risk investment. -Priority to investment projects that require less

execution and follow – up costs - Priority to investments that provide products and / or services

to the retirees. - Coordination of investment plans / programs with the

country fiscal and financial policies.

Sudan

Investment Policy

4- Investment Classes :- a- Short – term investments - Bank Deposits - Shahama bonds ( 3-6 months ) . - Commercial investment( buying and selling goods and produce) for

duration of 3 years only .

b-Medium term investment :- - Bonds ( one year ) . - Lease and contract bonds . - Trade in Khartoum Stock Exchange. - Banks . - Shares of Sudatel ( telecommunication ) . - Food industries.

Sudan

Investment Policy

C- Long – term investment :- - Acquisition of administration buildings for NSIF and

PSPF. - Social investment programs and productive households .

Sudan

Investment Policy

Size and Growth of Investment Funds (NSIF and PSPF)

Year Size of PSPF investment Fund

(Billion SD)

Size of NSIF investment Fund

(Billion SD)

Total size of investment

Funds

%of GDP

1998 3.5 NA NA NA

1999 11.5 NA NA NA

2000 16 17 33 1.1%

2001 22 19 41 1.2%

2002 29 21 50 1.28%

2005* 30 25 55  

* Estimated based on historical growth taking into consideration

Sudan

Distribution of NSIF and PSPF investment

A – NSIF

Year Commercial Investments

( %)

Bank Deposits

(%)

Equities (%)

Real Estate and

Construction Projects (%)

Total(%)

2000 51.4 40.3 8.3 0.0 100

2001 48.5 19.6 11.1 20.6 100

2002 22.3 21.3 34.5 21.8 100

Sudan

Distribution of NSIF and PSPF investment

• B – PSPF Type of instrument % Of total

investmentsCommercial investments 45

Land, Real Estate and projects

23

Shares and bonds 16

Equities 13

Bank deposits 3

T o t a l 100

Sudan

Demand for Investment Instruments by Pension Funds 1- The system costs of both NSIF and PSPF is high at present

where NSIF pays abut 52% of the contributions collected as pension expenditures and PSPF pays about 80% of the contributions collected as pension and administration expenditures.

2- The high systems costs coupled with the high growth rate of expenditures would leave limited flow of investment to the market for a limited time.

3- The size of two funds is currently 50 billion SD and is expected to grow to 55 billion SD in 2005 then to 60 billion SD in 2015 and may deteriorate within couple of years afterwards based on the high growth of the system costs.

Sudan

The types of available instruments are :-

1- Bank deposits .

2- Equities :- - In listed companies. - In unlisted companies .

3- Loans (commercial and Islamic).

4- Trading in basic commodities and produce including purchase and export of some produce like sesame , sugar cane --- etc.

5- Land and real estate projects including buildings and apartments .This activity involves acquisition of existing physical properties as well as development and construction of new projects.

6- Bonds including development and Islamic bonds (shihama and Shamam).

Sudan

The role of NSIF and PSPF Investment in the Market

1- The role of PSPF and NSIF investment in the market become of significance since the beginning of 1997 .

2- Due to lack of financial instruments , PSPF investment were shifted from the long-term real estate investment to commercial investment and other short term instruments including the buying and selling of land, real estate and construction development projects thus contributing to the economic development of Sudan and Maintaining reasonable return.

3- Other parts of the investment (NSIF) were directed towards the improvement of the living standards of the retirees due to high inflation.

4- The investment market in Sudan is very shallow as offerings in the Khartoum Securities Market (KSM) is very limited and market capitalization is very low in terms of both stocks and bonds ( in 2003 KSM market capitalization was 767 million U.S dollars.

Sudan

Major roles of NSIF and PSPF :-

1- PSPF investment provide financing to various projects and institution therefore supporting the mission of the commercial banks by adding complementary and , in certain cases new products and instruments.

2- Participation in major economic institutions thus providing long – term financing . Institution include banks ,industrial and service companies and others.

3- Investments, on short- term basis, through trading portfolios, Khartoum Stock Exchange thus improves market capitalization and turnover . The share of stocks and bonds in PSPF investment reached 16 % in 2002 .

Sudan

Oman Public Pension System- There are twelve public and private pension and social insurance schemes in

Oman.

- The public pension system consists mainly of the Public Authority for Social Insurance (PASI) and the Civil Servants Pension Fund(CSPF) .

- Active contributors of PASI increased from 34000 in 1997 to 65878 in 2002 .

- Insurance expenses paid by PASI were (24.7) , (35.4) and ( 40.9) million RO during the years 2000,2001 and 2002 respectively .

- The CSPF was incorporated in 1986.

- Total CSPF active contributors reached 74294 in 2002 while total beneficiaries were 28843 during the same year.

- Total pensions and other compensations bill paid by CSPF in 2002 was50 million RO.

Oman

Investment Policies/Objectives

- To ensure the scheme’s long term ability to pay future liabilities to the insured employees by achieving good investment returns .

- To properly allocate the investment into different and flexible classes that can maintain the real value of the money and diversify risks .

Oman

The investment policy of CSPF relies upon the following principles

- Safety of investment through diversification of risks and preservation of assets .

- protect the assets value against inflation effects.

- Increase self reliance and self financing of the scheme through improvement of the investment function thus achieving higher income.

- Provide liquidity to finance CSPF future liabilities.

- Contribute to the economic development through participation in commercially feasible projects and development components.

Oman

Both PASI and CSPF invest in instruments as determined by the Royal Decree No.31/96 and the investment guidelines developed accordingly. The investment instruments include:

- Equities in local companies - Local bonds - International Equities - Local Real Estate - Deposits in local and international banks including certificate of

deposits (CDs) - International investment funds - International funds of private shares

Oman

The investment policy of CSPF relies upon the following principles

Year MSM market

Capitalization(M. RO)

Estimated Size of PASI

Investment fund

(m.RO)

Estimated Size of CSPF

investment fund

(m.RO)

Total size of public pension

fund investments (M. Ro)

 % Of

 GDP

% Of market

capitalization

1998 2265NA NA NA

NA NA  

1999 2262 113 91 204   9.02%  

2000 1948 142 114 265 3.47%

13.6%  

2001 1722 157 126 283 3.7% 16.43%  

2002 1948 182 146 328 4.2% 16.84%  

2003 2790 223 178 401 4.8% 14.37%  

Oman

Distribution of PASI and CSPF Investments. a : CSPF 

Year  

Instruments  

1998 

%

1999 

%

2000 

%

2001 

%

2002 

%

Government & Non – government bonds

 16.41

 27.60

 26.05

 23.77

 32

Bank Deposits (RO) 

 63.60

 41.70

 25.21

 30.67

 20.70

 Bank Deposits (US $)

 ---

 ---

 7.32

 6.45

 3.46

Bank Deposits ( UAE Dirahms

)

 ---

 ---

 ---

 ---

 1.21

Equities (Local) 

18 

28.5 

39.23 

37.44 

39.68

Local portfolios *  

 0.99

 1.10

 1.10

 0.62

 0.63

 Real Estate

 0.0

 0.0

 0.0

 0.0

 0.35

  Overseas Investments

 

 1

 1.10

 1.09

 1.05

 1.97

 Total

  

 100

 100

 100

 100

 100

Oman

b- PASI Year

 Instruments

1998% 

1999% 

2000% 

2001% 

2002% 

Government and corporate bonds

17 17 16 17.4 22.2

Bank Deposits, CD’s and short

term investments

29 28 45 53.9 47.6

Equities 45.5  

48 34 26.2 27.4

Real-Estate 2  

3 2 2.5 2.8

Loans 6.5  

4 3 --- ---

Total 

100  

100 100 100 100

Oman

Both Schemes (and Particularly PASI) Is Not Yet in the Maturity Stage. It Is Expected That the Scheme Will Continue to Generate Surplus Thus Establishing More Demand for Investment instruments in the short &medium term.

Estimated size of PASI and CSPF investments relative to market capitalization ranges from 9.02 % in 1999 to 14.37% in 2003 with more potential for growth in the future.

Oman

Oman

Types of Investment Instruments a- Cash and cash equivalent:

   i. Time deposits in local and foreign currencies.    ii. Certificates of Deposits (CD). iii. Treasury Bills .

b- Fixed income securities:   i. Government bonds    ii.  Non-government bonds iii.Commercial loans.

c-  Equities:    i. In listed companies (listed in MSM)   ii. In portfolios

d- Real Estate and projects.

The values of PASI and CSPF portfolios relative to the market size are as shown :-

  2001 2002

1-PASI and CSPF equities in local companiesValue PASI and CSPF equities (million RO )Market capitalization (million RO)

Share of PASI and CSPF equities

 92 1722

5.34% 

  108.41948 

5.56% 2- PASI and CSPF bank deposits

PASI and CSPF value of bank deposits (million RO) Total bank deposits in Oman (million RO) Share of PASI and CSPF in total deposits in Oman banks 

 143  2683

5.33 % 

 117 2777  4.21% 

3- PASI and CSPF bondsValue of PASI and CSPF bonds (million RO) Total bonds (million RO) Share of PASI and CSPF bonds in total bond market 

 59.6422  14.12 %

 87.1 416.4  20.92%

4- PASI and CSPF Real EstateValue of PASI and CSPF Real EstatesTotal value of Real Estate market

Share of PASI and CSPF in Real Estate market

 ---- --

 5.6256.8 2.18 %

Oman

The Role of Public Pension Funds Investments in the Market

Public pension funds investments has provided, and will continue to do so in the future, the market with long term capital thus contributing to the deepening of the capital market in Oman.

Oman

The role of capital market for pension funds and other investments includes:

1- Provide investment opportunities in securities thus reducing investment costs.

2 - Regulate dealings in securities and provide protection to investors .

3- Provide a suitable environment for maintaining the counterbalance between supply and the easy liquidation of funds invested in securities.

4- Diversification through investment in exiting companies that are subject to control

Oman

Bahrain Public Pension System

Bahrain

The public pension system of Bahrain consists of:- The pension Fund Commission (PFC)- The General Organization for the Social Insurance.

The number of contributors of PFC increased from (13275) in 1976, to 37690 in 2002 and the number of beneficiaries ( pensioners and survivors ) increased from (15191) in 2000 to (21062) in 2002. The PFC is a partially funded defined-benefits scheme with the size of investment fund reaching 917.5 million BD at the end of 2002.

Total contributors covered by GOSI increased from (158894) in 2001 to (174809) in 2002 while the number of pensioners increased from 5976 to 6964 in the same years .The size of GOSI investment fund reached 721.6 million BD at the end of 2002 .

Investment Policies

Bahrain

GOSI and PFC aim at the preservation and maximization of the real value of the assets through diversification and risk management. Investment polices are based on the principles of guarantee, profitability and liquidity

The investment funds follow the conservative investment approach and concentrate their investments in Bahrain thus supporting economic activities and contributing to the economic and social development of the country.

The public pension funds size developed as follows (in million BD)

Year GOSIInvestment Fund

PFCInvestment Funds

Total Public Pension

Investments Funds

1999 --- 746.7 ---

2000 664.5 814.7 1479.2

2001 707.1 866.5 1573.6

2002 721.6 917.5 1639.1

2003 773.3 --- ---

Bahrain

Asset class

Bonds Bank Deposits

Stocks Loans Real Estate

Alternatives

Total  

Year GOSI

PFC GOSI

PFC

GOSI

PFC

GOSI

PFC

GOSI

PFC

GOSI

PFC

GOSI PFC

1999 _ 26.1%

_ 33.7%

_ 11.5%

_ 9.6%

_ 0.8%

_ 18.3%

_ 100%

2000 22%

29.4%

39% 29.2%

20%

9.7%

0.0 12%

5.4%

0.7%

13.6%

19%

100% 100%

2001 20%

23.8%

40% 29.7%

22%

13%

0.0 12.2%

4.5%

1%

13.5%

20.3%

100% 100%

2002 22%

22.6%

40% 27.9%

15%

15.8%

0.0 12.2%

4% 1%

19%

20.5%

100% 100%

2003 14%

_ 47% _ 16%

_ 0.0 _ 4% _ 19%

_ 100% 100%

Bahrain

Year Percentage Investments In Bahrain

GOSI PFC

Percentage Global Investments

GOSI PFC

Total Investments

GOSI PFC

2001

2002

2003

--- 83.2% 77 ---74

--- 16.8%

23% 17.2%

26 % ---

--- 100% 100% 100%  100% ---

Bahrain

The surplus generated by GOSI and PFC over the period ( 1999-2002)

Bahrain

Year GOSI surplus(million BD)

PFC surplus(Million BD)

Total demand for investment instruments (million BE)

1999 55.8 51.0 106.8

2000 52.2 57.4 109.6

2001 49.4 53.5 102.9

2002 52.0 43.7 95.7

Types of Instruments:

Bahrain

a-  Cash and cash equivalents:-   time deposits ( in BD, US $ and others )-  Treasury Bills -  Certificate of Deposits (CDs)

b-  Fixed Income Securities: - Government Bonds, Commercial Bond and International Bonds. - Islamic Bonds (Sukuk –Tajer and Salam). -  Commercial loans and Loans to PFC contributors. - Pension commutation (loans).

c-    Equities: -  In listed companies (in Bahrain Stock Exchange – BSE).-  In unlisted companies. -  Mutual funds.

d- Land, real estate and physical properties.

Share of GOSI and PFC Investments in the Market

During 2001 and 2002, GOSI and PFC investments were distributed in various instruments with allocations shown above . The values of GOSI and PFC portfolios relative to available instruments ( i.e market size) were as shown :

Bahrain

  2001 2002

1-Equities GOSI and PFC portfolios (million BD)Market Capitalization (million BD)Share of GOSI and PFC equities

 268.22500

10.7%

 253.22900

8.73%

2- Bank deposits GOSI and PFC bank deposits (million BD)Total Bank deposits( million BD)

Share of GOSI and PFC deposits in total deposits in Bahrain banks

 540.22717.9

19.9% 

 544.52840.5

19.2%

3- Loans PFC loans ( million BD)Total banks credit (million BD)

Share of PFC in total banks credit

 105.71448.2

7.3%

 1121629.8

6.8%

Bahrain

The Role of GOSI and PFC Investments in the Market

Public pension funds were established in the mid of 1975 and Bahrain Stock Exchange commenced operation in 1989 with 29 companies listed on the Exchange. Pension funds investment size has grown to around 4.3 billion U.S Dollars at present with annual demand for investment instruments of around 265 million US Dollars.

The conservative investment of pension funds and the long-term nature is considered an important element in providing long-term capital that flows into the investment market.In addition, public pension fund investments require diversification of investment in various instruments thus enhancing the development of new financial instruments.

Bahrain

The capital market has expanded in terms of capitalization and type of instruments since the operation of BSE in 1989.

Besides meeting the increasing demand for investment in Bahrain, BSE mission is to be an innovative and competitive international capital market.

Bahrain

The strategy focused on four main areas,

- Strengthening the legal infrastructure.- Adopting automated technical system.- Staff training.- Marketing and promotion.

Bahrain

Thank You

Discussion