THE ROLE OF FIXED INCOME IN PENSION SCHEME INVESTMENT IN GHANA

ABSTRACT

Pension scheme providers in Ghana adopt different asset allocation (the proportion of pension funds that need to be invested into different assets like equities and bonds) as an investment strategy. For instance, SSNIT seems to adopt a 60% bond allocation (fixed income investment) and 30% equity allocation (non-fixed income investment) as an investment strategy over the last decade. This study investigates the role of fixed income in pension schemes investment in Ghana by specifically looking at the asset allocation and the initial investment required to make the scheme solvent in the future at a specified high probability after matching all liabilities in Ghana. This thesis examines some basic risk and return characteristics of historical data. The best asset to invest in without matching liabilities as well as the liabilities paid by pension schemes in the future is also investigated. The asset allocation and the minimum initial fund required to make a scheme solvent at a specified probability in the future after matching liabilities using a stochastic asset-liability model under the closed pensioners’ portfolio is also examined. The stochastic asset model (mean-variance model) is adopted in the projection of returns of asset classes as well as the determination and projection on liabilities paid by pension schemes over a 40-year period. The investment strategy is examined using a stochastic asset-liability model. Looking at the assets-only analysis of pension schemes without matching their liabilities, equity appears to be an attractive asset classes to invest in. However, considering asset-liability analysis, bonds (specifically One-year bonds) are the best-matched liabilities since they have good risk-adjusted returns and are less risky. The asset allocation moves from equity towards bonds (specifically One-year bonds) at a higher solvency level and the minimum investment required also increases as the solvency level increases. This study has a significant implication for adopting the appropriate investment strategy by pension fund managers.