Originally aimed at safeguarding the value of financial assets and ensuring the financial viability and long-term sustainability of pension schemes, investing social security reserve funds has surged to become a core business process in social security administration. At the onset, investment decisions were informed essentially by the investors’ quest for capital and guided by the fundamental principles of safety, liquidity and yields with a predominant focus on financial instruments and/or financial markets (Cichon et al. 2004).
However, the modern day practice of investing social security reserve funds in Africa has surpassed the narrow pension-fund focus to include investments by social protection schemes providing short and medium-term benefits such as sickness, maternity, work injury and unemployment insurance schemes. Additionally, investments principles have evolved from the guiding principles of safety, liquidity and yields to include the socio-economic and sometimes political dimensions of social protection with an increasing inclination towards Economically Targeted Investment (ETI) and Socially Responsible Investment (SRI) of social security reserve funds.
There is a domineering perception that social security reserves play a vital role in ensuring the long-term sustainability of social security schemes. Nonetheless, Plamondon et al. (2002) reveal that social security reserves play a more important role in social protection policy design – fixing contribution rates, as well as supporting the development of the macro-economic environment and social policy framework. Thus supporting the gradual yet progressive shift from investing social security reserves for profits to investing for value creation.
Investing for profits is driven by the quest to safeguard the value of assets – essentially financial resources, to guarantee the short-term financial viability and long-term sustainability of social security schemes. Thus allotting credence to the principles of safety, liquidity and yields. On the other hand, investing for value creation is driven by the belief that greater efficacy and efficiency will reduce administrative cost and compensate for forgone profits. This is the rational for investing in cost cutting measures like information and communication technology (ICT) and human capital development.
Alternatively, investing for value creation has taken forms aimed at optimising contribution revenue and minimising benefit expenditure in lieu of making profits to finance potentially higher levels of benefits expenditure. This has favoured the investment of social security reserves in cost saving initiatives like prevention and/or revenue generating ventures like formal job creation/employment promotion as well as health and social action initiatives aimed at promoting social security protection for all.
These investment beliefs bring about competing goals and opportunities for social security administrations the world over. In Africa, the region with the highest deficit in infrastructural development and social security protection (ILO, 2017), the investment of social security reserve funds becomes even more crucial.
This article seeks to explore the concept(s) and explain the rational for investment for value creation in lieu of the narrow focus on profitability as a means to enhance the financial viability and long-term sustainability of social security systems and to extend coverage. It presents a synthesis of investment practices of member institutions of the International Social Security Association (ISSA) from the African Region with a focus on the entries to the ISSA Good Practice Award for Africa Competition 2020.
Theoretical empirical framework for investing social security funds
Historically, investing social security surpluses has been mainly through financial markets and/or financial market instruments as a means to transfer capital from social security administrations to entrepreneurs. Typically, these surpluses are invested with the justified expectation of positive returns i.e. profitability, taking into account safety and liquidity requirements of social security schemes (Cichon et al, 2004).
While these principles remain relevant, the rise in surpluses to constitute reserve funds and the deferral/suppression of the need to liquidate investments to cover recurrent expenditure has brought about new dynamics in investing social security funds. In practice, the investment paradigm has tilted from investing for profits to investing for value creation without downplaying the safety and liquidity requirements. Thus leading to new forms and ways of investing social security funds including scheme development and advancement, public infrastructure and/or investment in self-managed social and health care infrastructure.
Despite the shift in from investing for profits to investing for value creation, the overriding objective of the financial viability, solvency and long-term sustainability of social security schemes remains primordial in investment decisions. However, investment beliefs and approaches have evolved across countries and among social security institutions, thereby bringing to light a different perspective to the fundamental investment principles of safety, liquidity and yields.
For instance, social security institutions generally have two main categories of expenditures – administrative and benefit expenditure – and two main categories of revenue – contribution income and investment income. The net operating surpluses/deficits are obtained by deducting the total operating expenditures from the total revenues. Where institutions opt to invest in scheme development – for instance in ICT, as a compromise for revenue generating investments, there is a likelihood to improve administrative efficacy and efficiency with net reduction of administrative expenditure. Under such circumstances, the decrease in administrative expenses will compensate for the forgone profits – investment returns.
Alternatively, should the scheme elect to invest in infrastructural development and/or employment promotion initiatives, there is a tendency for a general rise in employment with a potential to extend social security coverage. Where this obtains, there is potential rise in contribution income to compensate for the forgone investment income. This is the rational for the increasing inclination of social security administrations to commit to Economically Targeted Investments (ETI) and/or Socially Responsible Investment (SRI).
Furthermore, declining interest rates, saturation of financial markets – domestic and international, and/or restrictions on cross-border investments support the accumulation of social security reserves constituting an important source of domestic capital. With limited demand for capital by entrepreneurs due to increasing investment risks, ill-equipped and or inefficient domestic financial markets or general economic downturns, social security administrations accumulate more than contingency reserves, leading to excess liquidity with a risk of administrative inefficacy and/or inefficiency and political interference.
In an effort to mitigate these risks, ISSA member institutions in the African region are developing new strategies and adopting new approaches in investing social security funds. With due regard to the fundamental principles of safety, liquidity and yields, social security administrations are increasingly inclined towards investing for value creation by investing in socio-economic development, infrastructure and health care as well as social action initiatives aimed at supporting socio-economic development, as well as stimulate domestic demand and job creation. The shift from investment for profits to investment for value creation affords new opportunities and challenges for social security administrations (Willis Towers Watson and International Social Security Association, 2019).
Worthy of note is that investment for value creation – ETIs and/or SRIs – generally have longer maturity periods, and are hence assessed based on solvency and net worth in lieu of short-term measures of liquidity and yields. However, safety remains an overriding principle in investing social security funds. Additionally, ETIs and SRIs are generally not envisaged for liquidation and/or disposal in the short to medium term to finance recurrent social protection expenditure and/or administrative cost. Hence, they constitute an alternative financing base for social protection over longer time horizons.
The idea of investing for value creation is brought to fore in the following section with a synthesis of recent investment practices among ISSA member institutions in the Africa, with a focus on investment related good practice submissions made during the 2020 ISSA Good Practice Award Competition for Africa.
Investment for value creation: A synthesis of investment practices of ISSA member institutions in Africa
A look at the catalogue of good practices submitted to the 2020 competition paints a good picture of the shift in investment beliefs from investing for profits to investment for value creation. While the foundational instruments remain ETIs and SRIs, the United Nations Sustainable Development Goals for 2030, in particular goal 7 – Affordable and clean energy, goal 8 – Decent work and economic growth, goal 9 – Industry, innovation and infrastructure, and goal 13 – Climate action, affords new investment opportunities and challenges for ISSA member institutions in Africa.
With the new investment dynamic of value creation over short-term profitability and liquidity priorities, ISSA member institutions have expanded their asset classes to include subsidiaries through acquisitions and takeovers, increased investment in health and social services, tourism and hospitality, infrastructure as well as job creation and employment promotion. Others, especially work injury schemes, have taken on investment in prevention and rehabilitation to minimise the incidence and impact of work accidents and occupational diseases and promote return to work with a huge cost saving potential.
Acquisitions and takeovers
Social security institutions are in a traditional business of registering beneficiaries/contributors, collecting contributions and paying benefits to eligible beneficiaries. However, they take on subsidiary activities including the investment of surpluses/reserve funds and encounter challenges with respect to the collection of contributions from inviable and/or defiant contributors – employers.
Interestingly, ISSA member institutions in Africa such as the National Social Insurance Fund (NSIF) of Cameroon have capitalised on investment opportunities to overcome challenges related to the collection of contributions from solvent yet financially constrained employers. This is epitomised in the settlement of debts through non-monetary means. In lieu of employing forceful measures to recover contributions from employers with liquidity constraints, the NSIF have opted for a non-monetary compensation mechanism to convert outstanding debts into shares and/or takeover of assets in companies with outstanding debts.
One year after the implementation of this approach, the NSIF has recovered over francs CFA (XAF) 15 billion CFA Franc BEAC (XAF) representing close to 8 per cent of the over 190 billion XAF initially declared as bad/irrecoverable debts. Whence the materialisation of the acquisition of two urban plots, the settlement of public tender invoices for goods and services, offsetting telephone and internet bills of the national telecommunications operator and some 20 service providers. This has resulted to an enhancement of compliance and collection of outstanding social security contributions (ISSA, 2020a).
Environmental protection and renewable energy
Over and above the traditional duties of providing social security protection to the population, social security institutions have Corporate Social Responsibility (CSR). This responsibility is reinforced by the principles of the United Nations Global Compact and the Sustainable Development Goals for 2030 on the protection of the environment.
In response, the Local Authorities Pension Trust (LAPT) of Kenya invested for sustainable value creation with a focus on environmental protection and the promotion of employment and decent work as an alternative to traditional investment practices. In a bid to curb carbon emissions, the LAPT invested for the installation of solar photovoltaic (PV) systems to boost sustainable energy consumption and management.
The successful installation of the solar PV system enabled the institution to save over 25,000 United States Dollar (USD) from August to December 2019, an average of USD 5,000 per month on electricity bills and, by extension, an overall reduction in administrative cost. The use of the solar PV system equally the averted the emission of up to 19 tonnes of carbon dioxide (CO2) into to the atmosphere, thereby contributing to curb global warming and atmospheric pollution (ISSA, 2020b).
Health and social services
Access to health and essential social services constitute a crucial element of the universal social protection agenda. While social security institutions have a fundamental duty to respond to the financial dimension of universal social protection, they can play an equally important role in providing health infrastructure and social services through the investment of social security reserve funds.
In this drive and in a context characterised by escalating health care cost, the Mutual Benefit Society for Public Employees (Mutuelle de la Fonction Publique – MFP) of Burundi resorted to invest in the gradual roll-out of its own pharmacies near partnering public hospitals. Thus it is gaining grounds to regulate the cost of drugs, improve outreach to patients and members, offset financial imbalances between and strengthen its financial viability and long-term sustainability (ISSA, 2020c).
In a similar vein, the National Social Security Authority (NSSA) of Zimbabwe invested in customised housing for severely disabled pensioners under the “Dzimba” project. NSSA operates a full rehabilitation programme. However, it was not complemented by a housing programme to address issues of homelessness among seriously injured workers. With the realisation of the “Dzimba” project, there has been an impressive reduction in the length of stay for injured workers (re-)admitted at the Workers’ Compensation Rehabilitation Centre from nine months to less than a week. It equally led to a drop of 33 per cent and 71 per cent in the number of admissions and readmissions for the treatment of pressure ulcers respectively (ISSA, 2020d). Thus leading to a drop in the cost of running the rehabilitation centre and improving the living conditions of injured workers.
Jobs creation and employment promotion
Social protection and employment share proximity and mutuality under the social justice and decent work agendas. While social security institutions commit to extend coverage to vulnerable yet unprotected population groups, they are confronted with the challenge of high levels of informal and/or precarious employment, especially in developing economies south of the Sahara. This has been a major obstacle to extend social coverage of contributory social security schemes, which dominate the social protection landscape in Africa.
Faced with these challenges and committed to promote social security on the continent, ISSA member institutions are making strides to create more and better jobs and boost (youth) employment through the tactful investment of social security reserve funds. The National Social Security Fund (NSSF) of Uganda has embarked on this journey by investing to facilitate employment opportunities through innovation.
The NSSF established a connection between youth empowerment, employment and extending social coverage by supporting the start-up ecosystem to drive new opportunities of economic development through the provision of support to potentially scalable businesses. This, in turn, drives a domino effect of opportunities that includes employment, government collections (taxes, NSSF, etc.), skills advancement and potential investment from external investors. Thus leading to entrepreneurial job creation and employment promotion opportunities with far-reaching impacts on extending coverage and enhancing the financial viability and long term sustainability of the scheme (ISSA, 2020e)
In the same vein, the Social Security Commission (SSC) – Namibia invested through the Development Fund of the SSC to create a platform aimed at stimulating job creation in response to high levels of unemployment. Through the platform and partnership with stakeholders, it was made apparent that funding developmental projects contributes in addressing needs of beneficiaries and specific needs of the country or location in terms rural job creation, poverty alleviation, and skills development with far-reaching impacts in societal development and extending social security protection to the most vulnerable clusters of society (ISSA, 2020f).
Prevention and rehabilitation
Social security schemes, in particular pension, health and sickness, and/or work injury schemes are confronted with the perennial challenge of growing expenditure levels due to population aging and/or rising health care cost and increasing morbidity and chronic disease prevalence among insured population groups. This is compounded by increasing socio-economic volatility, saturation of financial markets and declining interest rates amidst increasing invest risks.
Despite these challenges, pension schemes are making recourse to ETIs and SRIs accompanied by measures to stimulate employment through labour market interventions to increase contribution revenue and generalised reforms aimed at ensuring the financial viability and long-term sustainability of public pension schemes. On the other hand, health and sickness as well as work injury schemes have a window of opportunity to curb the materialisation of contingencies through prevention, rehabilitation and the promotion of operational and occupation safety and health (OSH). In so doing, there is a potential to reduce the incidence of work accidents and occupational diseases and facilitate return to work. This can reduce benefit expenditure and reinforce the financial viability and long-term sustainability of these schemes.
The National Social Security Fund (Caisse nationale de sécurité sociale – CNSS) of Djibouti established an Occupational Risk Prevention Policy as an integral part of its investment strategy. Prior to the policy, injured workers received compensation for industrial accidents and occupational diseases leading to hikes in benefit expenditure with far-reaching consequences on the financial viability of the scheme. With the deployment of the policy, there was an improvement in the well-being of workers and a decline in the number of accidents among construction, material handling and hospitality workers, reaching 35 per cent of companies affiliated to the CNSS within five years (ISSA, 2020g).
Tourism and hospitality
While the investment industry gets complex and congested, social security administrations are gaining new opportunities to invest in the tourism and hospitality industry with an increasing demand for capital especially in developing economies. The World Travel and Tourism Council – WTTC in conjunction with Oxford Economics (2020) found that the travel and tourism sector experienced 3.5 per cent growth in 2019, outpacing the global economy growth of 2.5 per cent for the ninth consecutive year. Over the past five years, one in four new jobs was created by the sector, making travel and tourism a good partner for governments to generate employment.
To tap into this growing potential, the Social Security Fund (SSF) – Libya invested in the tourism and hospitality industry through its project Investment hotels. The project has seen the construction of 18 hotels, and three tourist villages employing over 3,700 employees spread over the hotels and villages. This realised a total of 228,039,865 Libyan Dinars (LYD) in investment returns for the period of 1994–2010 averaging 13,414,109 LYD per annum (ISSA, 2020h). From the experience of the SSF – Libya, it is evident that investing in tourism is considered a means to support economic development, job creation and employment promotion and as an instrument for the extension of social protection in developed and developing countries alike.
In an increasingly complex and uncertain investment environment, cost cutting and/or cost savings initiatives are an alternative for profits and play a crucial role in value creation for social security systems. Additionally, revenue generation through employment promotion initiatives and/or investment in measures to broaden the contribution base through job creation and promotion of decent work as well as measures to enforce compliance and enhance contribution collection can play a crucial role in extending effective coverage and improving the financial viability and long-term sustainability of social security systems.
It is therefore important for social security administrations to assess their investment goals and take advantage of new investment opportunities within the framework of investing for value creation. Investing for value creation affords alternative investment options that go beyond the focus on safety, liquidity and yields to engulf short-term liquidity management and strengthen the long-term financial sustainability of social protection systems. Experiences of ISSA member institutions in Africa reveal that:
- There is a gradual shift in investment beliefs from investing for profits guided by the fundamental principles of safety liquidity and yields to investing for value creation where safety and solvency are the fundamental determinants of investment decisions.
- In a context characterised by increasing complexity and declining returns/interest rates, ISSA member institutions from Africa are exploiting new investment opportunities and implementing innovative strategies to tackle new challenges.
- Investing social security reserve funds have surged to become a core function in social security administration with a huge potential to influence the socio-economic trajectory of countries especially in low and middle-income countries.
Through innovative developments, African social security institutions show investment approaches aiming at value creation without downplaying the safety of invested funds in the drive to improve administrative outcomes and strengthen the financial viability and long-term sustainability of social security systems.
Cichon, M. et al. 2004. Financing social protection: Quantitative methods in social protection series. A joint technical publication of the International Labour Office (ILO) and the International Social Security Association (ISSA).
ILO. 2017. World social protection report, 2017 – 19: Universal social protection to achieve the Sustainable Development Goals. Geneva: International Labour Office.
ISSA, 2020a. Debt settlement through non-monetary means. Good practice of the National Social Insurance Fund – Cameroon: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020b. Alternative investment options for social security institutions: Green energy. Investment in solar photo-voltaic systems to boost sustainable energy consumption and management. Good practice of the Local Authorities Pension Trust – Kenya: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020c. The gradual roll-out of the Mutual Benefit Society pharmacies across the country. Provision of drugs to insured parties at a socialized rate. Good practice of the Mutual Benefit Society for Public Employees – Burundi: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020d. Project “Dzimba”: Customised housing for severely disabled pensioners. Good practice of the National Social Security Authority – Zimbabwe: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020e. Facilitating employment opportunities through innovation. Supporting sustainable employment by intervening in the start-up ecosystem. Good practice of the National Social Security Fund – Uganda: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020f. Namibia: Towards sustainable employment creation. Good practice of the Social Security Commission – Namibia: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020g. Establishing an occupational risk prevention policy. Good practice of the National Social Security Fund – Djibouti: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
ISSA, 2020h. Investment hotels. Good practice of the Social Security Fund – Libya: ISSA GPA Competition, Africa 2020. Geneva, International Social Security Association.
Plamondon, P et al. 2002. Actuarial practice in social security: Quantitative methods in social protection series. A joint technical publication of the International Labour Office (ILO) and the International Social Security Association (ISSA).
Willis Towers Watson and International Social Security Association. 2019. Infrastructure investment. Challenges and opportunities for social security reserve funds.
World Travel and Tourism Council. 2020. Economic Impact Reports.