By Dela AGBO
Pension funds serve as the backbone of financial security for retirees, ensuring that years of hard work culminate in a stable and comfortable future.
However, the current asset allocation of Ghanaian pension funds raises serious concerns about long-term stability and risk management.
According to Pensions Digest, as of December 2024, Government of Ghana (GoG) securities constituted a staggering 78.34% of total pension fund assets. This overconcentration poses significant risks that need urgent attention.
Current Pension Fund Asset Allocation in Ghana
As of the second quarter of 2024, the breakdown of Ghana’s pension fund investments was as follows:
- GoG Securities: 78.34%
- Corporate Debt Securities: 2.23%
- Bank Securities & Other Money Market Instruments: 8.11%
- Collective Investment Schemes: 2.40%
- Ordinary Shares (Equities): 4.03%
- Alternative Investments: 0.93%
- Receivables: 0.89%
- Cash: 1.98%
This allocation clearly illustrates a significant dependency on government securities, leaving pension funds vulnerable to economic shocks, fiscal mismanagement, and government debt sustainability challenges.
The Risks of Overexposure to GoG Securities
- Sovereign Debt Sustainability Concerns
- Ghana’s economy has faced ongoing fiscal challenges, with public debt reaching unsustainable levels. Government securities, while traditionally seen as low-risk, carry high exposure to macroeconomic volatility. With a history of debt restructuring, pension funds heavily invested in these instruments risk potential losses if another restructuring occurs.
- High Inflation and Negative Real Returns
- As of early 2025, Ghana’s inflation rate stands at 1%, significantly eroding the real value of fixed-income investments. Treasury bill rates—91-day at 15.86%, 182-day at 16.92%, and 364-day at 18.96%—fail to outpace inflation, resulting in negative real returns. The Monetary Policy Committee (MPC) rate at 27% further signals high borrowing costs, making it imperative to reconsider pension fund allocation strategies.
- Interest Rate and Liquidity Risks
- Overreliance on government securities exposes pension funds to interest rate fluctuations, reducing the value of existing bond holdings when rates rise. Additionally, if the government faces liquidity challenges, payments on these securities could be delayed or restructured, affecting pension fund cash flow and payouts to retirees.
- Lack of Portfolio Diversification
- The fundamental principle of investment management is diversification. With less than 5% of pension funds allocated to alternative investments and less than 5% in equities, Ghanaian pension funds are missing out on higher-yielding, diversified opportunities across various sectors and asset classes. A well-diversified portfolio should minimize risk and enhance returns over time.
A Recommended Approach to Pension Fund Diversification
To ensure a more balanced and resilient pension fund portfolio, trustees and fund managers should consider the following asset allocation framework:
- GoG Securities: 40–50%
- Corporate Bonds & Infrastructure Investments: 15–20%
- Equities (Domestic & International): 15–20%
- Alternative Investments (Private Equity, Real Estate, Commodities): 10–15%
- Money Market & Cash Reserves: 5–10%
Exploring Alternative Investment Avenues
- Corporate Bonds and Infrastructure Investments
- Investing in corporate debt and infrastructure projects can provide stable, long-term returns while supporting economic development beyond government borrowing.
- Equities (Local and Foreign Markets)
- A well-diversified equity portfolio allows pension funds to participate in economic growth through capital appreciation and dividends. Investing in Ghanaian blue-chip companies and selected African or global markets would enhance returns.
- Alternative Investments
- Real estate, private equity, agriculture, and technology-driven ventures offer non-correlated asset classes that reduce overall portfolio risk and create long-term value.
- Money Market and Cash Reserves
- Holding a reasonable portion in cash and short-term money market instruments provides liquidity to meet pension obligations without forcing asset sales at unfavorable market conditions.
Call to Action: Mandating Pension Fund Diversification
Regulators, fund managers, and policymakers must take proactive steps to ensure that pension funds are well-diversified. Trustees and fund managers should be compelled to explore alternative investment options that spread risk and enhance returns. There are countless untapped investment opportunities within Ghana and across Africa that can benefit both the economy and pension contributors.
Conclusion
The excessive exposure of Ghanaian pension funds to Government of Ghana securities presents significant financial risks that cannot be ignored. With rising inflation, interest rate fluctuations, and sovereign debt sustainability concerns, it is imperative that pension fund managers adopt a more diversified investment strategy.
A balanced portfolio that includes corporate bonds, equities, alternative investments, and infrastructure projects will ensure greater security, higher returns, and long-term financial stability for Ghana’s retirees. The time to act is now—pension funds must be repositioned for resilience and sustainable growth. EcoCapital, we empower you to stand!
