By: Dela AGBO
In our previous publication on the hidden risks of overexposing pension funds to Government of Ghana securities, today, we want to explorer it further as pension funds are a critical pillar of financial security for retirees, and their sustainability depends on prudent investment strategies that balance risk and return.
However, recent analysis of asset allocation trends in Ghana’s pension sector raises concerns about the heavy concentration of pension funds in Government of Ghana (GoG) securities.
While government securities are traditionally considered low-risk, the extent of exposure—both direct and indirect—reveals underlying vulnerabilities that warrant serious attention.
The Alarming Concentration of Pension Funds in GoG Securities
According to Pension Digest, as of the second quarter of 2024, the asset allocation of pension funds in Ghana stood as follows:
- Government of Ghana (GoG) Securities: 78.34%
- Corporate Debt Securities: 2.23%
- Bank Securities and Other Money Market Instruments: 8.11%
- Collective Investment Schemes (CIS): 2.40%
- Ordinary Shares (Equities): 4.03%
- Alternative Investments: 0.93%
- Receivables: 0.89%
- Cash: 1.98%
At first glance, 78.34% exposure to GoG securities is already a major concern. However, upon deeper analysis, the actual exposure is significantly higher due to indirect allocations through other asset classes.
The True Extent of Government Exposure
The 8.11% allocation to bank securities and other money market instruments might seem diversified at first. However, most banks, in turn, invest a substantial portion of their fixed deposits into Treasury Bills and other GoG instruments. This means that a large portion of pension fund money placed in banks is ultimately financing government debt.
Similarly, the 2.40% in Collective Investment Schemes (CIS), particularly fixed-income and balanced mutual funds, also finds its way into GoG securities. Most fixed-income mutual funds in Ghana heavily rely on government-backed assets as they offer relatively higher returns than corporate bonds, which are scarce. As a result, even funds classified under CIS are indirectly exposed to government debt.
Moreover, the 1.98% in cash holdings is parked in commercial banks, which, as mentioned, have a strong correlation with government securities. Considering these layers of indirect exposure, we can conservatively estimate that over 85% of total pension funds are ultimately tied to Government of Ghana-backed assets.
Why This Level of Exposure is Riskier Than It Seems
- Concentration Risk
- The principle of diversification is one of the fundamental tenets of risk management. By having an overwhelming percentage of pension funds invested in GoG securities, the system is dangerously concentrated. If the government experiences fiscal distress, pension funds could suffer significant losses, leading to reduced retirement benefits for workers.
- Systemic and Sovereign Risk
- Government securities are often considered “risk-free,” but this assumption does not hold when a country faces fiscal challenges. Ghana has previously undergone debt restructuring, and any future instability in government finances could lead to similar outcomes, affecting the value of pension fund assets.
- Interest Rate and Inflation Risk
- Heavy reliance on government bonds exposes pension funds to interest rate volatility. If interest rates rise sharply, bond values decline, eroding fund performance. Additionally, if inflation outpaces bond yields, retirees’ purchasing power diminishes.
- Missed Opportunities for Higher Returns
- Diversified asset allocation—incorporating equities, alternative investments, corporate bonds, and infrastructure projects—historically provides better long-term returns than an overconcentration in government securities. The current allocation strategy limits the potential for pension funds to generate higher yields.
The Need for a More Balanced Asset Allocation Strategy
To ensure long-term sustainability and risk mitigation, Ghana’s pension fund managers must rethink their investment approach. A more balanced portfolio should include:
- Increased Allocation to Corporate Bonds: Encouraging the development of a deeper corporate bond market to provide pension funds with viable alternatives.
- Growth in Alternative Investments: Infrastructure projects, real estate, and private equity can offer long-term stable returns.
- Stronger Equity Market Participation: Investing a higher percentage in listed equities would enable funds to benefit from capital appreciation over time.
- Stricter Regulations on Diversification: The National Pensions Regulatory Authority (NPRA) should consider setting exposure limits on GoG securities to prevent over-concentration.
Conclusion
The exposure of pension funds to Government of Ghana securities is far more significant than it appears at first glance. When indirect allocations are considered, over 85% of pension fund assets are linked to government debt, posing a substantial risk to the financial future of retirees.
While government bonds remain a crucial investment instrument, excessive reliance on them contradicts basic principles of risk management and diversification. A strategic shift towards a more balanced investment approach is necessary to secure the long-term sustainability and resilience of Ghana’s pension system.
