American International Journal of Research in Humanities, Arts and Social Sciences

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1 American Internatial Journal of Research in Humanities, Arts and Social Sciences Available line at ISSN (Print): , ISSN (Online): , ISSN (CD-ROM): AIJRHASS is a refereed, indexed, peer-reviewed, multidisciplinary and open access journal published by Internatial Associati of Sciific Innovati and Research (IASIR), USA (An Associati Unifying the Sciences, Engineering, and Applied Research) Financial Viability of Rwanda Pensi Scheme Fund Investms Françoise Kayitare Tengera Assistant Lecturer, Departm of Finance University of Rwanda, College of Business and Ecomics P.O. BOX: 1514 Kigali Rwanda & Agostino Manduchi Associate Professor of Financial Ecomics Jönköping Internatial Business School Jönköping University Sweden Abstract: Pensi funds are in charge of the decisis ccerning the allocati of an exceptial share of the savings of most countries. To guarantee financial viability, these funds should be invested in agreem with the general principles of safety, yield, liquidity and social ecomic utility. In this article, we evaluate the performance and the lg-term viability of the public pensi scheme fund managed by Rwanda Social Security Board, the major Rwandan pensi fund; by using financial informati covering the period from 2009 until The findings cast doubt the lg-run financial viability of the fund, and suggest the opportunity to implem more sound investm strategies, and possibly also to commit to more realistic paym plans. Key words: financial viability, pensi fund, investm, return, Rwanda. I. Introducti Since the world first social security program started in 1889, pensi funds have played a key role in financial markets. As the typical main source of income for the retired populati, pensi funds have given a significant ctributi to the reducti of old-age poverty in regis in which this problem was historically endemic (Clark, 2005; Heijdra & Ligthart, 2006; Sze, 2008; Stewart & Yermo 2009). For example, in South Africa, retirem benefits reduce poverty gap ratio by 13% and pensis increase the income of the poorest 5% of the populati by 50%. The impact of social security programs has been especially important in regis such as sub Saharan Africa, where approximately 30% of households are headed by a pers aged 55 and above. In these cases, the immediate receivers of the payms often rely their retirem benefits to provide assistance to their extended families, possibly including orphaned children and relatives infected with HIV/AIDS. More generally, social security can reduce rural-urban migrati, lessens birth mortality rates, finance the transiti from subsistence farming to surplus agriculture and other investms made by small family firms (Stewart & Yermo, 2009). The pres paper focuses the investm performance and the viability of the public pensi system in Rwanda. The Rwandan pensi sector features e large public pensi fund, managed by Rwanda Social Security Board (RSSB) and approximately 50 smaller private funds. Although still in its growing stage, the sector does play an important social and ecomic role, and manages a volume of assets that is secd ly to that managed by the aggregate banking sector. (Natial Bank of Rwanda Financial Stability Report, 2014). As per the Natial Bank of Rwanda Financial Stability report (2013), until June 2013 the pensi sector s total assets covered 61.7% of the overall total assets for n-bank financial institutis. The members ctributis are managed by various pensi funds, either public or private, through an array of differ schemes, commly known as Defined Benefits plan or Defined Ctributi plan. Due to large sums of mey collected from ctributors in pres time, social security systems or pensi scheme funds particularly public es accumulate huge amounts of mey, reserves which they have to manage and invest for the purpose of (Cich, et al.,2004). The large amounts of funds to be invested to finance the paym of future retirem benefits make the csequences of an inadequate managem potially very significant. Nevertheless, the managem of many funds worldwide has often been found to be sub-standard, in terms of performance (Thornt, 2012). In the US, for example, the ctributi rates to many funds were set according to the assumpti of an yearly rate of return the funds invested of 8%. However, over the last decade, the returns were approximately equal to 6%; in the AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 218

2 last five year-period, the rate has dropped further, to 3.2%. In many important cases, the results were substantially worse. The rates of return the assets invested by the two largest Californian funds in the fiscal year ended in June 2012 pensi funds were equal to 1% and to 1.8%. The rates of return the assets invested by New York State s largest fund in the former fiscal year was equal to 6%, with csiderable losses recorded in the secd quarter of A realized rate of return persistly lower than 8% cause the unfunded fracti of the liabilities to increase, and thus hamper the coverage of the payms to be made by the funds (Beermann, 2013). Furthermore, over the years, there has been an -going, but strg, csiderati of the role of pensi funds in achieving socially acceptable outcomes from some or all of their investms decisis without jeopardizing their capability and respsibility to provide stable retirem income to beneficiaries (Rosraub, M & Shroitman, 2004). Besides, in the same country, Thornt (2012) mied that over the past two decades public defined benefit (DB) pensi plans have come under critical analysis due to huge investm losses particularly in the stock market. Njuguna and Arnolds (2012) show that funds based in Kenya, Nigeria, Ghana, Tanzania, Uganda and Zambia earned investm returns lower than the rate of inflati over significant time-periods. Njuguna and Arnolds (2012) also highlight the organizatial inefficiencies often observed, alg with the large administrative costs and the poor performance driven by them. Situatis of this type are hard to be recciled with the guidelines set by the major internatial organizatis, such as the ILO, which in its World Social Protecti Report (2014) emphasizes the crucial role that the states and the governms should play in guaranteeing the balance between the ctributis received and the payms promised by the pensi funds, in the interest of financial solvency and the welfare of the future generatis. The pres study investigates the cgruence between the investm strategies of the Rwanda public pensi fund, and the lg-run viability of the pensi system. The main finding is that the low rates of return realized. The findings cast doubt the lg-run financial viability of the fund, and suggest the opportunity to implem more sound investm strategies, and possibly also to commit to more realistic paym plans. The remaining part of the paper is organized as follows. The next secti briefly discusses overview of the pensi system in Rwanda. This is followed by the literature review. The remainder sectis include assets allocati and portfolio analysis of the pensi scheme fund investms, financial viability and risk of pensi scheme fund investms, route to viable pensi scheme fund investms and the last part involves the cclusi. II. The Pensi System in Rwanda: an Overview On the attainm of the independency in 1962, Rwanda established its social security fund known as Caisse Sociale du Rwanda, established by the Law of November 15 th 1962 and the statutory order of August 22 nd 1974 (CSR Corporate Plan, 2007). The fund was charged with the provisi of benefits, compensati of occupatial hazards and professial illness. In 2010, the governm of Rwanda created a new organ administering social security in the country. Rwanda Social Security Board (RSSB) was established by the law No.45/2010 of 14/12/2010 that determines its missi, organizati and functiing. The fund was established after the merger of Social Security Fund of Rwanda (SSFR) with Rwanda Medical Insurance (RAMA). Its mandate is to administer social security in the country. The branches currly managed include; pensi, occupatial risks and health insurance (RSSB, 2014). Rwanda Social Security Board s general missi is to provide high quality social security services, ensure effici collecti, benefits provisi, managem and investm of members funds. (RSSB, About Us: Missi and Visi, 2014). RSSB has separated Medical Scheme Fund investms from Pensi Scheme Fund investms. According to the estimates of the Ministry of Local Governm (MINALOC) report, the curr situati features a large value of the ratio between the number of ctributing workers and the number of beneficiaries; hence, no immediate risk of insolvency exists. The criteria used to set the retirem benefits may however create problems in the medium- and the lg-run. Rwanda s system of social security almost solely relies salaried workers. Benefits are based the average of e s salary and years of services. The lowest mey for the yearly pensi benefits is RWF (Rwandan Francs) 5200, approximately equival to $7.6 (exchange rate provided in the Natial Bank of Rwanda annual report 2013/2014 is RWF = 1 for the year 2013/2014. BNR annual report, 2014) while the highest paid gets around RWF 2,5 milli, ($3663). (MINALOC, 2005). However, some retirees receive very large payms thanks to an increase in the wages received in the three or four years prior to the date of their retirem, effectively aiming at exploiting the large weight that these payms have in the calculati of the benefits under the Defined Benefit or Pay- as you go system used to calculate the benefits (CSR, 2008). The total ctributi is 8% of the employee s gross salary, of which 5% is paid by the employer and 3% is paid by the employee. This phenomen may impose a strg ctributive pressure the younger generatis, particularly if the ratio of the ctributors over the beneficiaries decreases. Currly, ctributis remittances are paid quarterly, members are eligible for pensi from the age of provided a member has 15 years ctributi and has ceased working, approximately 20% of ctributis are paid out as benefits; the remaining revenues are use to cover the administrative costs and to increase the amount of funds invested. AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 219

3 In a situati of this type, the performance of the fund s investms is of critical importance. Extremely and possibly unrealistically high rates of return are required for the sustainability of the system. According to the Actuarial Report for 2007, the pensi scheme is financially stable until Investm returns (IRRs) will need to range from 13.57% to 17.98% per annum to compensate for the high Imbalance Spread, otherwise the Fund will end up in a deficit positi. (RSSB Investm Policy Statem for the Pensi Scheme Fund, 2014). In additi, the Actuarial report highlighted other financial problems affecting the pensi scheme: A large volume of administrative costs, represing approximately 22% of the ctributis, a high replacem rate ( a net earning basis could be more that 100%), and imbalance spread existing between benefits promised and ctributi rates ranging between 9.6% and 15.1% depending the age the member ers the program. III. Literature Review The number of studies the pensi systems in Africa, and particularly in Rwanda, is very small. The pres paper refers to two streams of literature in order to analyze the financial viability of pensi funds investms. Firstly, although we are not aware of any studies the financial viability of pensi funds investms in Africa, there exists studies of the determinants of pensi funds efficiency, pensi funds systems and reforms and pensi funds managem in some African countries (Njuguna & Arnolds, 2012; Adeoti et al, 2012; Kpessa, 2011; Fedderke 2011 and Stewart & Yermo, 2009). This body of literature provides useful insights into the analysis of pensi funds managm. Moreover, many studies public and private pensi schemes, pensi plans, pensi reforms and pensi funds investms are available in developed countries and emerging ecomies. As virtually all countries, African countries are also expected to experience the general change in the demographic structure, with a growing weight of the people in the older age groups. The United Natis estimates that by the year 2050, the world populati will reach the level of 2 billi of people aged over 60 worldwide; 80% of these people will be living in developing countries. However, 85% of the world s populati aged 65 and above is not due to receive any pensi benefits, according to the curr natial laws. Sub-Saharan Africa is an extraordinary case, with less than 10% of the elderly benefits covered by ctributory pensis (Stewart & Yermo, 2009). Njuguna and Arnolds (2012) - amg others - stress the importance of a sound investm of the funds due to cover the pensi payms. However, idifying the best practices and guaranteeing that such practices are actually followed is a challenging task, given also the volatility of the rates of return many types of investm. Adeoti, Gunu and Tsado (2012) analyze pensi funds investm decisis in Nigeria. Risk was idified as the most determinant factor in investms of pensi fund. Therefore, pensi funds managers are required to draw a risk managem policy that defines the acceptable minimum level of risk which can be tolerated before undertaking any investms. Besides, in order to mitigate huge risks they face, fund managers should put in place good systems and maintain a reasable balance between investm returns and risks. They should make sure that all investm decisis are made in the best interest of their ctributors. In the lg-run, enormous risks reduce returns investm and create uncertainties about the value of pensi assets when pensi liabilities fall due. Furthermore, BGL (2010) and Adeoti, Gunu & Tsado (2012) believe that the greatest challenge for pensi fund managers all over the world is to maintain an acceptable level of investms with minimum risks and pay retirem benefits when they become due. Thus, it becomes essial to make sound decisis how to allocate pensi fund assets into differ assets categories and available financial instrums with the purpose of ensuring adequate returns investm over a period of time by keeping the fund away from unnecessary volatility which results in a significant reducti in assets values at time when the fund needs more liquidity. In additi, Njuguna and Arnolds (2012) reveals that in a private funded pensi arrangem like the e of Kenya, pensi funds do not look for growth and pay dividends to members or spsors. Instead, they are being assessed the value they add to their members and lg-term solvency. Before starting a pensi fund, the spsor is advised by Kenyan Retirem Benefits Authority to cduct actuarial review to determine the appropriate ctributi levels, design and financial viability of the fund. In Ghana, the managem of Pay- As- You Go (PAYG) social security programs were seriously criticized by reports released by the country s Auditor General who pointed out that there were fraud and political manipulatis in the investm practices of the social insurance programs. In 1994, the Social Security and Natial Insurance Trust (SSNIT) violated the scheme s investm code and gave loans to numerous companies without signing with those companies complete agreems detailing terms and cditis of repaym. Csequly most of those companies defaulted their payms and SSNIT failed to put in place coercive repaym mechanisms as a result of circumstances under which loans were provided. In additi, the Ghanaian Auditor General s report cfirmed that there were several checks issued by SSNIT to individuals or companies in form of loans. Unfortunately, they were no transacti records to prove that checks had been cleared. Neither accounting nor banking records of the SSNIT had ries to cancel these checks involving large sums of mey from workers ctributis. (Kpessa, 2011; Governm of Ghana, 1997). Similarly, Nigeria PAYG social security program did not financially sustain because the governm could not effectively hor its pensi obligatis. By the end of 1990s and begging of 2000s, the governm was using AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 220

4 general revenues to pay out pensi benefits (Kpessa, 2011). The outstanding pensi payms due were more than 50 perc of the total budgets of the federal governm for 1999, 2000 and 2001 put together and far more than each of the budgets. (Uche & Uche, 2002, p.236). The Nigerian pensi crisis was the result of mismanagem and weak institutial plan by Nigerian Social Insurance Trust Fund (NSITF). Due to huge demands the country s fiscal revenues, paym of pensi benefits were often forge to compensate the paym of salaries and finance developm projects. The pensi situati in Nigeria and Ghana called up another reform. Thus, two countries changed their security systems from PAYG to defined ctributi system, a fully-funded individual retirem saving accounts (RSAs) however, Ghana added some tiers in their defined ctributi systems (Kpessa, 2011). Fedderke (2011) stresses that administrative costs can shrink retirem income particularly in the case of defined benefits, and ruin the spsor as well. The case study of South Africa revealed that annual administrative expenses varied from 0.37% and 0.73% of pensi fund assets aligned with total annual ctributis of 6% to 12% in In South Africa, total net assets of the pensi industry was approximately 80% of the GDP in Cversely, Fedderke (2011) points out the effect of emerging pensi plan, defined ctributi that requires to rely more private sector cditi and invite members to bear more individual risks as far as investms are ccerned. In ctrast, DC plans should bring significantly higher investm returns than PAYG plans and enhance more retirem benefits. Likewise, Kpessa (2011) emphasizes that defined ctributi plan may not adequately operate in African countries, such as Nigeria and Ghana due to the lack of well established capital markets where retirem savings can be invested. In additi, most African countries suffer from persist inflati, market fluctuatis and macroecomic instability. Thus, it becomes very risk to invest social security ctributis in an ecomic envirm where the private sector is not very strg and citizens (ctributors and beneficiaries) have limited knowledge pensi plan arrangems and how their retirem savings can be invested to generate more returns in future. Another challenge is high administrative and operati costs of pensi funds. Hence, the effective operati of defined ctributi pensi plans necessitates well-built and effici governm policies, rules and regulatis to enforce regular payms of ctributis and to ctrol the managem of privately - governed social security funds. On e hand, the promin 1994 World Bank report recommended the developm of three systems, or pillars of old age security; a publicly managed system with mandatory participati; a privately managed mandatory savings system; and a voluntary savings with the purpose of generating more income security compared to relying a single system. (World Bank, 1994). As a result, between 1981 and 2007, more than 30 countries irely or to some ext replaced their PAYG systems with private pensi schemes savings accounts, a practice frequly csidered as pensi privatizati (Datz and Dancsi, 2013). Nevertheless, the private pillar was criticized to have various deficiencies; reducti in the rates of coverage, low ctributi levels, insuffici benefits, increased administrative costs, and high transiti costs that put more burden the governms budgets (Matijascis and Kay, 2006). After idifying weakness of private pillar, some Latin American countries undertook another round of reforms allowing workers to go back to PAYG scheme, including solidarity and redistributi mechanisms to the public system, and creating new public pensi reserve funds. ((Datz and Dancsi, 2013). Besides, the global financial crisis pushed Eastern and Cral European countries to ratify their private pillars (OECD, 2012b). A further problem potially faced by pensi funds is that the governms under which they operate may use the fund s assets to solve their own liquidity problems, particularly in times of fiscal deficits and in situatis in which access to internatial credits is cdensed (Datz and Dancsi, 2013). Particular cases were idified in Argina and Hungary where both countries were suffering from serious fiscal burdens and they were incapable to rely financing from foreigner creditors in the middle of an internatial credit crunch. Therefore, the natializati of private savings became a practical strategy adopted by two countries, irrespective of the internatial criticism. In Hungary, approximately half of the pensi funds assets were invested in governm bds and treasury bills in 2010, following the natializati of private pensi funds. It was estimated that by bringing these private funds to the public sector, the Hungarian governm could reduce sovereign debt ratio by 5. Hungary s sovereign debt rate increased from a 53% of GDP in 2001 to 81% in However, this decisi created a highly volatile investm envirm and harsh csequences (Datz and Dancsi, 2013). Various credit ratings, the EU, the IMF, the World Bank and the OECD revealed the threats involved in Hungarian governm decisi. The exchange rate was drastically reduced, credit default swap (CDS) spreads Hungarian bds increased, and credit-rating agencies downgraded the governm s bds to e level above the junk bds. Datz and Dancsi (2013) also report Argina s federal auditor criticism of the managem of the pensiers savings, sometimes used to grant loans to the governm at negative real interest rates. IV. Assets Allocati and Portfolio Analysis of Rwanda Social Security Pensi Scheme Fund Investms Our analysis is based the investm data available within the period of the last five years, from June 2009 until June However, a deeper analysis will focus more rec part of this period, as all investms de by the pensi scheme fund of Rwanda Social Security Board in that particular period were governed by the AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 221

5 curr Investm Policy Statem (IPS) implemed from July 2012 until June On e hand, the set funding objective is that all accrued benefits of the Fund are fully funded by the actuarial value of the Fund s assets given normal market cditis. For active members, benefits are based service completed also taking into csiderati expected future salary increases (RSSB Investm Policy Statem for Pensi Fund, 2012, p.10). On the other hand, the investm objectives are, to realize a lg-term return the fund s investm portfolio adequate to meet the funding objective and to get optimum return within defined risk factors in a prud and cost effici manner while ensuring the compliance of legal and regulatory frameworks. All these benefits are paid according to the applicable defined benefit plan (RSSB Investm Policy Statem for the Pensi Scheme Fund, 2012). Pensi fund investms are classified in two broad asset classes: (Formally) fixed and n-fixed income securities. income securities include governm securities, fixed, corporate bds. Corporate loans and mortgage loans. While n fixed income securities are composed of real estate and equity (private and public). Foreign investms fall in e of the above two broad classes as lg as they are either fixed income or n fixed income securities (RSSB Investm Policy Statem for the Pensi Scheme Fund, 2012). Since 2009, the pensi fund investms has been dominated by real assets, equity, mortgage loans, treasury bills and bds and corporate loans. Assets allocati as well as the investm portfolio analyzed in this article are either based a certain fiscal year s trend/ performance or a specific asset and how it affects the whole portfolio performance or total portfolio returns realized within a specific period of time. The fiscal year runs from July of the first year to June of the following year. 40.0% 35.0% 30.0% 25.0% Figure 1: Pensi Scheme Portfolio compositi for the fiscal year Portfolio structure 20.0% 15.0% Compositi in porfolio 10.0% 5.0% 0.0% Real Estate Equity Mortgage Bills and Bds Source: Authors analysis from data available in investm report of 2009/2010 In general, the asset allocatis and the shares of the assets invested in fixed- and n-fixed-income securities can be substantially differ across differ countries countries see for example Tapia (2008). The study also reveals that equity investms also differ noticeably, ranging from 0% to almost 60% of asset allocati. The wide dispersi depends several factors; firstly the pensi plan followed by a certain fund, either a defined benefit plan or defined ctributi plan. Secdly, the volatility of the capital markets and their developm, expected investm returns and the age structure of funds members. Thus, asset allocati varies from a fund to a fund, and from a country to country. Similarly, although asset allocati in bds and stocks dominate global pensi fund industry, evually it is becoming important to csider alternative assets. In 2009, stocks, bds, and cash accounted for 47.1%, 36.9%, and 2.5% of pensi fund portfolios, respectively, while the remaining 13.5% were invested in alternative assets. Real estate is the most important alternative asset class, with an average allocati of 5.1% in 2009, followed by private equity (3.6%), hedge funds (2.9%), and other alternative assets (1.8%) (Andov, Kok, & Eichholtz, 2013, p.33) Figure 1 shows that in the fiscal year , the portfolio was diversified. N-fixed income investms dominated the compositi of the portfolio with 60% of the total portfolio, real estate and equity counted for 37.1% and 22.9% respectively. Bills and bds also had a large porti in the portfolio, 34.6%. However, some assets met the benchmark while others underperformed the benchmark (CSR (SSF) investm annual report, 2010) AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 222

6 Table 1. Investm Portfolio against benchmark Investm Class Policy benchmark Minimum Maximum Weight of the asset in the portfolio as of June 2010 T. Bills/ governm paper/ Bds 5% 0% 10% 33.9% deposit 5% 3% 10% 2.5% Cash and curr accounts 5% 3% 10% 1.3% Foreign investms/offshore investms 5% 3% 10% 6.8% Corporate bds/loans 10% 7% 15% 1.0% Mortgage loans 20% 15% 25% 2.0% N- Real Estate 30% 15% 35% 37.6% Private Equity 15% 10% 20% 14.8% Private 5% 0% 10% Source: CSR (SSFR) investm annual report for Note: according to the Fund, green color shows the investm class that meets the benchmark and the red color shows the investm class that is out of the benchmark. Table 1 shows that treasury bills, governm bds and papers, and real estate have noticeably exceeded the investm benchmarks. Rwandan financial markets, as those of most developing countries, are not very developed. This is partly explained by limited investm optis, csidering the limited opportunities offered by the local financial markets. Alternatively, treasury bills and bds are csidered as risk free investms. As the governm can impose taxes and issue mey to hor obligatis, governm debt is generally perceived as less risky than corporate debt by the investors. The ranking of the risks associated with these two types of loans may however be reversed in countries subject to persist fiscal crises, cstant and high inflati, and excessive borrowing can raise doubts about the low risks involved in investing in governm securities (Holzmann, 2009). Moreover, Andov, Kok, & Eichholtz (2013) argue that real estate investms are included in the portfolio because they hedge against inflati, deliver steady cash flows in the form of ral income and ctibute to portfolio divesificati. In order to evaluate the impact of the asset allocati, it becomes important to look at the returns investms earned within the same period of the year. Figure 2: investms for the fiscal year % 12.0% 10.0% 8.0% investm 6.0% 4.0% investm 2.0% 0.0% Source: Authors analysis from data available in annual investm report of 2009/2010 Although, real estate had over 37% of the total portfolio, it generated 1.1% of the return investm in It is the lowest return compared to other assets in the portfolio. Cich et al (2004) discuss that investms in real estate are expensive and rates of returns to be expected are low, that is why private funds and insurance companies have a tendency of holding a limited fracti of their portfolio in that form. This is because returns real estate investms depend overall ecomic developm. It is argued that real estate markets are also volatile although they tend to behave differly from other markets. Due to low returns expected from by real AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 223

7 estate investms, the Danish pensi fund keeps between 5% to 7% of its assets in real estate. However, real estate investms are e of the typical factor of investing social security reserves for a natial developm plan. This system has been embraced by many pensi funds, mainly in developing countries in order to support natial developms. Moreover, Andov, Kok, & Eichholtz (2013) analyses a global perspective pensi fund investmnets in real estate through data from CEM Benchmarking Inc. of Canada, e of the global largest database available for pensi fund investm. The study reveals that US pensi funds investms in real estate perform relatively poorly compared to their peers in Canada, Europe, and Australia and New Zealand. The weaker performance is to some ext explained by real estate returns earned compared to the costs incurred. More to the point, U.S. pensi funds' real estate investms also extensively underperform their benchmarks. Figure 2 also shows that the return equity is low, 3.2% compared to its compositi of 22.9% in the portfolio. The larger part of equity is dominated by investm in local companies, 69.8% and 30.2% is invested in foreign companies. Amg 16 companies (SONARWA, BK, BHR, BRD, Rwandatel, AGL, REIC, RIG s.a, Ultimate Ccept, Hostels 2020, RFTZ, B.M.I, SOYCO, Gaculiro Property Developers Ltd, Rwanda Foreign Investm, SAFARICOM), ly four of them including SAFARICOM, BRD, RIG and SONARWA paid dividends to the Social Security Fund in the year (CSR Investm Annual Report, 2010). Besides, performance of equity investm can be explained by Rwandan financial market situati in where the country had no regulated and organized financial market where securities can be bought and sold at competitive prices governed by forces of demand and supply. Figure 3: Pensi Scheme Portfolio compositi for the fiscal year Portfolio shares of differ asset classes 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% Compositi in porfolio 10.0% 5.0% 0.0% Real Estate Equity Mortgage Bills and Bds Source: Authors analysis from data available in annual investm report of 2010/2011 The compositi of the portfolio does not significantly change in compared to the previous fiscal year. However, there is an increase in the percage of the compositi in the portfolio for differ assets; 4.1% in real estate, 1.2% in equity, 3.0% in fixed deposit and 4.1% in corporate loans. Cversely, a significant decrease is noticeable bills and bds, 6.8% and a slight decrease of 0.8% mortgage loans. For 2010/2011, governm paper/bds and real estate are still above the portfolio compositi benchmarks Figure 4: investms for the fiscal year investm 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% investm Source: Authors analysis from data available in annual investm report of 2010/2011 AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 224

8 Amg the six assets, ly two assets, real estate (3.6% in real estate and 1.4% for fixed deposit) increase their returns compared to the previous year returns investms. The remaining assets return investms have significantly reduced, particularly corporate loans; a decrease of 8.4% return investm compared to the previous year. s mortgage loans and equity also reduced, 2.9% and 2.7% respectively. Figure 5: Pensi Scheme Portfolio compositi for the fiscal year Portfolio shares of differ asset classes 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Compositi in porfolio Source: Source: Authors analysis from data available in annual investm report of 2011/2012 The year is not significantly differ from the previous years in terms of portfolio compositi. Three assets are still dominating; real estate, bills and bds and equity with more than 20% of the total portfolio. The csistency in terms of asset allocati by various pensi funds was discussed by other scholars. Hertrich (2013) cfers that asset allocati of pensi insurance fund in Germany has a very cservative risk-return approach. The majority of asset, 86.6% of assets are invested in highly rated corporatis or risk free governm bds, while 5.2% is allocated in real estate and 4.6% in equity. Such portfolio allocati has been fairly csist for the last 5 years. Figure 6: investms for the fiscal year % 10.0% investm 5.0% investm 0.0% Real Estate Equity Mortgage Bills and Bds Source: Source: Authors analysis from data available in annual investm report of 2011/2012 Following the same trend with the two previous years, real estate and equity ctinue to earn the lowest returns compared to other assets in the same portfolio. Figure 7: Pensi Scheme Portfolio compositi for the fiscal year % 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Real Estate Equity Mortgage Compositi in porfolio Bills and Bds Source: Authors analysis from data available in annual investm report of 2012/2013 Compositi in porfolio AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 225

9 In the fiscal year 2012/2013, it is when the investm policy statem for pensi scheme fund started to be implemed. Real estate is still having the highest percage in the portfolio compositi. Figure 8: investms for the fiscal year Source: Authors analysis from data available in annual investm report of 2012/2013 In comparis to the three previous years, investm returns have increased. The total portfolio earned 6.7%, an increase of 2.2% compared to the previous year. Such increase is mainly attributed to three companies (BK, BRALIRWA and BRD) that paid dividends. In additi, the fund sold some of the shares it held in CIMERWA. In additi, buildings like Grand Pensi Plaza and Kicukiro Pensi Plaza were fully completed and started generating ral fees. Interest treasury bds were also paid. Figure 9: Pensi Scheme Portfolio compositi for the fiscal year Source: Authors analysis from data available in annual investm report of 2013/2014 Comparing the two years, 2012/2013 and 2013/2014, there is no csiderable difference in terms of the portfolio compositi. For the two years, all assets meet the compositi benchmark. Figure 10: investms for the fiscal year % 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Real Estate Equity investm Mortgage Real Estate Equity Mortgage Bills and Bds Bills and Bds Source: Authors analysis from data available in annual investm report of 2013/2014 Although the two years had almost same asset allocati and portfolio compositi, their returns are slightly differ, there is an increase of 0.5% of return compared to the previous year. A significant decrease is noticeable Portfolio shares of differ asset classes investm Real Estate Equity Mortgage Bills and Bds investm Compositi in porfolio investm AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 226

10 Treasury bills because due to lowering interest rates in the market a WAR of % in June 2013 to reach 5.609% in June 2014, a decrease of 52.9% (RSSB, investms annual report, ). V. Financial Viability and Risk of Pensi Scheme Fund Investms There are various elems that influence the financing of a pensi scheme. DeMte (1995) idified three categories of factors that go into the financial modeling of any benefit defined pensi plan; operatis of the plan, including covered workforce, its age, ctributis and benefits. The secd category of factors involves external ecomic envirm such as inflati rate, interest rates, returns various classes of investm. The last category of factors csists of the applicable financing policies, allocati of assets amg investm classes and the actuarial methods used to determine annual ctributi to the plan. Thus, this paper examines the financial viability of Rwanda pensi scheme fund basing its investms as e of the major elems to ensure its financial sustainability. According to RSSB investm policy statem for pensi scheme fund released in July 2012, the fund is projected to exhaust itself by as a result of Pensi Benefit(PB) deficit. The fund s Open Group Unfunded Obligati (OGUO) is projected at milli with the actuarial deficit projected at 2.94% of taxable payroll over 50-year projected period. In additi, the Actuarial Report (2007) revealed a potial menace of aging populati. The dependency ratios are projected to increase from 17% to 38% in 15 years to come, getting as high as 50% in 25 years time. Therefore, in order to minimize future financial distress and to ensure financial sustainability of the fund, it becomes imperative to induce high investm returns which are relied up to hold up the lg-term financial health of the fund. The Actuarial Valuati of Social Security Fund of Rwanda as at 31 December 2007 recommended that investm returns, particularly internal rates of returns (IRRs) would have to vary from 13.57% to 17.98% per annum to compensate for imbalance spread existing between benefits promised and ctributi rates which are ranging between 9.6% and 15.1% depending the age of the member who ers into the program, otherwise the fund will wind up in a shortfall financial positi (RSSB Investm Policy Statem, 2012). Similar observati is made in the Actuarial Valuati of the Rwanda Pensi and Occupatial Hazards Scheme as 30 June It emphases that if the fund earns less than 7.5% as an annual return investm, the fund is projected to start to decline before 2020 and it will be exhausted in 2053 (GAD, RSSB Actuarial Valuati 2012). Our analysis of financial viability of pensi scheme investms is mostly based the benchmarks set by the fund through its investm policy statem and the fund annual targets and achievems as far as investms are ccerned. Our research does not make a significant comparis between the pensi fund returns investms and financial market returns because financial markets in Rwanda are at nasc stage. Currly ly two local companies are registered Rwanda Stock Exchange; Bank of Kigali and BRALIRWA; and four companies ( KCB Bank, Uchumi Supermarket Market, Natial Media Group and Equity Bank) cross-listed Rwanda Stock Exchange from Kenya. Besides, most of bds are issued by the governm through its Natial Bank. The major finds our analysis are discussed in this secti after deeply analyzing the investms portfolio for the past five years. Table 2 : Average Investm for a five year period, Investm Assets Real Estate 2.8% Equity 3.3% Mortgage 8.3% 6.4% Bills and Bds 8.3% 10.6% Average investm for each asset Total Portfolio 5.3% Source : Authors analysis from RSSB portfolio trend analysis First, e of the return objectives set in pensi fund three year investm policy statem is to achieve a minimum investm return of 8.5% (the three-year average of actuarial investm return assumptis for the medium cost basis for the years ) over a three-year rolling period (RSSB Investm Policy Statem, 2012). The above table shows that the objective has not been attained. The average returns are low AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 227

11 with the average portfolio return investm standing at 5.3% and 6.4% for five years and two last years respectively. However, e of the assets, corporate loans outperform the benchmark with an average rate of return of 10.6%. Investm Assets Table 3: Average Real return Investm for a five year period, investm Inflati rate Real Investm investm Inflati rate Real Investm investm Inflati rate Real Investm investm Inflati rate Real Investm investm Real Estate 1.1% 8.2% -7.1% 4.6% 8.3% -3.7% 2.9% 5.9% -3.0% 3.3% 3.7% -0.4% 1.9% 1.4% 0.5% Equity 3.2% 8.2% -5.0% 0.5% 8.3% -7.8% 3.3% 5.9% -2.6% 4.8% 3.7% 1.1% 4.6% 1.4% 3.2% Inflati rate Real Investm Mortgage 11.9% 8.2% 3.7% 8.9% 8.3% 0.6% 5.9% 5.9% 0.0% 4.6% 3.7% 0.9% 10.2% 1.4% 8.8% 3.4% 8.2% -4.8% 4.7% 8.3% -3.6% 3.9% 5.9% -2.0% 9.5% 3.7% 5.8% 10.3% 1.4% 8.9% Bills and 8.2% 8.2% 0.0% 8.0% 8.3% -0.3% 8.2% 5.9% 2.3% 10.1% 3.7% 6.4% 6.8% 1.4% 5.4% Bds Corporate 11.1% 8.2% 2.9% 2.7% 8.3% -5.6% 12.7% 5.9% 6.8% 14.1% 3.7% 10.4% 12.6% 1.4% 11.2% Total Portfolio 4.39% 8.2% -3.8% 4.76% 8.3% -3.5% 4.5% 5.9% -1.4% 6.7% 3.7% 3.0% 6.22% 1.4% 4.8% Average real return for five years ( ) = 5.3% -5.5% = -0.2% Source : Authors Analysis based inflati rates provided by the Natial Bank of Rwanda annual reports and financial stability reports, 2010, 2011, 2012, 2013, 2014 Secd, the pensi scheme investm policy statem says that the real rate of return has to be positive. The table below shows that the objective was achieved in the last two years in almost all assets apart from real estate (in ). Nevertheless, the average real rate of return for the past five years is negative standing at -0.2% Third, from the two above table, corporate loans outperform the benchmark although they do not take the biggest proporti of the total portfolio compositi like real estate and equity. Mortgage loans earned higher returns compared to real estate and equity investms in the last five years although their compositi in the portfolio has never exceeded 2.7%. Thus, the fund asset compositi and returns investm did not directly correlate for the past five years. Fourth, in a defined benefit plan, the risk of funding is borne by the spsor. In case of Rwandan pensi scheme fund, the funding risk is borne by the governm of Rwanda (RSSB, Investm Policy Statem, 2012). This means that ce the fund exhausts or start declining and not be able to meet its pensi liabilities, the governm of Rwanda will have to step in. Figure 11: Standard deviati of return investm for Standard Deviati of investm for single investm (%) Real Estate Equity Mortgage Bills and Bds Total Portfolio Standard Deviati of investm for single investm (%) Source : Authors analysis from RSSB portfolio trend analysis In order to measure the investm risk and the volatility of real returns, standard deviati measure is chosen for its simplicity and for data available. The standard deviati of returns over the five year period under csiderati indicates that the risk the investms is very low. The portfolio return standard deviati is at 1%. Generally, AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 228

12 this is an indicati that investms undertaken are of low risk, hence they generate low returns. However, corporate loans have the highest standard deviati in the investm portfolio for the five years although they also generate higher returns for the same period. Holzmann (2009) cfirms the same results comparing OECD pensi funds returns and emerging markets returns between 1999 and Emerging markets generated csiderably higher dollar returns, averaging 22%, than did the financial markets in developed ecomies, where returns averaged 2.4%. Those higher returns, nevertheless, demstrated greater volatility; the standard deviati for emerging market returns was 26.9%, as opposed to 18.2% for the developed markets. Figure 12: Geometric mean of return investm for Geometric Mean of investm for single investm (%) Real Estate Equity Mortgage Bills and Bds Source : Authors analysis from RSSB portfolio trend analysis The results indicate that the total portfolio geometric mean is not high. Such indicator shows that the year year returns have been low culminating in compounded returns that are low. The low returns in each year impact the following year returns to also be low. An individual csiderati of investms indicates that the loans have the highest geometric mean of 9.2, however this is still correlated to the earned returns by the same asset. The level of risk can also be gauged by glancing at the minimum and maximum annual real rates of returns as it shows the range of returns around the mean. In our situati, total portfolio range is 2%, and corporate loans have the highest range of 11% whereas equity has the lowest range of 1.43%. the remaining assets range from 3.4% to 7%. Tapia (2008) found interesting results in Latin American countries where Argina and Uruguay have the highest range as large as 41% and 37% points respectively followed by annual returns ranged -10.4% to 31% in Argina and 3.6% to 40.6% in Uruguay. Cversely, Costa Rica experiences the narrowest range, 7.3 % points, with annual returns ranking from 2.5% to 9.8%. Another way of assessing the viability of pensi scheme fund investms is to look at the expected investm revenues and the actual revenues earned within the last five years by RSSB pensi scheme fund. Before the fiscal year starts, the fund makes projectis of expected revenues and at the end of the year they realize the actual revenues which is referred to in order to evaluate the yearly performance. Table 4 : Expected investm revenues vs. actual revenues for the year Asset Asset Expected Actual Revenue Variati Expected Actual Variati Amount in Revenues (r, dividend, from Principal Principal from (r, interest) in expected Amount in Amount expected dividend, revenues to Received in principal to interest) in actual paid revenues in principal in N Real Estate 102,979,081 7,015,856 1,481,997 (5,533,860) 408, ,804 (265,946) Equity (Local) 40,584,631 1,714,883 1,852, ,740 - Equity (Foreign) 18,698, , ,278 - Total N 162,261,806 8,730,740 3,452,898 (5,277,842) 408, ,804 (265,946) - Mortgage 5,540, , ,106 (64,875) 279, , ,503 Corporate loans 2,004, , ,022 (47,083) 1,398,209 1,033,156 (365,053) Deposits 6,859, , ,243 (248,031) - Corporate Bd 600,209 45,916 47,269 1,353 - Treasury bds 92,432,219 7,369,924 7,369,924 7,379,669 7,379,669 - Total Portfolio Geometric Mean of investm for single investm (%) AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 229

13 Governm 457,981 32,116 32,116 - bd Total 107,895,150 8,849,317 8,490,680 (358,637) 9,057,672 9,251, ,450 Total Investms 270,156,956 17,580,057 11,943,578 (5,636,479) 9,466,422 9,393,926 (72,496) Source :Authors analysis from Investms Annual Report, Note: Average exchange rate of Rwandan Francs against Dollars is 1 = RWF for the year 2010 from statistics provided by Natial Bank of Rwanda Departm of Statistics Natial Institute of Statistics of Rwanda (NISR, 2014 Statistical yearbook, 2015) The expected revenues involve interests loans, fixed bills and bds, ral fees building (real estate) and dividend income from equity, while expected principal amount is the principal amount expected to be paid within that particular year from various investms. The year marks a big disproporti between expected and actually earned revenues. In total, there is $5,708,975 that was not realized as planned. The largest difference falls under real estate investm due to its highest cost, either cstructi or maintenance, low occupancy rate of buildings, unexploited land after paying heavily to acquire it, a building sold but the mey was not paid within that particular fiscal year. Besides, the side of expected earned principal, a corporate loan principal amount was cverted into share thus becomes equity, and the expected principal is not earned within the period. It is very rare to go below the fixed term deposit income unless are withdrawn before maturities hence incurring penalties interest. (CSR (SSFR) investm annual report, 2010). Table 5: Expected investm revenues vs. actual revenues for the year Asset Asset Amount in Expected Revenues (r, dividend, interest) in Actual Revenue (r, dividend, interest) in Variati from expected revenues to actual revenues in Expected Principal Amount in Actual Principal Amount Received in Variatio n from expected principal to paid principal in N Real Estate 124,112,530 4,017,434 8,735,398 4,717, ,172 71,203 (261,969) Equity (Local) 54,543,387 2,332, ,325 (2,201,882) - - Equity (Foreign) Total N Mortgage 18,163, , , ,819,503 6,349,640 9,074,970 2,725, ,172 71,203 (261,969) 3,701, , , , , , ,957 Corporate loans Deposits Corporate Bd Treasury bds Governm bd Total Total Investms Source :Authors analysis from Investms Annual Report, ,611, , ,749 (93,764) 1,832, ,944 (1,336,50 3) 16,658, , ,114 57, ,052 44,603 62,071 17, ,126,489 6,890,420 6,890,420-6,663,446 6,663, ,731 29,930 7, , , ,681,053 8,186,743 8,314, ,693 9,162,238 8,522,080 (640,158) 315,500,557 14,536,383 17,389,406 2,853,023 9,495,411 8,593,283 (902,128) Note: Average exchange rate of Rwandan Francs against Dollars is 1 = RWF for the year 2011) from Natial Bank of Rwanda Departm of Statistics (NISR, 2014 Statistical yearbook, 2015) The year shows better performance compared to the previous year apart from some assets, real estate, equity and corporate loans. The most promin problem for two years is related to the buildings sold and funds are not directly paid in the same fiscal year. As regard to equity, expected income was realized at 5.6% due to unpaid dividends. As June 2011, Caisse Sociale du Rwannda (Social Security Fund of Rwanda) was a shareholder in 19 companies; in four of them the fund owned 100%, 80.96%, 65.95% and 50%. The shareholding in the remaining companies was between 0.24% to 40% (RSSB annual investm report, 2011) AIJRHASS ; 2015, AIJRHASS All Rights Reserved Page 230