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Investment of Public Pension Funds in the MENA Region

 The Third Annual Public Pension Fund Management Conference Washington, Sep. 20-22,2004 The World Bank. Investment of Public Pension Funds in the MENA Region Mohammad M.Sartawi,CEO. Sartawi Consulting / (Management and Actuarial Consultants)

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Investment of Public Pension Funds in the MENA Region

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  1.  The Third Annual Public Pension Fund Management Conference Washington, Sep. 20-22,2004 The World Bank Investment of Public Pension Funds in the MENA Region Mohammad M.Sartawi,CEO Sartawi Consulting / (Management and Actuarial Consultants) e - mail : mm_sartawy@yahoo.com www.sartawi-consulting.com

  2. Contents: • MENA • Jordan • Sudan • Oman • Bahrain

  3. MENA MENA Countries Indicators - 10 oil exporters. - 7 significant labor exporters. - 6 depend highly on diversified manufacturing and service industries. - Total population : 306 million (2002). - Average life expectancy = 69 years. - GDP 670.7 billion US Dollars. - GDP Per capita $ 2193 (2002).

  4. Population ( m) Life expectancy (Yrs.) Under – 5 mortality rate per 1000 MENA 306 69 54 Algeria 31 71 54 Bahrain 0.67 73 -- Egypt 66 69 39 Iran 66 69 41 Iraq 24 63 125 Jordan 5 72 33 Lebanon 4 71 32 Libya 5 72 19 Morocco 30 68 43 Oman 2.5 74 -- Saudi Arabia 22 73 28 Sudan 32.8 58.4 -- Syria 17 70 28 Tunisia 10 73 26 West Bank and Gaza 3 73 -- Yemen 19 57 114 MENA

  5. Country Pension Expenditures % of GDP Algeria 2.7 Bahrain 1.4 Iran 1.2 Jordan 2.4 Morocco 2.1 Tunisia 3.4 Djibouti 2.6 Saudi Arabia 0.2 Egypt 2.2 Yemen 0.45 Lebanon 3.7 West Bank and Gaza 0.8 MENA Pension expenditures of major MENA countries in 2003:

  6. Country Pension Funds Assets % of GDP Algeria 1.75 Bahrain 50.8 Egypt 33 Iran 6 Jordan 25 Morocco 9 Oman 4.2 Tunisia 6.5 Yemen 4 Saudi Arabia 135 Lebanon 9 Sudan 1.3 MENA The size of Fund assets as % of GDP in 2003

  7. Market Total Market Capitalization (Billion$) Saudi Stock Market 157.3 Kuwait Securities Market 59.5 Abu Dhabi Securities Market 30.3 Cairo and Alexandria Bourses 27.8 Dubai Financial Market 14.3 Doha Securities Market 26.7 Casablanca Bourse 13.05 Amman Bourse 10.9 Bahrain Securities Market 9.7 Muscat Securities Market 7.2 Tunis Securities Bourse 2.4 Beirut Bourse 1.5 Khartoum Securities Market 0.75 Algeria Bourse 0.14 Total 361.54 MENA Total market Capitalization Source : Muscat Securities Market (MSM) Internet Data

  8. Jordan Investment Policies (SSIC) The main investment policies of SSIC include : - Priority to national viable instruments within parameters and standards ensuring risk management and liquidity requirements. - Diversification of asset class, sector and time. - Investment decisions are based on economic fundamentals thus avoiding speculative instruments. - Follow strict guidelines to ensure safety and diversity of overseas investments.

  9. Asset Class 5-years targets Long term targets Money Market instruments 5% - 25% 10% - 20% Fixed Income Securities 7% - 30% 15% - 35% Listed local Equities 17% - 30% 25% - 40% Non - listed local Equities 8% - 20% 10% - 20% Loans 7% - 15% 10% - 20% Real Estate 3% - 15% 10% - 20% International Fixed Income 0 - 10% 5% - 10% International listed Equity 0 - 2% 0 - 5% Jordan Asset allocation policy :-

  10. Year Size of investment (m.JD) % of GDP 1980 4.2 0.4 1985 121 6.2 1990 357 13.1 1995 744 16.5% 2002 1627 25% 2003 1930 - 2008 3170 - 2023 12533 - Jordan Size and Growth of Investment Fund:

  11. Year Stocks and Shares Loans and Bonds Real Estate Bank Deposits Total 1997 176.1 (17.8%) 255.1 (25.8%) 51.5 (5.2%) 505.3 (51.2%) 988.0 1998 191.7 (17%) 267.5 (23.7%) 52.2 (4.5%) 619.4 (54.8%) 1130.8 1999 235.5 (18.3%) 231.3 (18%) 57.5 (4.4%) 763.4 (59.3%) 1287.7 2000 346.6 (24%) 281.1 (19.4%) 63.6 (4.6%) 756.4 (52%) 1447.7 2001 475.8 (30%) 232.6 (14.7%) 84.3 (5.3%) 789.8 (50%) 1582.5 2002 503.0 (30%) 388.4 (23.2%) 92.4 (5.6%) 690.3 (41.4%) 1674.1 2003 714.6 (37%) 487.9 (25.3%) 110.7 (5.7%) 615.8 (32%) 1929 Jordan Distribution of investments SSC

  12. Year Contribution Revenue (1) Investment Income (2) Total Revenues (1+2)=3 Total Expenditures (4) Annual Surplus (3-4) Size of Investment Fund 1980 4.7 0.104 4.8 0.309 4.49 4.5 1985 34.4 5.4 39.8 6.24 33.56 121 1990 50.5 25.4 75.9 20.3 55.6 357 2002 200 65 265 142 123 1674 2003 237 72 309 169 140 1929 2008 400 241 641 295 346 3170 2023 1758 939 2697 1788 909 12533 Jordan JSSS Revenues, Expenditures and Surplus in million JD(1980 – 2023)

  13. Jordan Supply of Investment Instruments - The type and volume of investment instruments available for pension funds and other investment have developed significantly since the beginning of fund accumulation . - Traditionally, the main investment instruments include bank deposits, physical properties, ( lands, buildings and tourist facilities ) loans and ownership in companies.

  14. Jordan Types of Instruments Due to the increasing demand for investment instruments ( by pension funds and others ) and the economic developments in Jordan in general, more instruments were introduced which can be classified as follows :- • Cash and cash equivalent • Fixed Income securities • Equities • Physical properties

  15. Jordan A- Cash and cash equivalent :- - Time deposits - Certificate of Deposits (CD’s) - Treasury Bills - Commercial papers

  16. Jordan B- Fixed Income securities - Government bonds - Commercial bonds - Development bonds - Debentures - Commercial loans - Housing loans

  17. Jordan C – Equities :- - In listed companies (listed in Amman Stock Exchange – ASE) - In unlisted companies - Mutual Funds - Overseas instruments ( Global Investments )

  18. Jordan D- Physical properties - Land Plots - Buildings - Tourist facilities - Other physical projects

  19. 2002 2003 1. SSC equities in listed companies: Market value of SSC portfolio (million JD) 517.2 820 Market capitalization (million JD) 5029 7772.8 Share of SSC equities 10.3% 10.6% 2. SSC bank deposits SSC time deposits (million JD) 671 464.5 Total banks deposits in Jordan (billion JD) 9.4 10 Share of SSC deposits in total deposits of Jordanian banks 7.1% 4.7% 3. SSC Loans SSC loans portfolio (million JD) 53.5 69.8 Total Jordanian’s banks credit facilities and loans (billion JD) 5.1 5.3 Share of SSC loans in total credit facilities 1.05% 1.32% 4. SSC real estate portfolio: Value of SSC land and property portfolio 95 111 Total value of real estate market (million JD) 1783 1874 Share of SSC real estate in total market 5.3% 5.9% 5. SSC Bonds Value of SSC bonds 216 418 Total bonds 1345 1525 Share of SSC bonds in total bond market 16% 27.4% Jordan Share of SSC investment in the Market

  20. Jordan The Role of SSC Investment in the Market • SSC investments (as pension funds) has important role in the development of capital market. • Considered as a reliable source for long – term capital.

  21. Jordan The role of capital market for SSC investment includes :- 1- Provide a forum to buy / sell securities at ease thus reducing investment costs . 2- Diversification through investment in exiting companies that are subject to control and distribution of investments in various sectors of the economy and several terms (medium and long- term with respect to time of investment). 3- Allow control of decisions through membership in company boards of directors and through general assembly. 4- Allow profit maximization through dividends and capital gains.

  22. Sudan Sudan Public Pension System 1- The National Social Insurance Fund (NSIF) covers all Private sector workers working for employers with 5 or more workers as will as all government workers in public organizations and institutions. 2- The Public Service Pension Fund (PSPF) covers all employees in the service of the Government . 3- Total contributors are currently 706000. 4- Total cost of the two schemes including administration costs, stands at 9.5 billion SD at present

  23. Sudan 1- Management of Investment Funds NSIF and PSPF are governed by a unified Board of Directors with Director General of both funds as member of Board .

  24. Sudan 2- Investment Policy 1- Investment objectives :- - Maximize social protection efforts through improving the living conditions of the retirees. - Preserve the real value of assets of both schemes - Contribute to the social and economical development and activate the economy. 2- Investment principles :- - Security - Liquidity - Yield - Economic and Social development.

  25. Sudan Investment Policy 3- Priorities and controls :- - Priority to low risk investment. -Priority to investment projects that require less execution and follow – up costs - Priority to investments that provide products and / or services to the retirees. • Coordination of investment plans / programs with the country fiscal and financial policies.

  26. Sudan Investment Policy 4- Investment Classes :- a- Short – term investments - Bank Deposits - Shahama bonds ( 3-6 months ) . - Commercial investment( buying and selling goods and produce) for duration of 3 years only . b-Medium term investment :- - Bonds ( one year ) . - Lease and contract bonds . - Trade in Khartoum Stock Exchange. - Banks . - Shares of Sudatel ( telecommunication ) . - Food industries.

  27. Sudan Investment Policy C- Long – term investment :- - Acquisition of administration buildings for NSIF and PSPF. - Social investment programs and productive households .

  28. Year Size of PSPF investment Fund (Billion SD) Size of NSIF investment Fund (Billion SD) Total size of investment Funds %of GDP 1998 3.5 NA NA NA 1999 11.5 NA NA NA 2000 16 17 33 1.1% 2001 22 19 41 1.2% 2002 29 21 50 1.28% 2005* 30 25 55 Sudan Size and Growth of Investment Funds (NSIF and PSPF) * Estimated based on historical growth taking into consideration

  29. Year CommercialInvestments( %) Bank Deposits (%) Equities (%) Real Estate and Construction Projects (%) Total (%) 2000 51.4 40.3 8.3 0.0 100 2001 48.5 19.6 11.1 20.6 100 2002 22.3 21.3 34.5 21.8 100 Sudan Distribution of NSIF and PSPF investment A – NSIF

  30. Type of instrument % Of total investments Commercial investments 45 Land, Real Estate and projects 23 Shares and bonds 16 Equities 13 Bank deposits 3 T o t a l 100 Sudan Distribution of NSIF and PSPF investment • B – PSPF

  31. Sudan Demand for Investment Instruments by Pension Funds 1- The system costs of both NSIF and PSPF is high at present where NSIF pays abut 52% of the contributions collected as pension expenditures and PSPF pays about 80% of the contributions collected as pension and administration expenditures. 2- The high systems costs coupled with the high growth rate of expenditures would leave limited flow of investment to the market for a limited time. 3- The size of two funds is currently 50 billion SD and is expected to grow to 55 billion SD in 2005 then to 60 billion SD in 2015 and may deteriorate within couple of years afterwards based on the high growth of the system costs.

  32. Sudan The types of available instruments are :- 1- Bank deposits . 2- Equities :- - In listed companies. - In unlisted companies . 3- Loans (commercial and Islamic). 4- Trading in basic commodities and produce including purchase and export of some produce like sesame , sugar cane --- etc. 5- Land and real estate projects including buildings and apartments .This activity involves acquisition of existing physical properties as well as development and construction of new projects. 6- Bonds including development and Islamic bonds (shihama and Shamam).

  33. Sudan The role of NSIF and PSPF Investment in the Market 1- The role of PSPF and NSIF investment in the market become of significance since the beginning of 1997 . 2- Due to lack of financial instruments , PSPF investment were shifted from the long-term real estate investment to commercial investment and other short term instruments including the buying and selling of land, real estate and construction development projects thus contributing to the economic development of Sudan and Maintaining reasonable return. 3- Other parts of the investment (NSIF) were directed towards the improvement of the living standards of the retirees due to high inflation. 4- The investment market in Sudan is very shallow as offerings in the Khartoum Securities Market (KSM) is very limited and market capitalization is very low in terms of both stocks and bonds ( in 2003 KSM market capitalization was 767 million U.S dollars.

  34. Sudan Major roles of NSIF and PSPF :- 1- PSPF investment provide financing to various projects and institution therefore supporting the mission of the commercial banks by adding complementary and , in certain cases new products and instruments. 2- Participation in major economic institutions thus providing long – term financing . Institution include banks ,industrial and service companies and others. 3- Investments, on short- term basis, through trading portfolios, Khartoum Stock Exchange thus improves market capitalization and turnover . The share of stocks and bonds in PSPF investment reached 16 % in 2002 .

  35. Oman Oman Public Pension System • There are twelve public and private pension and social insurance schemes in Oman. • The public pension system consists mainly of the Public Authority for Social Insurance (PASI) and the Civil Servants Pension Fund(CSPF) . • Active contributors of PASI increased from 34000 in 1997 to 65878 in 2002 . • Insurance expenses paid by PASI were (24.7) , (35.4) and ( 40.9) million RO during the years 2000,2001 and 2002 respectively . • The CSPF was incorporated in 1986. • Total CSPF active contributors reached 74294 in 2002 while total beneficiaries were 28843 during the same year. • Total pensions and other compensations bill paid by CSPF in 2002 was50 million RO.

  36. Oman Investment Policies/Objectives • To ensure the scheme’s long term ability to pay future liabilities to the insured employees by achieving good investment returns . • To properly allocate the investment into different and flexible classes that can maintain the real value of the money and diversify risks .

  37. Oman The investment policy of CSPF relies upon the following principles • Safety of investment through diversification of risks and preservation of assets . • protect the assets value against inflation effects. • Increase self reliance and self financing of the scheme through improvement of the investment function thus achieving higher income. • Provide liquidity to finance CSPF future liabilities. • Contribute to the economic development through participation in commercially feasible projects and development components.

  38. Oman The investment policy of CSPF relies upon the following principles • Both PASI and CSPF invest in instruments as determined by the Royal Decree No.31/96 and the investment guidelines developed accordingly. The investment instruments include: • Equities in local companies • Local bonds • International Equities • Local Real Estate • Deposits in local and international banks including certificate of deposits (CDs) • International investment funds • International funds of private shares

  39. Year MSM market Capitalization (M. RO) Estimated Size of PASI Investment fund (m.RO) Estimated Size of CSPF investment fund (m.RO) Total size of public pension fund investments (M. Ro) % Of GDP % Of market capitalization 1998 2265 NA NA NA NA NA 1999 2262 113 91 204 9.02% 2000 1948 142 114 265 3.47% 13.6% 2001 1722 157 126 283 3.7% 16.43% 2002 1948 182 146 328 4.2% 16.84% 2003 2790 223 178 401 4.8% 14.37% Oman

  40. Year 1998 % 1999 % 2000 % 2001 % 2002 % Instruments Government & Non – government bonds 16.41 27.60 26.05 23.77 32 Bank Deposits (RO) 63.60 41.70 25.21 30.67 20.70 Bank Deposits (US $) --- --- 7.32 6.45 3.46 Bank Deposits ( UAE Dirahms ) --- --- --- --- 1.21 Equities (Local) 18 28.5 39.23 37.44 39.68 Local portfolios * 0.99 1.10 1.10 0.62 0.63 Real Estate 0.0 0.0 0.0 0.0 0.35 Overseas Investments 1 1.10 1.09 1.05 1.97 Total 100 100 100 100 100 Oman Distribution of PASI and CSPF Investments. a : CSPF

  41. Year Instruments 1998 % 1999 % 2000 % 2001 % 2002 % Government and corporate bonds 17 17 16 17.4 22.2 Bank Deposits, CD’s and short term investments 29 28 45 53.9 47.6 Equities 45.5 48 34 26.2 27.4 Real-Estate 2 3 2 2.5 2.8 Loans 6.5 4 3 --- --- Total 100 100 100 100 100 Oman b- PASI

  42. Oman Both Schemes (and Particularly PASI) Is Not Yet in the Maturity Stage. It Is Expected That the Scheme Will Continue to Generate Surplus Thus Establishing More Demand for Investment instruments in the short &medium term.Estimated size of PASI and CSPF investments relative to market capitalization ranges from 9.02 % in 1999 to 14.37% in 2003 with more potential for growth in the future.

  43. Oman Types of Investment Instruments a- Cash and cash equivalent:   i. Time deposits in local and foreign currencies.    ii. Certificates of Deposits (CD). iii. Treasury Bills . b- Fixed income securities:   i. Government bonds    ii.  Non-government bonds iii.Commercial loans. c-  Equities:    i. In listed companies (listed in MSM)   ii. In portfolios d- Real Estate and projects.

  44. 2001 2002 1-PASI and CSPF equities in local companies Value PASI and CSPF equities (million RO ) Market capitalization (million RO) Share of PASI and CSPF equities 92  1722 5.34%  108.4 1948  5.56% 2- PASI and CSPF bank deposits PASI and CSPF value of bank deposits (million RO) Total bank deposits in Oman (million RO) Share of PASI and CSPF in total deposits in Oman banks 143   2683 5.33 % 117  2777  4.21% 3- PASI and CSPF bonds Value of PASI and CSPF bonds (million RO) Total bonds (million RO) Share of PASI and CSPF bonds in total bond market 59.6 422  14.12 % 87.1  416.4  20.92% 4- PASI and CSPF Real Estate Value of PASI and CSPF Real Estates Total value of Real Estate market Share of PASI and CSPF in Real Estate market -- -- -- 5.6 256.8 2.18 % Oman The values of PASI and CSPF portfolios relative to the market size are as shown :-

  45. Oman The Role of Public Pension Funds Investments in the Market Public pension funds investments has provided, and will continue to do so in the future, the market with long term capital thus contributing to the deepening of the capital market in Oman.

  46. Oman The role of capital market for pension funds and other investments includes: 1- Provide investment opportunities in securities thus reducing investment costs. 2 - Regulate dealings in securities and provide protection to investors . 3- Provide a suitable environment for maintaining the counterbalance between supply and the easy liquidation of funds invested in securities. 4- Diversification through investment in exiting companies that are subject to control

  47. Bahrain Bahrain Public Pension System The public pension system of Bahrain consists of:- The pension Fund Commission (PFC)- The General Organization for the Social Insurance. The number of contributors of PFC increased from (13275) in 1976, to 37690 in 2002 and the number of beneficiaries ( pensioners and survivors ) increased from (15191) in 2000 to (21062) in 2002. The PFC is a partially funded defined-benefits scheme with the size of investment fund reaching 917.5 million BD at the end of 2002. Total contributors covered by GOSI increased from (158894) in 2001 to (174809) in 2002 while the number of pensioners increased from 5976 to 6964 in the same years .The size of GOSI investment fund reached 721.6 million BD at the end of 2002 .

  48. Bahrain Investment Policies GOSI and PFC aim at the preservation and maximization of the real value of the assets through diversification and risk management.Investment polices are based on the principles of guarantee, profitability and liquidityThe investment funds follow the conservative investment approach and concentrate their investments in Bahrain thus supporting economic activities and contributing to the economic and social development of the country.

  49. Year GOSI Investment Fund PFC Investment Funds Total Public Pension Investments Funds 1999 --- 746.7 --- 2000 664.5 814.7 1479.2 2001 707.1 866.5 1573.6 2002 721.6 917.5 1639.1 2003 773.3 --- --- Bahrain The public pension funds size developed as follows (in million BD)

  50. Asset class Bonds Bank Deposits Stocks Loans Real Estate Alternatives Total Year GOSI PFC GOSI PFC GOSI PFC GOSI PFC GOSI PFC GOSI PFC GOSI PFC 1999 _ 26.1% _ 33.7% _ 11.5% _ 9.6% _ 0.8% _ 18.3% _ 100% 2000 22% 29.4% 39% 29.2% 20% 9.7% 0.0 12% 5.4% 0.7% 13.6% 19% 100% 100% 2001 20% 23.8% 40% 29.7% 22% 13% 0.0 12.2% 4.5% 1% 13.5% 20.3% 100% 100% 2002 22% 22.6% 40% 27.9% 15% 15.8% 0.0 12.2% 4% 1% 19% 20.5% 100% 100% 2003 14% _ 47% _ 16% _ 0.0 _ 4% _ 19% _ 100% 100% Bahrain

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