ZAMBIA CATHOLIC UNIVERSITY

FACULTY OF BUSINESS, FINANCE AND MANAGEMENT

DEPT. OF ACCOUNTANCY

AN ASSESSMENT OF PENSION INVESTMENT RETURNS AND

THEIR IMPACT ON BENEFITS PAYMENTS:
A CASE STUDY OF: NATIONAL PENSION SCHEME AUTHORITY
(NAPSA) HEADQUATERS LUSAKA, ZAMBIA

A RESEARCH PAPER PRODUCED IN THE PARTIAL

FULFILLMENT OF A BACHELORS DEGREE IN ACCOUNTANCY

TIZA SILAVWE

STUDENT ID: 090089

AUGUST, 2014
 DECLARATION
I hereby declare that this submission is my own work towards the Bachelors of study and that, to

the best of my knowledge, it contains no material previously published by another person nor

material which has been accepted for the award of any degree of the University, except where

due acknowledgment has been made in the text.

……………………………...……. ……………………... ………………………..

Student name & ID Signature Date

Certified by:

……………………....................... …………………….. ………………………..

Supervisor’s name Signature Date

Certified by:

……………………....................… ….. …………………. ………………………....

Head of Dept. name Signature Date

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 DEDICATION
This dissertation is dedicated most to the Man who paid supreme sacrifice to the investment of

my career. M.Y.S.R.I.E.P Dad (Mr. Joseph Silavwe) you have gone too soon, I wish you had a

portion to eat from your investment. Special dedication goes to my two Mothers (Mrs. Julia

Kapotwe Silavwe) and Jessy Kapotwe for the strong financially support and guidance throughout

my entire life of living. Thirdly, I am dedicating this paper to the following members of my

lovely family for the love and total support paid on my education: (Mr. Willie Silavwe, Mr.

Charles Silavwe, Mr. Mwalimu Silavwe, Lilian Nalavwe, Barbra Nalavwe, Martha Nalavwe,

Tisa Nalavwe, Jessy K. Nalavwe and Nicholas C. Silavwe). To you all; I salute and this is for

you, without you I wouldn’t have made it.

May the Peace and favor of the Lord reach you wherever you are.

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 ACKNOWLEGMENT

My warmest appreciation goes to my supervisor Mr. F.K Chanda (H.O.D Accountancy Dept.)

for his encouragement, concern and guidance throughout the writing of this thesis.

Special thanks go to the staffs of NAPSA Headquarters Lusaka: Mr. J. Kangwa (Human

Resource Manager), Mrs. Dorothy P. Soko (Investment Manager-Treasury), Mrs. Kombe T.

Siwale (Benefits Manager), Miss. Mwangwe Mudenda and NAPSA Public Relation Manager,

Kitwe for the help rendered in obtaining the necessary NAPSA reports and the relevant data that

was needed for this work.

It is also my singular opportunity to appreciate the greatest support filled with deep respect and

gratitude and true emotions for the unique lectures, supervision, guidance and encouragement

during the study of my program to the following people the Zambia Catholic University: Prof.

Fr. Rev. Chilambwe (Dean of Social & Development Studies), Mr. Cornelius Chilala (Dean of

Accountancy), Mr. W. Sikazwe (H.O.D Banking and Finance), Mr. Japhet Mwanza, Mr.

Mkhazika J. Zimba, Mr. Kafula Mulenga, Mr. Bwalya Kampamba.

All in all, all thanks and gratitude belongs to God for his endless mercy, love and support

throughout my life. True wisdom and knowledge comes from the almighty God, and indeed He

gave me the capacity of knowledge I require for my profession through the above mentioned

people.

Thank you,

Tiza Silavwe (Mr.)

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 ABSTRACT
In recent times, some doubts have been expressed on the ability of the Pension Schemes to pay

pensions in the future because pension fund’s investments have yielded low returns. It is for this

reason that the study was undertaken to assess the investment returns performance and their

impact on benefits payments for the National Pension Scheme Authority (NAPSA) over the

period of ten (10) years.

NAPSA controls large pool of resources collected from its members every month. These

contributions are expected to grow in value if the scheme is to sustain payments out as a pension

to retired pensioners for the remainder of their lives. It is only prudent for this reason that the

scheme invests long-term to cover long-term liabilities. The investment of member’s

contributions is expected to realize a return that should be able to cover the lump-sum benefits,

as well as periodic payments till the death of a member.

The research design used was a case study, secondary and primary data was also utilized in this

research paper. The data were processed using the Statistical Package for Social Sciences,

version 16.0 (SPSS 16.0). The results were analyzed from various dimensions that all led to the

overall portfolio performance assessment. The Shapes Ratio (1966) and the Jensen’s measure

(1968) were used to measure the true investment performance of the firm.

The performance of NAPSA’s portfolio asset allocation returns was that; their weighted returns,

weights of portfolio assets and also the nominal returns and real returns had been considerably

acceptable at their level of operation at time.

It is this regard that investments guidelines have been published to guild the trustees of NAPSA

in the manner of investing member’s funds. Further, the Authority is still young in terms of its

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investments and the claims for benefits are still low though they expects increase by 2015 as

many members will start qualifying for a pension.

The recommendations given were that the Authority needs to be more active on the market to

help develop the capital market subject to review of each individual issue, in this line, there is

need to be more collaborative with players on the market, and reviewing of Investment

Guidelines more often.

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Table of Contents
DECLARATION ......................................................................................................................................... 1
DEDICATION ............................................................................................................................................ 2
ACKNOWLEGMENT.................................................................................................................................. 3
ABSTRACT ............................................................................................................................................... 4
LIST OF ABBREVIATIONS ..................................................................................................... 9
LIST OF TABLES .................................................................................................................... 10
LIST OF FIGURES................................................................................................................... 11
CHAPTER ONE ....................................................................................................................................... 12
1.0 Introduction ...................................................................................................................... 12
1.1 Background of the Study ................................................................................................ 12
1.2 Origin of Pension Funds .................................................................................................. 13
1.3 Types of Pension Funds ................................................................................................. 14
1.3.1 Social Security Scheme ....................................................................................................... 14
1.3.2 Social Insurance ................................................................................................................. 14
1.3.3 Company Pension / Work Pensions / Pension Scheme ....................................................... 14
1.3.4 Government/State Pension Scheme .................................................................................. 15
1.3.5 Classification of Pension Fund ............................................................................................ 15
1.3.5.1 Defined Benefit Plan ....................................................................................................... 15
1.3.5.2 Defined Contribution Plan ............................................................................................... 16
1.4 Social Security System in Zambia .................................................................................. 16
1.4.1 Zambian Pension Scheme Pre Independence ..................................................................... 18
1.5 Benefits Paid by NAPSA ................................................................................................ 19
1.5.1 Investments of Pension Funds ........................................................................................... 21
1.5.2 The Concepts of Investment .............................................................................................. 21
1.5.3 Overview of NAPSA Portfolio Asset Allocation Class ............................................... 22
1.6 Problem Statement .......................................................................................................... 23
1.7 Purpose and objective of the study.................................................................................. 25
1.8 Research questions ......................................................................................................... 25
1.9 Significance of the study ................................................................................................ 25
1.9.1 Research Hypothesis .................................................................................................... 26

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 1.9.2 Scope of the study....................................................................................................... 26
1.9.3 Organization of the study report.................................................................................... 26
CHAPTER TWO ...................................................................................................................................... 28
2.0 Introduction .................................................................................................................... 28
2.1.0 Origin and Features of Pension Funds .......................................................................... 28
2.1.1 Acceptance of Social Security in Africa ............................................................................... 29
2.2.0 Evidence on Investment Performance ........................................................................... 31
2.2.1 Investments in Equity Portfolio .......................................................................................... 33
2.2.2 Evidence of studies done in Zambia ................................................................................... 38
2.2.3 Performance of Pension Funds in Zambia .......................................................................... 40
2.2.3.1 Oversees Studies on Performance of Pension Funds ........................................................ 41
2.3.0 Critique of the studies .................................................................................................. 41
Summary ................................................................................................................................... 42
CHAPTER THREE .................................................................................................................................... 44
CONCEPTUAL AND THEORETICAL FRAMEWORK ....................................................... 44
3.0 Introduction ..................................................................................................................... 44
3.1.1 The Actuarial Concepts ....................................................................................................... 44
3.1.2 World Bank’s Policy Framework................................................................................. 45
3.2 Theoretical Framework ................................................................................................... 48
3.2.1 Sharpe Ratios..................................................................................................................... 48
3.2.2 Jensen’s Measure (Alpha) .................................................................................................. 50
3.3.0 The Concept of Return ................................................................................................. 50
3.3.1 Components of Return ................................................................................................... 51
3.3.2 Other Measures of investment return ........................................................................... 51
3.3.2.1 Economic Value Added (EVA) ......................................................................................... 51
3.3.2.1.1 Calculating EVA.............................................................................................................. 52
3.3.2.1.2 Economic Value Added, Net Present Value and Discounted Cash flow Valuation ............. 52
3.3.2.2 Fuzzy Approach............................................................................................................... 54
CHAPTER FOUR ..................................................................................................................................... 56
RESEARCH DESIGN AND METHODOLOGY..................................................................... 56
4.0 Introduction ...................................................................................................................... 56

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 4.1 Research Design ................................................................................................................... 56
4.2 Area of Study ........................................................................................................................ 57
4.3 Instruments for Data Collection ............................................................................................. 57
4.4 Methods of data Analysis...................................................................................................... 58
4.5 Analysis of Data and Interpretations ..................................................................................... 58
4.6 Limitation of the study ........................................................................................................... 59
CHAPTER FIVE........................................................................................................................................ 60
DATA ANALYSIS AND INTERPRETATIONS .................................................................... 60
5.0 Introduction ...................................................................................................................... 60
5.1 Analysis of Data ............................................................................................................... 60
5.2 Portfolio Investment Performance .................................................................................. 61
5.2.1 The performance of investments ......................................................................................... 65
5.4 Benefits Payments ........................................................................................................... 67
5.4 Summary ......................................................................................................................... 69
CHAPTER SIX.......................................................................................................................................... 70
FINDINGS, CONCLUSIONS AND RECOMMENDATIONS ............................................... 70
6.1 Research Objectives and Hypothesis ............................................................................... 70
6.2 Findings ........................................................................................................................... 71
6.3 Conclusion........................................................................................................................ 72
6.4 Recommendations ............................................................................................................ 72
6.5 Areas for Further Research ............................................................................................... 73
APPENDICES .......................................................................................................................................... 74
Appendix i NAPSA’s Market Overview: as at 2013 .......................................................................... 74
Appendix 1.2 NAPSA Equity Shares as at 2013 ............................................................................... 74
Appendix 3 NAPSA investment in Bond .......................................................................................... 75
REFERENCES .......................................................................................................................................... 76

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 LIST OF ABBREVIATIONS

EVA -Economic Value Added

ILO -International Labor Organization

LASK -Local Authority Superannuation Fund

NAPSA -National Pension Scheme Authority

OMERS -Onterio Municipal Employees Retirement System

PSPF -Public Service Pension Fund

PIA -Pension and Insurance Authority

RM -Return on the Market

RF -Risk-free Return

WCFCB -Worker Compensation Fund Control Board

ZSIC -Zambia State Insurance Company

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 LIST OF TABLES

Table 1.1 -NAPSA’s summary of investment as at 31th December 2012…………….22

Table 5.1 -Economic indicators (2004-2013).................................................................50

Table 5.2 -NAPSA investment performance from 2004-2008..……………………….61

Table 5.3 -NAPSA’s Portfolio Asset Allocation Performance………………………...63

Table 5.4 -NAPSA Benefit Payment…………………………………………………..67

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 LIST OF FIGURES

Figure 5.1 -Trend Analysis of Investment Performance…………………………………62

Figure 5.2 -Portfolio Asset Allocation as at 2013………………………………………..64

Figure 5.2 -Weights of Portfolio Asset Allocation as at 2013….………………………..64

Figure 5.4 -Trend in number of claims for both NAPSA and ZNPF from 2004-2013…..68

Figure 5.4 -Trend in amounts of benefits for both NAPSA and ZNPF from 2004-2013...68

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 CHAPTER ONE

INTRODUCTION AND BACKGROUND OF THE STUDY

1.0 Introduction

This chapter deals with the background of the study on pension schemes system. It outlines the
types of pension funds, brief operations of social securities, the statement of the problem,
research objective, research questions, significance of the study, and scope of the study.

1.1 Background of the Study

Before the establishment of pension funds, many workers in wage-earnings employment

especially in urban areas did not have the means of setting aside something from their monthly
income to secure their needs or secure the dependents of a breadwinner in case of his or her
death or the breadwinner in case of not being able to work due to old age or infirmity. This was
in some cases due to low incomes which did not permit voluntary saving, and consequently,
most of them retired from, or left, employment with nothing to show for their long years of work.
For those who could not be re-incorporated into family life with their folks it meant living a life
of destitution. However, the government being sensitive to the social needs of its citizens after
retirement from gainful employment decided to establish a fund which was primarily a
compulsory saving scheme. Moreover, the International Labor Organization (ILO) conversion
No.102 of 1952 compels all ratifying countries to establish social security schemes based on its
principal definition. Zambia is a member of ILO and hence had to develop a social security
system.

Pension funds are described as financial intermediaries using a functional approach to finance
which encompasses traditional theories of intermediation. Funds fulfill a number of the functions
of the financial system more efficiently than banks or direct holdings. Their growth complements
that of capital markets and they have acted as major catalysts of change in the financial
landscape. Financial efficiency in this functional sense is not the only reason for growth. It is
also a consequence of fiscal incentives and benefits to employers, as well as growing demand
arising from the ageing of the population. Pension funds according to (Davis 1995) are forms of
institutional investor, which collect, pool, and invest funds contributed by sponsors and

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beneficiaries to provide for the future pension entitlements of beneficiaries. They thus provide
means for individuals to accumulate saving over their working life so as to finance their
consumption needs in retirement, either by means of a lump sum or by provision of an annuity,
while also supplying funds to end-users such as corporations, other households (via securitized
loans) or governments for investment or consumption. Since early withdrawal of funds is usually
restricted or forbidden, pension funds have long term liabilities, allowing holding of high risk
and high return instruments. Accordingly, monies are intermediated by pension funds into a
variety of financial assets, which include corporate equities, government bonds, real estate,
corporate debt (in the form of loans or bonds), securitized loans, foreign holdings of the
instruments mentioned above and money market instruments and deposits as forms of liquidity.
Pension funds are therefore sponsored by employers, such as companies, public corporations,
industry or trade groups; accordingly, employers as well as employees typically contribute.

1.2 Origin of Pension Funds

Pension funds were started in 1875 in the United States of America by the American Express
Company. Although established in the 1800’s real growth in retirement programs came after
World War Two. The rapid growth was attributed to high-profit taxes imposed on corporations
which encouraged some of them to establish pension plans; since the employer’s contributions to
qualified pension plans were not tax-deductible and therefore could be funded inexpensively.
(www.ansahl.com/Altersvorsorge/pension-scheme-FRG/German-History.html). Another factor
that made the people in America conscious of the need to provide for their future economic
security was the Depression of the 1930’s. The depression swept away the life savings of
millions of people and created a feeling of insecurity. In the United Kingdom pension funds have
existed since the early 1900’s. Lloyd George, the Chancellor of the Exchequer under the
government of Herbert Asquith introduced the very First state pension. To pay these pensions, he
had to raise government revenues by an additional £16million per year
(http://www.incipit.co.uk/state-pensions). The 1909 budget known as the People’s Budget
included increases in taxation. By 1936, active membership of private pension funds had risen
substantially. This was associated with a shift in benefit design from defined contribution to final
salary defined benefit (Avrahampour, 2006). An additional, State Pension payable on top of the
Basic state Pension was introduced and came into effect from April 1978. It was an earning

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related pension. The Guarantee Minimum Pension was also introduced to provide guarantee with
respect to the adequacy of pension funding.

1.3 Types of Pension Funds

There are many different types of pension funds depending on who instituted them and the
benefits derived. The process that each type of pension fund uses to decide on policies relating to
investing and financing etc. is different from other competitors. In this case, the researcher looks
at four main types of pension funds which are as follows: Social Security; Social Insurance;
Company Pension; and Government Pension Scheme.

1.3.1 Social Security Scheme

This is where all social transfers in kind and in cash is organized by the government or is agreed
upon through collective bargaining processes. Benefits include cash transfer such as pension,
employment injury benefits, short term cash benefits (sickness and maturity benefits,
unemployment benefits), as well as benefits in kind such as health services.

1.3.2 Social Insurance

This is a form of social security designed to protect income earners and their families against a
reduction or loss of income as a result of exposure to risks, which impair their capacity to earn
income. Social insurance is contributory with contribution being paid by employers, employees,
self-employed persons or other contributions depending on the nature of the specific scheme.

1.3.3 Company Pension / Work Pensions / Pension Scheme

A Company Pension or (Work Pension) scheme is a pension that is set up by the employer to
provide retirement benefits to the employees whilst they are employed by employer. It allows the
employee to accumulate a pension fund during his or her working life. Employees will usually be
required to make regular pension contributions based on a percentage of their salaries into the
work pension scheme. It is customary for the employees’ company or employer to match the
level of contribution the employee make.

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1.3.4 Government/State Pension Scheme

This is a Government Pension that is accumulated during an individual’s lifetime and paid by the
Government when they reach public pension or retirement age. A government pension value is
based on the individual's National Insurance contributions (NI) made throughout his or her
working life. There is difference between Pension Scheme and Social Security which is quite
significant, and while certain Social Security programs may resemble pensions, no part of it is
administered like a pension plan. Pensions are retirement benefits that are provided to people
who have paid into a plan or who have been granted pension benefits by an employer. Whereas
Social Security is a social insurance program that provides a wide number of services, one of
which is taxpayer-funded benefits to the elderly.

1.3.5 Classification of Pension Fund

Pension funds can be classified into two different main kinds of plans. The Defined Benefit plan
and Defined Contribution plan, and these are described as follows:

1.3.5.1 Defined Benefit Plan

This is a pension plan that defines a benefit for an employee upon retirement. It offer a pension,
assured by the employer, it is usually defined in terms of some proportion taking into
consideration certain factors such as the number of years a person works, the member’s salary at
retirement, age at retirement and a factor known as the accrual rate. A defined benefit plan may
be funded or unfunded. A funded plan is one which invests the contributions of both employers
and members towards meeting the benefits to be paid in later years. On the other hand, an
unfunded defined benefit pension sets no assets aside for investments. The benefit is paid for by
the pension sponsor as and when they fall due. Most national pensions in the world are unfunded
with benefits directly paid out of workers contributions and taxes. Therefore, in a defined benefit
plan any investment risks or rewards are assumed by the sponsor and the individual takes no
responsibility for it.

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1.3.5.2 Defined Contribution Plan

The contributions made by each member are paid into his or her individual account. An
employees’ contribution (together with any from the employer) are invested and the amount the
employee gets when he/she retires depends mainly on the total amount of money the employee
and the employer have paid into the scheme over the years and how the investment has grown.
Hence, the returns on the investment which may be positive or negative are also credited to the
members account. Defined contribution plans have become widespread all over the world. In
these plans, investments risks and rewards are assumed by the employee and not the sponsor.
Many employers are avoiding the large expenses associated with using a defined plan and are
instead offering a defined contribution plan to employees.

An occupation or employer pension is one created by an employer (company) for the benefit of
its employees. Open pension funds support at least one pension plan with no restrictions on
membership while a closed pension fund supports only pension plans that are limited to certain
employees. Government-sponsored pension plans are countrywide, compulsory programs such
as the social security system in the United States and the Canada and Quebec pension plans in
Canada (Masulem and Palicios, 2003). However, both the public and private sector pension plans
are subject to the same financing, investment and organizational principles. It is process that each
type uses to decide and implement its policies that differ. For example investment policy
decisions for public sector plans are made at public forums while the same decisions for private
sector plans are made behind closed doors by individuals with strong investment background.

1.4 Social Security System in Zambia

In Zambia, Social Security System coverage is limited to the contributors only. It is quite
different from what the USA and the UK operates in terms of pay outs. In the US and UK social
security are funded or run directly by the government which qualifies them to provide monthly
pay to those who are in unemployment. Whereas in Zambia social securities are not funded by
the government, hence they do not provide monthly pay to those who are in unemployment but
to the contributors of the scheme only. There are four (4) major statutory social security
institutions in Zambia that operate at national level, and these are the; National Pension Scheme
Authority (NAPSA), Local Authorities Superannuation Fund (LASF), Public Service Pension

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Fund (PSPF), and the Workers Compensation Fund Control Board (WCFCB). Furthermore there
is also a number of social security in the private sector. The contributions in these schemes is
basically by both the employer and the employee, however the Workers Compensation Fund
Control Board contributions is entirely on the employer (Kalwa Kaunda, 2012).

The National Pension Scheme Authority (NAPSA) is a social security pension scheme for both
private sector and parastatal employees that provides social security to its contributory members.
It was established through an Act of parliament, the National Pension Scheme Act of 1996, and it
came into being on 12th February 2000 following the transformation of the then Zambia National
Provident fund (ZNPF) which had been in existence since 1966. NAPSA operates on a defined
benefit basis, and it is financed by the contributions of members and the investment income on
the assets held in its investments. The scheme is concerned with providing pensions and other
social security benefits to its members to ensure that the future income needs can be met when
that need arises. It is therefore designed to provide basic pension, hence, it is a basic scheme
which perhaps satisfies the requirement of the low-income groups. Without this arrangement,
many might stand to suffer severe hardships and embarrassment in the future. In this case, the
government is actively involved in the provision of pensions in effort to meet the future needs of
vulnerable groups in society. Most importantly the scheme should invest in viable projects with
high returns to secure the future of workers. In line with this objective, NAPSA invest in many
areas of the economy such as the financial sector, real estate development, the hospitality
industry etc. in the country.

Before the transformation of ZNPF to NAPSA, ZNPF was the largest pension funds in Zambia;
it was a compulsory savings scheme for private sector employees. The ZNPF collected
contributions from employers and employees, kept individual member accounts and provided
lump-sum benefits upon retirement. An estimated 40 percent of all private sector employees
were additionally enrolled in private pension plans. Civil servants and employees of local
authorities were covered by separate pension funds, the Civil Service Pension Fund (CSPF) and
the Local Authorities Superannuation Fund (LASF). Both schemes were designed as funded
systems and provide defined retirement benefits based on the last annual salary and the years of
service. The transformation of ZNPF to NAPSA was a realization of the need for social
insurance by the government, and appointed a commission of enquiry into the establishment of

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comprehensive social security known as the Kabwe Commission. The Kabwe Commission
explored the whole country and collected information which resulted in the Kabwe Commission
Enquiry Report, and presented to the government for implementation. (Transformation of the
Zambia National Provident Fund-Internal Education Campaign Booklet). Moreover, during the
early to mid of 1990s the International Labor Organization (ILO) undertook a number of studies
on social insurance in Zambia. The ILO report outlined a national defined benefit scheme
coupled with the desire to strengthen pension provision culminated in the enactment of
legislation to establish a new national pension scheme, and to amend the Civil Service and Local
Authority Pension Scheme to strengthen their administration and financing. Subsequently, the
National Pension Scheme Act No. 40 of 1996 authorized conversion of the Zambia National
Provident Fund into a new National Pension Scheme under the National Pension Scheme
Authority (NAPSA).

The transformation from ZNPF to NAPSA meant a complete change which was to run social
insurance principles. It became necessary to transform to a pension because of structural
weakness of a provident fund. A provident fund provides benefits in a form of lump sum which
are usually eroded by inflation, thus rendering the benefit meaningless in real terms whereas the
pension scheme provides periodical payment (pension) till the death of a member and is adjusted
annually in line with increases in National Average Earnings (NAE) which is calculated by the
Central Statistical Office. The scheme system is commonly described as a pay-as-you-go system,
in that revenues are collected to pay the current retirees, and therefore, it is also called a defined
benefit system. As long as a worker who has met the minimum required number of contribution,
he or she is entitled to receive the same amount of pension upon retirement, regardless of how
much or how little he or she has contributed to the scheme.

1.4.1 Zambian Pension Scheme Pre Independence

In the time after independence, Zambia nationalized all companies four years after attaining its
independence, which meant that all privately-held assets had to be transferred to government-
owned companies. This brought about the establishment of the first Zambia insurance company,
the Zambia State Insurance Company (ZISC), which held occupational funds. It was a monopoly
until 1991 when Zambia went into the third republic. The new government embarked on

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economic liberalization, which pared way for the formation of competing privately-owned
pension funds. This also brought about the establishment of the Pension and Insurance Authority
(PIA) which was made in February 1997 to regulate and supervise pension schemes in Zambia.
The PIA derives its mandate from the Pension Scheme Regulation Act no. 28 of 1996. Its
mission is ‘to regulate the conduct of pensions and insurance industry through prudential
supervision in order to protect the interest of pension scheme members and insurance policy-
holders and to foster the industry’s growth, development and stability.’

1.5 Benefits Paid by NAPSA

The primary objective of NAPSA is the disbursement of benefits. The Authority pays two types
of benefits which have been distinguished in our day to day language, and their meaning is
different and needs to be appreciated from the onset. The scheme pays benefits in form of
Pension and Lump-Sum.

I. “Pension”: this means that benefit payment which one receives at regular intervals
(monthly in NAPSA’s case) for the rest of the life until they die. In most cases, this is
passed on to the survivors who include the spouse and the children.
II. “Lump-Sum”: this is referred to as a benefit payment which is a one off payment and
once one has received it, there are no other payments accruing to that person in respect of
that benefit, (NAPSA Pullout, 2012).
Having deliberated the foregoing, there are four benefits currently payable under the Act namely:
Retirement Pension/Lump-Sum; Invalidity Pension/Lump-Sum; Survivors’ Pension/Lump-Sum;
and Funeral Grant. However, there are different requirements for each of the benefits that
NAPSA pays and these requirements are largely determined by the type of benefits being paid. A
member qualifies for pension or is deemed to be fully insured if:
 He/ She has 180 months or 15 years of contribution to NAPSA
 He/ She meet conditions of the Sliding Scale.
The sliding scale was designed to enable members who would not have made the 180 months of
contributions to qualify for a pension subjected to their age as at 1st February 2000. This means a
scale was developed to enable people who were at various ages as at that date to still qualify for
a pension despite them not making the 180 contributions. The following scale indicates the

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various minimum numbers of contributions required for people who were at the following ages
as at 1st February, 2000.
Age at 1/02/2000 No. of Months Required
39 168
40 156
41 144
42 132
43 120
44 108
45 96
46 84
47 72
48 60
There are also requirements for eligibility for normal and early retirement pension. In order to be
eligible for a normal retirement pension one must:
a) Reach the age of 55 years
b) Be fully insured; that is must have made 180 months of contributions or meet conditions
of the sliding scale.
While on the other hand, in order to be eligible for an early retirement pension, the following
will apply:
a) Reach the age of 50 years
b) Member’s early retirement pension should exceed the minimum pension applicable at the
time of retirement. (NAPSA Pullout, 2012)
NAPSA is the official manager of all contributions made to the ZNPF on a custodial basis and
has continued paying benfits on behalf of ZNPF. The benefits payable under ZNPF are:
1) Age benefit; these are paid to those who are at least 50 years old and above.
2) Survivors; these are paid to eligible beneficiaries.
3) Funeral Grant; these are paid to the next of kin of the deceased member.
4) Disorder; this may be physical or mental.
5) Emigration; thase are payable to eligible members permanently leaving the country.
6) Home Ownership Benefit; these are payable for home improvement, and

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 7) Supplementary savings; are paid where applicable.

In addition, the scheme receives funds from members’ salary which it is expected to invest in
low risk ventures with appreciable returns made on them. The monies coming from the salary
deduction or contribution is the input into the fund, also together with investment returns they
constitute the process of managing the fund. Therefore, the output is the benefit paid to retirees at
the end of their lives, working period or contribution. The illustration below shows the
management of funds.

Returns +
Contributions Investments contributions
reserves

Benefits

The illustration indicates that funds are received from members and safeguarded in form of
investments for future benefits payments.

1.5.1 Investments of Pension Funds

Pension funds invest in capital markets to make profit. They need a future economic recovery
that lasts and as such most of them invest for the long term. In many countries, pension fund
resources are the domestic sources of long term capital. Initially, the pension funds are channeled
into safe investment areas. However, as the funds mature some turn towards “alternative
investment vehicles, which in general have had better returns than pension fund portfolios,
although with greater risk” (Vives,1999).

1.5.2 The Concepts of Investment

Rubinstein Mark (2006) defines an investment as any asset tangible or intangible that has the
potential to provide a periodic return and/or to increase value of the business, and he identify two
forms of investment as:

21
 1) Economic Investment; the net additions to the capital stock of society.
2) Financial Investment; an exchange of financial cliam thtat is; stock and bond (collectively
termed securities) mortgages, real estates, etc.

Dougall (1973) also defines investment from the economic and financial points of view. From
the economic point of view he indicates investment to imply the formation of new and
productive capital in the form of new construction, new producers’ durable equipment, or
additional inventories. From the financial point of view investment is the commitment of present
funds for the purpose of deriving future income in the form of interest, dividents, rent, or
retirement benefits, or appreciation in the value of the principal. Also, according to Gitman and
Joehnk (1993) investment is any vehicle into which funds can be placed with the expectation
that, they will be preserved or increases in value and/or generate positive returns. Finally Sharpe
et al (1999) also defines investment as the sacrifice of certain present value for (possibly
uncertain) future value.

1.5.3 Overview of NAPSA Portfolio Asset Allocation Class

The Authority has a diversified portfolio investment of various asset classes. According to a
summary of portfolio asset allocation as at 2013, NAPSA has invested into the following assets:

1. Treasury Bills
2. GRZ Securities
3. Real Estates
4. Equities
5. Corporate Bonds
6. Term Deposits

Under the act and regulations, the Authority also controls and manages the assets and liabilities
of members who contributed to a defined contribution plan established under the repealed
Zambia National Provident Funds Act (the ZNPF Act). The table 1.1 follows showing a
summary of NAPSA’s investments for both Pension Scheme and Provident Fund as at 31st
December, 2012.

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Table 1.1: NAPSA’s Summary of investments as at 31 December, 2012

ITEMS Pension Scheme Provident Fund

% held ZMK’M % held ZMK’M

Loans and Advances - 7 - -

Fixed Interest Securities 1 41 - -
Other receivables 5 298 - -
Treasury bills 5 321 - -
Equities 6 349 32 94
Housing inventory 9 532 - -
Work in progress - - - -
Investment Properties 17 1,006 62 184
Term deposits 19 1,088 6 17
Government Bonds 38 2,267 - -

Total 100 5,909 100 295

Source: NAPSA’s 2013 Post Newspaper publications

1.6 Problem Statement

NAPSA has the mandate to invest employees and employer contribution in order to pay adequate
post-employment benefits such as pensions. However, pension money is being driven in
investments that are held to be secure but with very low returns. This is due to investments being
exposed to a number of risks such as inflation, political risk, asset underperformance, reduced
return margins than earlier projected, and sometimes management costs of the pension scheme
are too high to allow any reasonable benefit to accrue to the pensioners. Lack of Asset in the
current market of the Authority and other constraints have also affected the performance of their
investments returns. In addition, in the ‘2013 NAPSA open forum’ the Authority reported that
equity investment had suffered various problems such as; low liquidity on the market, small
public floats, few listed companies, tax framework not providing for REITs, low capitalization of
some listed companies, and also corporate governance issues. In addition, limited issues of bond,
lack of long dated bond, and interest rate risk have affected the investments in bonds. Further, for

23
real estates investments; lack of feasibility station and complete contract documentation, high
construction costs, delayed complete generally, high sale price for housing unity, slow sale for
housing unity, etc. have affected the significant return of real estates.

Under the ZNPF major investments were made but these were mostly biased toward real estates
at the direction of the government. In later years real estate investment was unable to provide the
liquidity to meet member benefit payment leading to poor payout and dissatisfaction. The failure
of the funds was partly as a result of the slope in the investment portfolio. It was a common
practice for ZNPF to lend funds to the government, local authorities and parastatal organization
without regard to the entity’s ability to service the obligations. The situation was worsened by
political pressure and the government’s interest to invest in real estate in various parts of the
country for social and economic development. It was also traditional for government to direct
institutions such as ZNPF to fund government expenditures. This led to the erosion of the value
of investment, as government could not pay economic interest rates on funds borrowed. In
addition the government often failed to honor its obligation to the fund (Musenge, 2002). It was
hoped that the pension scheme would perform better in providing adequate benefits to its
members upon retirement, or to the members’ beneficiaries upon his or her death.
Therefore, the new pension scheme (NAPSA) has a huge responsibility placed on its hand as it
was expected to be a responsible custodian of the fund entrusted to it. The returns from
investments could have determined how well the scheme met the main objectives of providing
financial security for its members and eligible survivors.
In accordance with the prudential management principles specified in the Pension Scheme
Regulation Act (No.28 of 1996), a number of investment guidelines were adopted. Two major
ones that related to portfolio management are:
 Appointment of Fund Managers to manage the investment portfolio of the scheme on the
basis of a competitive tender process which shall take into account past performance,
training and experience, size and asset to be under management, quality and proposed
fees structure (Section 5 (1)).
 Develop and establish market benchmarks to assess the performance of its investment
managers (Section 6).

24
To date, none of the two prudential guidelines specified in the provisions has been implemented.
Therefore, it is these and other factors such increases in pensions contribution pay out, increases
in private pension fund management, low enrollment, lack of contribution by some private
companies and small & medium scale enterprises highlight the need for good investment
decisions and returns by the scheme to maintain then confidence of the people.
Hence, this study is going to be undertaken in order to analyze the investment returns made by
NAPSA over the period from 2004-2013 and their impact on post-employment benefits.

1.7 Purpose and objective of the study

The research seeks to accomplish the following

1) To examine the rates of returns obtained from portfolio investments of NAPSA;

2) To determine whether the Authority is able to pay benefits based on their returns made;
3) To assess the returns on investments and their impact on the expected future benefit
payments by the pension fund;
4) To determine how investments returns can be adequately be achieved.

1.8 Research questions

1) What rates of returns are obtained from pension fund investments?

2) Is the Authority able to pay benefits based on their returns made from investments?
3) What is the impact of the investments returns on investments on benefits payments?
4) How can investments returns be adequately achieved?

1.9 Significance of the study

The justification behind conducting this research is:

1) To determine whether the Authority would be able to cover future payouts from
investments income.
2) To determine the reinvestment percentage when compared the benefits paid with returns
on investments.

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 3) The research on the investments would guide future decisions by employers and
employees on whether to invest all their pension contributions with NAPSA or invest
some portion with other private pension fund managers.
4) To contribute to knowledge in pension fund management.

1.9.1 Research Hypothesis

In order to help in the analysis of the research the researcher developed the hypothesis as
follows:

Ho: There is no significant relationship between investments returns and benefits payments.

H1: There is a significant relationship between investments returns and benefits payments.

1.9.2 Scope of the study

This study covers mostly the period of 2004 to 2013.

i. Hence, the study will consider audited end of year financial figures provided by the
NAPSA and other financial institutions.
ii. The study looks at the portfolio asset allocation as a whole.
iii. Finally, the study concentrates on the one type of pension fund which a social security
scheme.

1.9.3 Organization of the study report

This research paper is organised into five chapters.

Chapter 1 deals with the introduction and background of the study on pension scheme
system. It outlines a brief background of the study, the statement of the problem,
research objectives, research questions, significance and, scope of the study.

Chapter 2 seeks to review literature on investments of pension schemes and their returns. It
also highlights the origin and features of pension funds in relation to social
security. The chapter looks at the empirical review of investment of pension funds
and slightly on the performance of pension schemes.

Chapter 3 deals with the concepts and theories relevant to this study, and the measures of
investment returns.

26
Chapter 4 deals with research design, methodology and data collection. It describes the
methodology used to carry out the research, his target population, sample design
and the research site.

Chapter 5 deals with data presentation and analysis

Chapter 6 deals with summary, conclusion and recommendations

27
 CHAPTER TWO
2.0 Introduction

This chapter will review literature on investments of pension schemes and their returns. It also
highlights the origin and features of pension funds in relation to social security. The chapter
looks at the empirical review of investment of pension funds and on the performance of pension
schemes. A summary of the issues discussed is given to conclude the chapter.

2.1.0 Origin and Features of Pension Funds

Pension funds in relation to social security often start before birth with the provision of pre-birth
care and maternity benefits and continue after death, with the payment of some form of death
benefits. Century by century, communities organised themselves into groups of various types.
This was done to protect themselves from the physical dangers which surround them, but later on
attempts were made to lesson some of the harsher aspects of life. As this continued people with
similar problems and concerns came together for mutual protection. Trade and artisan guides
were, formed with the aim of helping members when hardship struck, and many religious
institutions helped to alleviate some of the misery of those who were unable to cope with life's
problems. Kaseke (1998) and McGill, Brown, Haley and Schieber (2005) noted that, with
increasing urbanisation, changes in housing conditions, greater geographic mobility, and many
other economic and social developments, the traditional approach to old-age care and support
was weakened. Whitaker (1998) and Berghman and D'Haeseleer (2003) observe that piecemeal
attempts were made to lessen the distress of those whose wages stopped because of sickness,
unemployment, work injury or old age. Savings schemes were organised by governments or
mutual aid societies. Private insurance developed and provided life cover and funeral benefits.
Government began to introduce legislation which required employers to provide some
maintenance for their sick or injured workers but these arrangements were not sufficient in
themselves. The philosophy of the day was that workers could and should make their own
arrangements to counteract life's risks yet they were so absorbed in the day-to-day struggle for
survival that it was unrealistic to expect them to anticipate or plan for possible or distant
eventualities. Against this background, labour became more organised, more vocal and more
powerful, and social security programmes began to take shape in industrialised countries. These

28
early programmes were often compulsory, applying initially to certain categories of workers but
were progressively extended to cover large sections of the population. Various benefits were
introduced which sought to replace at least in part lost wages and income. With the passage of
time, these benefits were extended and eventually the term "social security" was used to
collectively describe them. (Kumado & Gockel, 2003).

2.1.1 Acceptance of Social Security in Africa

Most societies, at all levels, recognise the need to ensure that their members are protected against
loss of income in the event of social risks. They also recognise the need to ensure that there is
access to adequate and affordable health care. For many, these needs are met through their
conditions of work which form an important component of decent work. Africa is no exception.
Social security provisions in Africa are generally characterised by the following: economic
features comprising limited productivity, persistently high inflation rates, and increasing
informal sector employment. Skewed income distributions and demographic characteristics, with
reference to uneven population densities, low life expectancies, high birth rates, differing
patterns of retirement; and issues of governance, relating to emerging democracies and weak
subsystems for public administration according to Oliver (2005) are other factors that
characterise the provision of social security in Africa.
Barbone and Sanchez (2000) submit that the pattern of social security provision in Africa reflects
colonial preferences and considerations. New systems of organised social protection emerged to
support economic development.
Initially, the colonial powers extended their own system to their expatriates, the extension of
such provisions to African workers varied but was mainly concentrated on urban and industrial
workers to stabilise the labour force and to satisfy the trade unions. However, the majority of the
population remained beyond the scope of such an extension.
In North Africa, where proximity to Europe was a dominant factor, schemes are to be found in
Algeria, Egypt, Libya, Morocco and Tunisia, which provide pensions based on social insurance
principles that were established in the 1950s. Efforts have also been made both to provide a wide
range of benefits with contingencies such as unemployment (being covered in Algeria, Egypt and
Tunisia) and also to reach beyond employed persons to coverage of the self-employed.

29
Barbone and Sanchez (2000), and Bailey (2003) comment that in the former British colonies,
priority was given to employment injury schemes, but the development of social insurance was
slower. Liability was instead placed directly on the employer (in Ghana, Nigeria, Kenya,
Swaziland) and only later were schemes developed which relied on the payment of contributions
by employers into a public social security fund and at least, to some extent, on the pooling of
risks. The systems introduced by the British were generally more modest and except in the case
of provision for public servants, did not follow the lines of schemes operating in the United
Kingdom.
Although there was a growing recognition of the need to provide some form of protection to
other workers in the organised sector, this led only to the establishment of national provident
funds. These were effectively compulsory savings schemes, financed from contributions paid by
employers and workers, which accumulated, with investment interest, to form an individual
savings account for each worker. They were seen as simple to operate and also as consistent with
the future needs of the African workers who were expected to return to their village on
retirement where they would benefit more from a lump sum than a pension. Some countries such
as Sierra Leone did not establish either pension schemes or provident funds for private sector
workers and particularly in Southern Africa (Zimbabwe, Malawi, Botswana and Lesotho and, to
an extent, in South Africa) this development was delayed and instead there was considerable
reliance on occupational pension schemes and private provident funds (Bailey, 2003). However,
social security provisions in Africa face a lot of challenges. As noted by Barbone and Sanchez
(2000), people came to view social security contributions more as a tax and do not trust financial
institutions as a result of periodic sector crises.
According to Musenge (2003), good governance in social security schemes is critical for the
viability and sustainability of the schemes. It is equally critical for building trust in institutions
that have often been the subject of suspicion and scorn.
In many African countries there are clear indications of excessive government intervention or
interference. Governments often control the composition and appointment of governing boards,
as well as social security administrations, the management of funds and investment decisions.
Invariably, the relevant minister is empowered by statute to give directions of a general or
specific character to the board. This increases the possibility of political interference and may
compromise the independence of the board. Furthermore, while the composition of the boards,

30
where appropriate, is often of a tripartite nature, Barbone and Sanchez (2000) noted that this may
have to reflect experience in social security, financial matters or administration. The choice of a
stakeholder representative may be restricted to a particular entity from among the stakeholders,
and may result in weak representation of those for whom the relevant scheme has been
established.

2.2.0 Evidence on Investment Performance

In most countries, Pension funds invests in capital market to make profit. They need a future
economic recovery that lasts and as such most of them invest for the long term. Pension fund
resources are the domestic source of long term capital. Initially, the pension funds are channeled
into safe investment areas. However, as the funds mature some turn towords ‘alternative
investment vehicles, which in general have had better returns then pension fund portfolios,
although with greater risk,” (Vives, 1999).

The early evidence on the performance of pension funds in the U.S found that simple tests of
abnomal performance did not yield signifincant returns. Jensen (1968) examined the
performance of 115 pension funds over the period 1955-1964, using the Security Market Line
(SML) as the basis for comparison. Jensen’s technique was to regress the excess returns in the
individual fund (above the risk-free rate), against the excess returns on the market (Rmt-Rft).
Jensen’s conclusion was that the investment performance, that is average return across funds was
approximately -1% per annum, which gave an indication that investments did not yield
significant reutrns. By applying the same methodology to the average perfomance of pension
funds, Ippolito and Turner (1987) examined returns on 1,526 U.S pension funds and found
underperformance relative to the Standard & Poor’s 500 index (S&P500 index).

In the similar line, Lakonishok, Shleifer and Vishneyb (1992) examined 769 pension funds in the
U.S and they found that the equity performance of the funds under performance of the S&P500
was by 1.3% per year through the eighties. In addition, Coggin, Fabozzi and Rahman (1993)
investigated the investment performance of a random sample of 71 U.S equity pension funds for
the period January 1983 through December 1990. However, they found that some of the funds
out performed the market by 2.1% per annum while others under performed by -0.96%.

31
A study conducted by Goldman Sachs (1995) from the period of 1985 to 1994 to see the impact
of over–investment (i.e. about 90% of the total asset ) of the Malaysian provident fund on
Malaysian Government Securities (MGS) during the 1980s and 1990s, showed that if the
proportion invested in MGS had been reduced to 75% and that in equities and properties had
been raised to 10% and 5%, then the average returns on this more diversified portfolio would
have been some 15% higher with a corresponding reduction in risk of about 12%. Therefore, a
more balanced portfolio with 50% in MGS, 25% in equities, 10% in cash and 15% in properties
would have increased returns by about 35% and lowered risk by 10%, as compared to the
Malaysian provident fund’s historical portfolio with 90% invested in MGS and 10% in cash. In
the U.K, Blake, Lehmann & Timmerman (1999) examined a sample of 364 U.K pensions over
the period 1986-1994. They found that average return from stock selection was negative, and
also average returns to market return were negative.

However, on the role of financial structure in influencing the investment of pension funds there
are also some countries that provide specific evidences. For instance, Studart (2000) presented
the case for Brazil, and found that, at least five aspects of the Brazilian macro economy and the
functioning of its financial markets has to do with a minor role played by pension funds as
providers of long-term funds to productive investors and directing most of their resources to the
financing of public debt and the acquisition of real assets, such as real state. It therefore found
that there is:
I. High inflation and macroeconomic instability, which led to highly uncertain financial
environment and to short-termist behavior of most financially surplus units in the
country;
II. High levels of public debt financed by issuance of highly remunerated government
bonds;
III. The existence of relatively easy access (for large companies) to long-term, subsidized
credit from public institutions;
IV. Too much volatility of asset prices both in the short and medium run, which makes
institutional investors reluctant to invest, and
V. The lack of appropriate regulatory arrangements and institutions to stimulate the direct
acquisition of corporate securities by pension funds, or to channel their savings towards
the financing of productive investment.

32
In addition, Iglesias and Palacios (2000) found that countries with poor governance experience
achieved low return on their investment return. They used twenty developed and developing
countries public pension fund as a sample. However, for many of these countries, investment
returns of public pension funds were often below bank deposit rates and almost always below the
growth of per capital income. They also found that publicly-managed funds almost always face
serious political obstacles that hamper their ability to invest effectively. Their asset allocation is
systematically biased toward targeted investments and lending to government at low yields. As a
result, returns are much lower than those found in privately-managed funds and mostly lower
than bank deposit rates.

2.2.1 Investments in Equity Portfolio

Thomas and Tonks (2001) investigated the performance of the U.K equity portfolios of 2,175
segregated U.K pension funds over the period 1984-1997. They noted from the outset the
similarity between pension fund returns and the returns on the Financial Times Actuaries All
share index (FT-All share index). Most of the pension fund in the sample had an equity beta
close to unity. In addition, the coefficient of determination in the regression of fund returns
against returns on the market was very high. Both of the findings imply that fund returns were
very close to the returns of the FT-All Share Index. It would appear that in the sample were
“close-trackers” since they all invested in similar well diversified portfolios, which mimic the
market index. Any measures of the performance were therefore bound to be small. However,
during the period there was significant average underperformance during the strong bull market
of the mid-eighties, but significant out performance since 1987 that over the whole period and
across all funds average out performance was not different from zero, and there were negative
returns to market timing.

In a similar case, Dimson, March & Staunton (2002) looked at investment performance in
equities from a different prospective. They argue that there is a considerable amount of evidence
that in competitive capital markets additional risk is compensated by additional expected return
(for example the equity risk premium). This is in line with the Capital Asset Pricing Model
(CAPM) advance by the Nobel Prize winning economist, Sharp (1964) which noted that in both
the long and the short run, there is a linear trade-off between risk and return. In addition to this,

33
Gregory and Tonks (2004) examined the performance of individual personal pension that
invested predominantly in U.K equities in the U.K from 1980 to 2000. The report was that the
average performance was not significantly different from zero. However, Sutcliffe (2004) also
argued that there is empirical evidence to suggest that equities are a good hedge for a pension
scheme liability, and so there is no particular hedging advantage in equities over other forms of
investment.

On the other hand, Mulualem (2002) studied the accounting and management of pension funds
of Social Security Authority in Ethiopia. In his finding he discovered that although the authority
established as an autonomous public office allowed by proclamation 38/1996 to invest its
resources in profitable and reliable investment activities, he found that the authority has been
investing its resources in relatively less risky investment such as Government bonds and
Treasury bills as well as Fixed time deposit hence earning low returns.

In the United Kingdom again, pension plans have increased their investments in hedge funds by
significant proportions since the year 2006. They often outperform the broad stock market by
wide margins. The pension funds in Canada, Portugal, Holland, Switzerland, the United States
and many others have also invested in hedge funds for profit. “Though estimates vary, up to 20%
of European and American pension funds and 40% of Japanese pension funds are thought to
invest in hedge funds,” Stewart (2007).

In addition to equity portfolios, Busse et al. (2006) extends the analysis to other asset classes
including 1,683 fixed income portfolios and 1,196 international equity portfolios held by the US
pension plans over the period of 1991-2004. Using quarterly returns, they found a positive
abnormal return after adjusting for the relevant risk factors for all three asset classes, even after
controlling for costs. As persistence is concerned, only winner portfolios show performance
persistence for a one-year horizon. Furthermore, to the performance evaluation at the portfolio
level and fund management house level, Bauer et al. (2007) study the performance of the
aggregate equity portfolio for the US pension plans (including 716 Defined Benefit and 238
Defined Contribution plans) between 1992 and 2004 at the plan level. They deducted the gross
annual returns by the returns to fund-specific benchmark and the costs, and they found a close-
to-benchmark performance. This result also holds when the net returns are adjusted by the Fama-
French risk factors. However, they argued that it was because pension funds are less exposed to

34
agency costs than mutual funds for their monitoring capacity and negotiation power. Therefore,
they detected no persistence of the equity portfolios at the plan level for one year horizon.
In the global context, various studies show that setting a quantitative restriction whether on
international diversification or domestic diversification does not bring the desired optimal
risk/return trade–off. Therefore, going to more liberated form of investment regulation should
result in higher portfolio return. The studies prove that moving to less restricting rules reduce the
risk of portfolio by leading to optimal risk–return trade off. Hu, et al. (2007) looked at how
keeping a large amount of fund on government securities increase risk, basing their empirical
analysis on Pillar one B that only allowed investing in Bank deposits and Government bonds,
that is a state pensions and with the aim of providing pensioners with their basic needs. “In
Canada, the Ontario Municipal Employees Retirement System (OMERS) has several billions of
Cash invested in infrastructure through its subsidiary Borealis Infrastructure set up in 1998. The
big US pension, CalPERS, adopted a new investment policy in 2008 with a target of 3%
allocation of assets, or US$ 7.2bn in infrastructure. Other US pension funds with infrastructure
allocations or intentions include CalSTERS, the Washington State Pension Plan, Alaska
Permanent Fund Corporation, Oregon PERD, and the World Bank. In the UK, a number of big
pension funds have announced going into infrastructure in recent years: USS, BT, RailPen”
(Inderst, 2009).

Brown, Pollet, & Weisbenner (2009), investigated the investment behaviour of state pension
plans. They provided evidence on the investment behaviour of 20 state pension plans that
actively manage their own equity portfolios. They found that while these governments tend to
hold a diversified portfolio that approximates the overall market, they nonetheless substantially
overweight the holdings of stocks of companies that are headquartered in-state. The extent of this
over-weighting of within-state stocks by government pension plans is three times larger than that
of other institutional investors. They explored three possible reasons for this in-state bias,
including familiarity bias, information-based investing, and non-financial/political
considerations. State boundaries are important for predicting state pension plan holdings while
there is a significant preference for instate stocks, there is no similar tilt toward holding stocks
from neighbouring stocks. They find evidence that states are able to generate excess returns
through their in-state investment activities, particularly among smaller stocks in the primary
industry in the state. However, they also find evidence that is at least suggestive of political

35
influence playing a role in the stock selection process, as state pension plans of corrupt states are
more likely to hold within state stocks. The difference in performance between within-state and
out-of-state stock investments is strongest for the state pension plans located in more corrupt
states.
Runarsson E.T & Arnarsodottir E.H (2009), investigated on the optimal portfolio investment of
the Icelandic Pension sector. Their objective of the research was to find the optimal portfolio of
assets for the Icelandic pension sector and they compared it to actual data for evaluation of the
investment performance at a macro level. Three optimal portfolios were constructed for the
purpose, following a mean variance optimization model by Jorion and Khoury (1996). These
portfolios provided the foundation for answering their research questions. Their period of
analysis was 10.5 years from January 1998 to June 2008. However, the basis of the actual
portfolio was a report on the Icelandic pension sector´s investments, issued monthly by the
Central Bank in Iceland. The optimal portfolios were built on data acquired for monthly returns
from equity and bond indices. For both the actual and optimal portfolios, the investments were
categorized into four broad categories: international equities, domestic equities, domestic bonds
and risk free assets. Furthermore, the optimal model also included two major currencies, the
USD and the EUR, in order to answer their research question about the feasibility of hedging
foreign positions.
However, with the introduction of the theoretical framework which was the backdrop for the
calculation of two constrained optimal models that is: one ex ante or historical portfolio; and two
ex post or forward looking portfolios. They compared the optimal models´ investment fractions
to the actual portfolios, which enabled them to identify indications of suboptimal investments by
the Icelandic pension sector. Therefore, their findings were that for the historical portfolio, an
“equity preference bias” was detected in the actual allocations, as the optimal model
recommends substantially less allocation into equity. This suggested that the Icelandic pension
funds have adopted the equity asset class faster than can be rationalized by a mean variance
analysis of historical returns. The comparisons of their two forward-looking optimal portfolios to
the actual loss incurred in October 2008 indicate that the pension funds were investing
excessively in the local equity market. The riskiness of the domestic equity class was abruptly
exposed in the events of October 2008, when the local equity market collapsed. Eventually, their
conclusion was thus that there was a strong evidence for that the pension sector ware holding

36
relatively risky and undiversified portfolio by making large investments in domestic equities.
From mean-variance optimization perspective, a wiser choice should have been to divert the
investments into high yielding domestic bonds and diversify all equity holdings internationally.
In recent times some doubts have been expressed on the ability of the scheme to pay pensions in
the future because its investments have yielded low returns. Agyeman A (2011), analysed
various investments returns made by Social Security and National Insurance Trust over a
specified period from 1999-2008, and assessed their impact on the capacity of the fund to make
future benefit payments. The case study approach was used in this research and the results
showed that the returns on SSNIT investment were generally below the returns achieved by other
investment funds over the study period. The effect of inflation on the returns of the fund was
significant with the fund recording negative real return in some years. It was also found that
inadequate investment expertise at SSNIT may have contributed to the low returns recorded by
the organization. Though the benefits paid grew steadily, the contributions received also
increased on yearly basis and were always higher than the benefits paid. High returns on the
excess funds that are invested would enable the pension fund meet its future obligation to
workers. She therefore recommended that the board and other stakeholders should ensure better
management of the pension fund so that adequate returns are obtained on the monies received
and invested by the fund. That would be in the form of holding top management accountable and
also ensuring an effective supervision of the company’s activities. The company has to ensure
that qualified professionals are recruited to manage the fund at all times. This will help the
company meet its obligation to its clients and regain the confidence of the people.

Aleemkhan B.M (2011), evaluated on the effectiveness of portfolio management of private

pension funds in Suriname, South America, and his main objectives of the research were to:

a) Determine the fundamental factors affecting the contribution of asset allocation that
provides the basis for Pension Funds supervision to ensure reliable (future) pension
benefits.
b) Determine the real process of investment and management of investment.
c) Determine the role of Central Bank van Suriname (CBvS) as the supervisory institution.

The main purpose of his study was to identify the main factors in asset allocation in making a
correct choice for a well-balanced construction of a portfolio, which reflect the retirement

37
objectives of the pension fund. Although all pension funds under supervision of the CBvS are
required by the supervisory institution and the legislator to have a written statement of
investment policy all pension funds, they failed to have it. They found that in the absence of a
statement of investment policy with a strategic allocation policy, overall performance, modifying
asset allocation and a good market timing, pension funds did not developed any investment
objectives, which is consistent with the retirement income objective (payment to pensioners and
other beneficiaries), the demographics (diversification), the risk tolerance and the market timing.
The governing board of pension funds were more focused on a trade of between risk and return
of individual investment opportunities rather than the retirement objectives of the pension funds.
The analysis showed that the current account with the employer is huge and is increasing each
year despite an arrangement for repayment. He therefore analysed his predictions that there
would be a decline in assets due to the following events after 2009 and surely would have
consequences for pensioners and other beneficiaries:

I. The political environment in Suriname was fragile.

II. Due to the devaluation of the SRD in January 2011 all pension funds’ assets using the
local currency as their official currency declined with 20%.
III. The financial crisis in Europe would also have impact on the asset allocation of pension
funds.

2.2.2 Evidence of studies done in Zambia

Before the transformation of ZNPF to NAPSA, Queisser, Bailey & Wooall (1997), conducted a
study on the analysis of Existing Schemes and option for Reform in Zambia. Their study results
were that all pension schemes in Zambia suffer from a series of significant weaknesses reflecting
deficiencies in their design, in their financing and in their administration. These deficiencies
have not only been exposed but aggravated by the economic crisis and the radical measures
necessary to face its structural causes. They recommended that Zambia needs to restructure its
social protection system to correspond to, and complement, its new economic strategy. The main
problems which needed to be addressed are summarized as follows:

 The Macroeconomic fluctuations and the instability of the financial sector had negatively
affected pension fund management.

38
  The real value of their reserves had been eroded through high inflation rates and the
channeling of resources into politically motivated low-yield investment and loans.
 The income ceilings applied in the calculation of ZNPF contributions was not adjusted
regularly for inflation. Because of high inflation rates, the ceiling fell to the equivalent of
US$20 in 1995. This resulted in very low, practically flat-rate contributions of only K.
1,500 or US$2 per month to members' accounts.
 Pension benefits were used to compensate for the social hardship caused by public sector
adjustment measures. The funds were obliged to award generous early retirement benefits
without being given the necessary financial resources.
 The defined-benefit schemes for public sector employees were running high actuarial
deficits and had accumulated substantial arrears in benefit payments. During the waiting
period until a pensioner is paid, benefits were not adjusted for inflation. Almost all
pensioners choose to take the maximum amount as a lump-sum.

Their final recommendation for reform was placed into two parts; the short and medium term
and the long term. In the shot and medium term the objectives of pension reform was to settle
outstanding pension claims, revise early retirement provision and investment policies, and
improve capabilities for administering statutory pension funds. Whereas in the long term the
objective was to convert the ZNPF into a modest basis pension scheme for private sector, and
subsequently integrate civil servants and public employees into the scheme. In this case, the
transformation has already been done from ZNPF to NAPSA which now cater for private and
parastetal employees, but not civil servants. The other objective was that to establish an
administrative mechanism to review social protection policy and supervise and coordinate its
application.

In the recent time, Mapoma R. (2008) evaluated the equity portfolio performance for National
Pension Scheme Authority (NAPSA) over the period of 2001-2005. She compared the portfolio
returns to the returns on the market as a whole and the result showed the portfolio outperformed
the market. However, even though portfolio returns exceeded that of the market in general, one
of the stocks within the portfolio performed below the average market returns. The correlation
coefficient (co-variance) between stocks, which showed the direction in which stock returns
were moving, indicating that while some stocks were positively corrected others were negatively

39
corrected, an indication of a well-diversified portfolio. Using Sharpe, Treynor & Jensen
measures of portfolio performance; it was observed that all the three measures gave the same
results of superior performance. In addition, a final note concerns justifying the risk return trade
off that the higher the risk, the higher the return. This can be observed by relating stock to stock
returns.

2.2.3 Performance of Pension Funds in Zambia

Chingezhi M.F (2008) undertook a study to investigate the plight of pensioners in Zambia. The
essence was to establish and confirm the existence of the alleged difficulties faced by pensioners
as observed from the stand point of the pensioners themselves. A case study was done on
NAPSA, PSPF, LASF and Mukuba Pension Scheme pensioners. The enquiry had established
that a good ground of progress on pension scheme arrangements had since been covered, but that
Zambia as a country still had a lot of work to do in order to achieve safer and more secure social
protection and pensions, in particular. He then recommended herein that a stronger and effective
regulatory regime be put into place to aid supervision of pension funds with regard to
compliance with trust rules and regulations. Also, a comprehensive social security system has to
be established in Zambia to cater for vulnerable groups in society.

Lungu F (2009) also looked at the assessment of the viability of occupational pension schemes
(OPS) taking into account only the seven (7) multi-employer trusts in Zambia and specifically
the factors affecting their viability. The multi-employer trusts were: Zambia State Insurance
Pension trust Fund; Satumia Regna Pension Trust Fund; Professional Insurance Corporation
(PICZ); Madison Pension Trust Fund; Intermarket Securities Limited; Mukuba Pension; and
Motor Mart Group –MMG (former Lonrho). The research showed that various studies and
information suggest that various occupational pension schemes in Zambia are in deficit and
therefore not financially viable. The factors that affected their viability are among others:
inadequate regulatory policy, macroeconomic instability, and employee mobility. It also
questions whether the current changing labour market of changing from permanent and
pensionable employment to short term contract has an effect on the viability of the OPS.

40
2.2.3.1 Oversees Studies on Performance of Pension Funds

In a similar study looking at the performance of pension funds, Seyram K (2008) from Ghana
conducted an analysis of the performance of Social Security and National Insurance Trust
(SSNIT) from 1995- 2005, using horizontal and vertical analysis and financial ratios such as
dependency, coverage, contribution, benefits and indebtedness to fund size and ascertained if
there was government interference in the operation of SSNIT. The result was that the
performance of SSNIT pension scheme from 1995-2005 has been mixed. This is because while
funding status, contributions received and benefits paid have improved over the years, other
indicators like investment income, coverage rate, dependency ratios and processing time have
not fared as well. Agency problem exist in the operations of SSNIT. This is due to the fact that
there political interference that negatively affect the choice of investment and investment
income. The study showed that the method of computing the pensionable income is an indication
of poor scheme design because it can easily expose the scheme to abuse.

Amare H. (2012) undertook a research to assess the practices and challenges of pension funds
investment in Ethiopian Social Security Agency. The researcher used a mixed approach study
where the quantitative data showed existing pension funds investment practices of the agency
quantitatively and the qualitative data showed the opinion of respondents regarding pension fund
investment practices at SSA and related issues. The study result were that the achievement of
unsatisfactory return on pension funds investment, concentration of the funds on non-marketable,
short-term assets which yield low return, and lack of standard investment practices had affected
the performance of the pension funds investment. In addition, the agency’s investment activities
had been influencing by implicit and explicit government intervention specially, the invested
pension fund in one way or another way had been used as a captive source of finance for
government. In addition, underdeveloped financial market, limited expertise in the area, low
market return and low understanding about the fund from officials have been challenging the
investment of pension funds in SSA.

2.3.0 Critique of the studies

In this paper, the study distinguishes itself from other previous studies conducted in the global
context in two major aspects. Firstly, the researcher focuses on the multi-asset pension

41
investments portfolio and their returns rather than a delegated portfolio in some asset class.
Secondly, the researcher compares the investment returns of all asset-classes as a whole in order
to determine the performance of the pension fund with regard to the payouts to the members or
beneficiaries. The researcher also observed that in the above articles, most of the studies done in
the global context have concentrated most on equity portfolio performance rather than
investments as a whole in all the asset-classes of pension funds’ investments portfolio. If this was
done so, the investment returns of pension funds would have shown a more comprehensive
investment returns. Hence, this would have encouraged pension investors to diversify their
portfolio investments in asset-classes such as real estates, treasury bills, government bonds, time
deposits, hospitality industry, services, the banking industry, etc.

Finally, the investment policy of a pension funds should be based on prudent–person principles
and appropriate qualitative restriction. It should take into account; risk management,
diversification and dispersion, matching assets and liabilities, including considerations of
duration and maturity, currency matching, and performance measurement and monitoring. In
addition to taking consideration these concepts the investment policy and investment strategy
should be consistent with the financing objective of the pension scheme and its cash-flow
requirements , the investment policy of a pension scheme should be established taking into
consideration the economic policies of national financial authorities such as the ministry of
finance and or central bank and, a statement of the investment policy and strategy should be
formally articulated by the governing bodies of the pension scheme and of the investing
institution and should be publicly available.

Summary

The literature review has shown that countries should move towards establishing comprehensive
social security systems in order to fill the gaps that have been left by the existing social security
schemes. The literature has also reviewed the theories of social security and specific approaches
to address the problem of old age poverty. Empirical work on social security arrangements in
developing countries and case studies of various developing countries that have already
introduced non-contributory pension for the elderly have also been reviewed. Therefore,
investment of social security funds should be made with the view to achieving a reasonable

42
balance between the twin objectives. The security (the investment should assist the social
security scheme to meet its commitments in a cost-effective way) and profitability (the
investment should achieve maximum returns, subject to acceptable risk) With regard to
integrated approach, the investment of the funds of a social security scheme should take into
account the financial system under which the scheme operates, and be consistent with its short–
medium and long-term financing objectives. In addition to investment objectives and integrated
approach the guideline also outline some points about investment policy and strategy.

However, some results suggest that responsible investment is not a general feature of the
economy, but is specifically linked to certain actors in society and to particular characteristics.
Both pension funds and non-governmental organizations appear to play a pivotal role in
responsible investment. The latter may place responsibility on the agenda, which the former may
act on. Economic openness does not result in more responsible investment, but it does appear to
support broad responsible investment. Furthermore, the size of the pension industry appears to be
related to differences in responsible investment: the larger this industry, the more scope there is
for norm- and value-based investing, as well as for responsible investment in general. Finally,
the pension schemes have to appoint qualified professionals to monitor its investments
portfolios.

43
 CHAPTER THREE
CONCEPTUAL AND THEORETICAL FRAMEWORK

3.0 Introduction

This chapter will discuss the conceptual and theoretical framework of pension investment funds.
It illustrates the concepts and the theories that are relative to pension schemes’ investment
performance. The measures of investment returns and components of return are also given; the
chapter looks directly at the historical measures of investment returns.

3.1 Conceptual Framework

3.1.1 The Actuarial Concepts

In analyzing pension system and retirement incentives, the word ‘Actuarial’ has been
increasingly used by many researchers such as Economists and policy makers as the propensity
to advocate actuarial-based pension reforms. The actuarial profession however is traditionally
associated with measuring and ensuring solvency of pension funds. However, the definition of
the actuarial concept according to Daykin, Trowbridge and Farr (1997) comes into two as:
Actuarial Fairness and Actuarial Neutrality and are defined as follows:

1. Actuarial Fairness; the concept requires that the present value of lifetime contribution of
a pension member equals the present value of lifetime benefits. Queisser and Whitehouse
(2007) described the actuarial fairness as the concept that illustrates that there is no
redistribution towards or away from any individual: it is thus; ‘what a retiree get out in
retirement is the same as what he/she paid in when working, together with any interest
that was earned before retirement.’ However, in order to examine actuarial fairness, there
is need to measure lifetime contribution and benefits. Finally, the actuarial concepts are
measured ex ante and therefore actuarial fairness is measured based on population
mortality and life expectancy, thus longer lived individuals will get a better deal from
most pension systems than the short-lived.
2. Actuarial Neutrality; this concept requires that the present value of accrued pension
benefit for working an additional year is the same as in the year before. However,

44
 Blöndal and Scarpetta (1998) defined the actuarially neutral pension system as one in
which “the increase in pension benefits is exactly offset by the higher cost in terms of
contributions and forgone pensions at all ages”. Again, this appears to include both
employer and employee contributions. The concept illuminates that pension wealth for
retiring a year later is the same as pension wealthy when retiring today plus whatever
pension is accrued during the additional year of work. This means that benefits increase
only by the additional entitlement earned in the year. On the other hand, a person who
retires a year earlier, his/her pension benefits reduces both by the entitlement that would
have been earned during the year and by an amount that reflects the longer duration for
which the pension must be paid. In its measurement, Desmet and Jousten (2003) measure
actuarial neutrality taking account only of employee (and not employer) contributions.
They suggest that actuarial neutrality requires that the additional pension entitlement
from an extra year’s work should equal the employee contribution. Therefore, the
actuarial concept is based on a comparison of entitlement conditional on different ages of
withdrawal of pension benefits, and thus the concept is central for both equity individual
retiring at different ages and to incentives retirees.
Going by the above, the concepts differs in terms of the time period that each covers. This is
supported by Queisser and Whitehouse (2007) who held that the actuarial fairness reflects the
entire lifetime of total contribution and benefits, while the actuarial neutrality is in contract with
the marginal concept which reflects the essence of working an extra year. It is important that
both concepts only make sense ex ante. Actual or ex post outcomes differ because the
calculations are based on probability, in real life situation people die at different ages.

3.1.2 World Bank’s Policy Framework

In the early 1990’s the World Bank introduced the Banks’s policy framework which utilized the
multi-pillar framework as a model for the design and appraisal of pension systems. The model
was derived from the principle that the primary functions of pension systems, that is; poverty
alleviation, and consumption smoothing and insurance are most effectively and sustainably
performed when they are made transparent through separate and distinctive elements of the
system. Holzmann, Hinz and Dorfman (2008), noted that the Bank’s conceptual framework
incorporates assessment of initial conditions capacities in relation to a multi-pillar model of the

45
potential modalities for pension system that establish a broad but defined range of likely reform
designs. The potential designs are then appraised against a set of main and subordinate
evaluation criteria in an effort to reaching an outcome that is contoured to country’s definite
conditions, needs and goals. However, the structure of the Bank’s conceptual framework starts
with the valuation of the initial conditions that establish the motivation for, and constraints on,
feasible reform options. It then goes to the essential objective of pension systems, the modalities
for achieving objectives where the establishment of Pillars exists, the primary evaluation of
criteria and finally, the secondary evaluation of criteria.

In addition, the Bank’s policy framework compliantly applies a five-pillar model defining the
range of design elements to determine the pension system modalities and reform decisions that
should be reflected. Consequently, the deliberation of the full range of potential elements at this
stage and seeking to integrate several elements of the classical in design is based on the view that
a spread system can deliver retirement income more successfully and competently. This is
supported by Holzmann, Hinz and Dorfman (2008), who stated that multi-pillar designs provide
more flexibility than mono-pillars and are therefore typically better able to address the needs of
the main target groups in the population and provide more security against the economic,
demographic, and political risks faced by pension system. On the other hand, solitary pillar
schemes are also less operational than multi-pillar designs when measured in terms of the four
appraisal criteria as discussed below. These five pillars are as follow:
1.) A non-contributory or “zero pillar” this is a non-contributory basic benefits financed by
the state, regional or national government, for fiscal conditions permitting to compact
clearly with the poverty mitigation objective in demand to provide all of the elderly with
a nominal level of security. The pillar guarantees that people with low lifetime earnings
are provided with basic security in old age, as well as those who only contribute
marginally in the prescribed economy, and whether this is viable and in the specific form,
level, eligibility and disbursement of benefits depends upon the prevalence and need of
other vulnerable groups, availability of budgetary resources and the design of
complementary elements of the pension system.
2.) A mandatory “first pillar” under a mandatory pillar the contributions relates to earnings
and objective of switching some portion of lifetime pre-retirement earnings. A mandatory

46
 social security scheme pays periodically in monthly with other pension benefits such as
survivors and invalidity benefits. It is a defined benefit scheme benefiting from a portion
of contributions paid by both the employee, and the employer, and therefore NAPSA falls
under this type of pillar. The pillar address, among others, the risks of individual
prejudice, low earnings, and inappropriate planning horizons due to the uncertainty of life
expectancies, and the lack or risks of financial markets. In addition to this, the mandatory
are typically financed on a pay-as-you-go basis and thus are, in particular, subject to
demographic and political risks.
3.) A mandatory “second pillar” this is typically an individual saving account mandatory for
defined contribution plan with independent investment management, and the choice
parameters for selecting investments and investment managers, and options for the
withdrawal phase. The defined contribution plans establish a clear linkage between
contributions, investment performance and benefits. Thus, it support enforceable property
rights; and may be supportive of financial market development. Therefore, when matched
to defined benefit plans they can subject participants to financial and agency risks as a
result of private asset management, the risk of high transaction and administrative costs,
and longevity risks unless they require mandatory annuity.
4.) A voluntary “third-pillar” the voluntary takes various methods of individual savings;
employer sponsored; defined benefit or defined contribution for instance, but is
essentially flexible and discretionary in nature. The third pillars compensate for
inflexibilities in the design of other systems but include similar risks as second pillars,
and finally;
5.) A non-financial “fourth pillar”, the fourth pillar according to Holzmann, Hinz and
Dorfman (2008) comprises access to informal maintenance such as family support, other
formal social programs such as health care and/or housing, and other individual financial
and non-financial assets such as home ownership and reverse mortgages where available.
However, the availability and type of such support for the aged has a major bearing on
the design and application of the other pillars, including target benefit levels.
In an analysis of the five pillars, the necessary feature of the multi-pillar classification is that
definite pillars are better suited to address the needs of objective populations. For instance, a zero
pillar social pension is well suited to address the need for basic income support of the lifetime

47
poor while also providing a groundwork that covers gaps in coverage and benefit adequacy in
societies with mandatory first and second pillar schemes that may not be reaching workers
through their full working lives due to their movement in and out of formal employment. On the
contrary, in societies that have only been able to achieve limited coverage of mandatory first and
second pillar schemes, evolving well-supervised voluntary (third pillar) schemes may effectively
reach the informal sector and provide an efficient means to supplement and diversify benefits for
higher income group. However, certain of the same societies may find that mandated first and
second pillar schemes present difficulties to increased formalization of the labor force and
achieve better outcomes with a combination of a social pension and a more extensive voluntary
system, (Holzmann, Hinz and Dorfman, 2008). Lastly, public policies which are supportive of
allocations of family wealth such as through land and asset titling, registries and inheritance
laws, can strengthen old-age income security of both the lifetime poor and informal sector.

3.2 Theoretical Framework

3.2.1 Sharpe Ratios

The Sharpe ratio (SR) is the prime of modern portfolio theory which is the unique measure of
investment performance that is mostly used to rank alternative investment prospects. If every
investor combines a single riskless asset that is allegedly well defined with the portfolio whose
performance is being appraised, assuming that the relevant risk measure is the same for all
investors’ instability. The investors however, maximize the expected return per unit of total risk
by making assumptions to choose the portfolio with the highest SR and thus, the SR measures
the line’s slope coefficient. The preferences are estimated to increase in expected returns and
decreasing in instability. Therefore, the possible benchmarks against which pension system SRs
can be compared are, for example, a portfolio of all available securities in a given country that is
the cumulative “market” portfolio, an equity portfolio, a fixed-income portfolio, and the absolute
zero. In addition, Lo (2002) develops a methodology to determine whether SRs are considerably
different from zero, but if they are not, it indicates that the returns offered by the pension system
correspond fundamentally to the low-risk asset’s return. While, if they are expressively positive,
it means that the pension systems have delivered a positive risk premium per unit of instability,
which suggest higher welfare than having invested the same funds in short-term low-risk assets.
Therefore, a significantly positive SR does not necessarily mean that fund managers have added

48
value because, a passive or naive investment strategy in a well-diversified risky portfolio is also
expected to deliver a considerably positive risk premium per unit of risk. To calculate the SR, we
can take this clearly into account by measuring the SR as follows:

1. rpt - rft
SR =
SD (rpt - rft)

In the above formula, the numerator is the excess return with respect to the low-risk asset, and
the denominator corresponds to the standard deviation of the excess returns. Where; Rpt is the
Return of the portfolio; and Rft is the risk free rate of return. However, in order to determine if
the ratio is significantly different from zero, the result in Lo (2002) is used. Supposing that
independent and identically distributed (I.I.D) excess returns, the standard error of the SR is
therefore:

2.
SE = [1 + ½ (Sp)2 

In the above equation, a 95% confidence interval is SR ± 1.96 SE.2 The investment horizon is
the second consideration of the formula if anticipated that the investment horizon is not short
term. This follows that short-term volatility is not necessarily a good risk measure. Indeed, if we
find a portfolio that is highly correlated with the short-term return on the 15-year bond for
instance, then it has good hedging properties or low risk from the long-term horizon perspective.
Therefore, in equation (1) we can use the short-term return of a long-term bond as the riskless
asset, and in this way the SR is amended to the planning horizon. The necessary assumption for
this measure to be valid is that excess returns are uncorrelated through time because this allows
us to rank, period by period, the different investment alternatives according to this indicator.
Therefore, based on the different measures for the SR, we can importantly ask whether the
different pension systems have delivered significant risk premium per unit of risk with respect to
the low-risk benchmarks considered.

49
3.2.2 Jensen’s Measure (Alpha)

In addition to Sharpe (1966), Jensen (1968), on the other hand, writes the following formulas in
terms of realized rates of return, assuming that CAPM is empirically valid:

J= (Rp – Rf) – [ p x(Rm – Rf)]

Where; Rp: Return of the portfolio p: portfolio beta

Rf: Risk free rate of return Rm: return of the Market index
The Jensen’s measure concetrates on the difference between the portfolio’s actual return and its
required return. The positive value is thus preferred; it indicates that the portfolio earned a return
in excess if its risks-adjusted, and market adjusted required return. A value of zero indicated the
portfolio earned exactly its required return; negative value indicates that the portfolio failed to
earn its required return. Finally, Jensen’s measure through its use of CAPM, automatically
adjusts for the market return. Therefore, there is no need to make a separate market comparison.
In general, the higher the Jensen’s measure, the better the portfolio has performed; only those
portfolios with Jensen measure have out performed the market on a risk-adjusted basis.

3.3.0 The Concept of Return

Return can be seen as the reward for investing. (Gitman and Joehnk, (1993:126) This reward
from investing relate to:

a) Realised Return or Actual Return- This is an ex-post return that is achieved.

b) Expected Return – This is the return that the investor xpect or anticipates to earn on
his/her investment over a future period of time. It is a predicted return which may or may
not occur.

Realised return are compared with expected return to determine whether the investment has
performed positively or negatively.

50
3.3.1 Components of Return

The return on an investment may come from more than one source. The most common source is
periodic payments such as interest or dividents. The other source of return is appreciation in
value- the ability to sell an investment vehicle for more than its original purchase price.

a) Current income; the cash or near cash that is periodically received as a result of owing an
investment.
b) Capital Gains (or losses): the second dimension of return is concerned with change, if
any, in the market value of an investment. Investors pay a certain amout for an
investment, from which they expect to receive not only current income but also the return
of the invested funds sometimes in the future.
c) Total Return: the sum of the current income and the capital gains (or losses) earned on an
investment over a specified period of time.

3.3.2 Other Measures of investment return

3.3.2.1 Economic Value Added (EVA)

This paper utilizes the Economic Value Added (EVA) as one of the measures of pension
investment return in order to determine the historical returns made. The EVA is determined and
it’s described as the financial performance measure that comes closer than any other to capturing
the true economic profit of an investment. It is thus a measure of the dollar surplus value created
by an investment or a portfolio of investment. Lehn and Makhija (1996, p.34), describe EVA as
superior to accounting profits, which is a measure of value creation because it recognizes the cost
of capital, hence, the riskiness of a firm’s operations. It is used as a value based performance
measure tool. Under the EVA an accounting performance measure called residual income is
defined to be operating profit subtracted with capital charge. EVA is thus one variation of
residual income with adjustments to how one calculates income and capital, and according to
Wallace (1997, p.1) one of the earliest to mention the residual income concept was Alfred
Marshall in 1890. Finally, Stewart (1990) defined EVA as Net operating profit after taxes
(NOPAT) subtracted with a capital charge.

51
3.3.2.1.1 Calculating EVA

The EVA framework describes three basic inputs needed for its computation that is: the return on
capital earned on investments, the cost of capital for those investments and the capital invested in
them. However, many of the same adjustment will be made in measuring each of these items.
The market value includes capital invested not just assets in place but in expected future growth.
In addition, to assess the quality of assets in place, the measure of the market value of these
assets need to be evaluated. At the minimum, the three adjustments to capital invested in the
discounted cash flow valuation made is that; converting operating leases into debt, capitalizing
R&D expenses and eliminating the effect of one-time or cosmetic charges that have to be made
when computing EVA as well. Therefore, to evaluate the return on this invested capital,
the ‘after-tax operating income’ earned by a firm on these investments is estimated. Again, the
accounting measure of operating income is adjusted for operating leases, R&D expenses and
one-time charges to compute the return on capital. The third and final component needed to
estimate the economic value added is the cost of capital.

3.3.2.1.2 Economic Value Added, Net Present Value and Discounted Cash flow Valuation

The net present value (NPV) rule of a project is one of the bases of investment analysis in
traditional corporate finance which reflects the present value of expected cash flows on a project,
netted against any investment needs, is a measure of dollar surplus value on the project. It is thus,
investing in projects with positive net present value will increase the value of the firm, while
investing in projects with negative net present value will reduce value. The Economic value
added is a simple extension of the net present value rule, and therefore, the net present value of
the project is the present value of the economic value added by that project over its life. The
formula applies as follows:

t=n EVAt
NPV = ∑
t=1
(1+Ke )1

The formula above implies that EVAt is the economic value added by the project in year t and
the project has a life of n years. This construction between economic value added and NPV
allows us to link the value of a firm to the economic value added by that firm. However, a simple

52
design of firm value in terms of the value of assets in place and expected future growth is set as
follows:

Firm Value = Value of Assets in Place + Value of Expected Future Growth

Therefore, in a discounted cash flow model, the values of both assets in place and expected
future growth can be written in terms of the net present value created by each component.

t=n

Firm Value = Capital Invested Asset in Place + NPV asset in Place + ∑ NPV Future Project –t
t=1

Hence, substituting the economic value added version of net present value into this equation, we
get:

t=n EVAt Asset in Place t=n EVAt Future Projects

Firm Value = capital Invested Assets in Place + ∑ +∑
t=1 t t=1
(1+ke) (1+ke)t

Thus, the value of a firm can be written as the sum of three components, the capital invested in
assets in place, the present value of the economic value added by these assets and the expected
present value of the economic value that will be added by future investments. Therefore, the firm
could also have been valued using a discounted cash flow valuation, with free cash flows to the
firm discounted at the cost of capital, and finally, the Net Investment and the EVA of the firm is
calculated as follows in the formulas:

EBITt (1-t) – EBITt (1-t)

 Net Investment t =
ROCt

 EVA = NOPAT – Capital Employed x WACC

Where: NOPAT and WACC are determined as:

 NOPAT = Net Operating Profit – {(Net operating profit/ excess depreciation/ other
increase in Reserves) x (tax rate)
 WACC= (Rce x Wce) + ( Rpe + Wpe) + (Rd x Wd) (1 - T) + (Rx x Wx)…..

53
Thus:
Common equity - ce, preferred equity - pe, debt - d, others - x, respective weights (W) and
corporate tax rate (Tc).

3.3.2.2 Fuzzy Approach

The Fuzzy approach is another measure of investment return that is utilized in this paper. The
approach defines the mutual and delayed effect among the significant variable of the investment
portfolio. The calculation of the return of an investment portfolio is as a weighted average of the
return of all included securities. The weights however correspond to the configuration of the
investment portfolio, the allocation investment in each position. Therefore, the sum of all
weights including cash position is always equal to 1, and the return of a cash position is normally
assumed as 0. The formula is given as follows:
k

1. Rp (t) = ∑ Wi (t). Ri (t)

i-1

Where: Rp (t) = return of the portfolio p at the time (t):

Ri (t) = return of the security i at the time (t);
Wi (t) = relative weight of position i at the time (t)
The first assumption to calculate return of each security at the time t(Ri (t)) is that the time
domain is discrete. The return also accounts for market frictions, such as taxes, brokerages,
inflation etc. the most general case is shown in formula with some further elaboration in formula
2.

Rpi (t). (1-Dp) + Rci (t). (1-Dc)

2. Ri (t) = I (b.s); Dp, Dc ∈[0,1]
Pi (b)
Where: Rpi (t)= return from capital gains of money i at the time (t).

Rci (t) = return from complimentary benefits of security i at time (t).

Dp = function for tax rate on capital gain;

Dc = function for tax rate a complimentary benefits;

Pi (b)= buy price at the time b of security;

54
 I (b,s)= inflation rate between time b and s.

Summary

The theoretical and conceptual framework shapes various concepts and theories, one of which is
the actuarial concept. The actuarial concepts are traditionally associated with measuring and
ensuring solvency of funds. The concepts comprises two features that is; the actuarial fairness
which requires that the present value of life time contribution of pension member equals the
present value of lifetime benefit; and the actuarial neutrality requires that present value of
accrued pension benefit for working an additional year is the same as in the year before. The
other concept is the World Banks’s policy framework which comprises the multi-pillar
framework as a model for the design and appraisal of pension systems. The Bank’s policy
framework compliantly applies a five-pillar model defining the range of design elements to
determine the pension system modalities and reform decisions that should be reflected. These
five pillars are: a non-contributory (zero pillar); a mandatory (first pillar); a mandatory (second
pillar); a voluntary (third pillar); and finally a non-financial (fourth pillar). On the other hand, to
determine the investment performance of pension funds, some core measures of investment
returns are considered in this paper. The Shapes Ratio (1966) and the Jensen’s measure (1968)
are analyzed to measure the true investment performance of the firm. The other measure includes
the Economic Value Added (EVA) which is the value based performance measure that gives
importance on value creation of the investment performance. Finally, the Fuzzy approach is the
final measure of investment return that is utilized in this paper. The approach defines the mutual
and delayed effect among the significant variable of the investment portfolio. The calculation of
the return of an investment portfolio is as a weighted average of the return of all included
securities.

55
 CHAPTER FOUR
RESEARCH DESIGN AND METHODOLOGY

4.0 Introduction

The paper is aimed at making an assessment of the pension investment returns and their impact
on benefit payments to the members and establishes ways in which benefit payments can be
value-added. This chapter presents the sources of data, and methods of data collection, data
description and data analysis techniques.

4.1 Research Design

A number of different research strategies can be identified, comprising experiment, survey, case
study, grounded theory and action research. A research strategy has to contribute to answer the
particular research questions and should help to meet the objectives of the study.
In this research work, the research strategy used is a case study. This research method is used for
the reason that there are other pension fund managers in the country and therefore the research
had to be restricted to NAPSA alone. Moreover case studies emphasize detailed contextual
analysis of a limited number of events or conditions and their relationships. It is a kind of
quantitative research method that most social scientists including business oriented researchers
use to analyze real-life situations to provide the basis for applying new ideas. Yin (1984) defined
the case study research method as “an empirical inquiry that investigates a contemporary
phenomenon within its real-life context; when the boundaries between phenomenon and context
are not clearly evident; and in which multiple sources of evidence are used”. The research mainly
focused on return on investments of NAPSA from the year 2004 to 2013, and its effects on the
benefit payments expected from the fund. This period is chosen because of the fact that NAPSA
has done several investments in this period since its establishment.
The research utilize the exploratory research method through the use of literature searches which
has yielded information on the current challenges NAPSA faces in the management of its
investment. Data was gathered from news reports, articles on the investment by the various
writers, questionnaires, interviews, NAPSA’s presentations and NAPSA’s website.

56
However, in line with assessing its impact on future benefit payments, the inflows of funds into
the Scheme and the payouts made over the last 10 years was considered. The returns made on the
investments are used to ascertain the impact on the levels of benefits disbursements and
therefore, the effect of this process on the future benefit disbursements was also analyzed.

4.2 Area of Study

The study was conducted from the two (2) departments of the National Pension Scheme
Authority (NAPSA) Headquarters Lusaka; that is investments treasury department and benefits
department. In addition, other economic indicators such as inflation rates and risk free rate were
considered to determine the significance of the returns on investments. Also the expected pay out
rate and the number of people going into pension is also studied to determine the fund’s capacity
to pay benefits to the contributors in the future. The research was a desk top research conducted
through the gathering of data from the NAPSA.

4.3 Instruments for Data Collection

This research utilized primary and secondary data which was gathered from relevant sources.
Interviews were administered to gather the primary data which was collected from the relevant
departments of NAPSA’s Headquarters in Lusaka. The relevant departments comprised
investments and benefits department. From the investments department data was collected from
the Investments Manager, and from the benefits department data was gathered from the Benefits
Manager. The secondary data used mainly excerpts from academic publications by various
authors to explain and justify the techniques employed in this research work, as well as data from
annual reports of NAPSA. The data collected was obtained from books and articles on pension
funds, news reports, journals, and NAPSA’s public presentations and reports. The research
involves the review of already existing data.
The researcher used Purposive sampling as the sampling technique used in selecting respondents.
The validity and generalizing of research findings is very important, but so is the method for
arriving at the representative sample. Maximizing the credibility of a piece of research demands
a good research sample (Kvale, 1995). Therefore, purposive sampling is a technique that
involves selecting certain units or cases “based on a specific purpose rather than randomly”

57
(Tashakkori and Teddlie, 2003). The choice of this sampling depends on the type of information
the researcher is expected to gather for the study.

4.4 Methods of data Analysis

Different forms of data were applied for both descriptive and explanatory purposes during the
conduction of the research. The yearly gains of the pension authority were weighed against the
general number of retirees going on pension annually, as well as the contributions received by
the scheme and the benefits paid are analyzed as a basis of determining whether the authority
make adequate benefits disbursements when they fall due. Again the effect of inflation on the
fund is examined in the determination of the capacity of the national pension fund to meet its
obligation to pay pensions to retirees in the future. NAPSA is to ensure that the value of the
investments is not eroded by an inflationary economic environment and also the returns on the
investments should be appreciable. The questionnaires were administered to people who were
thought to be knowledgeable in a bid to obtain credible information.

4.5 Analysis of Data and Interpretations

Data collected from the various sources was edited and processed using Microsoft Excel 2010
and Statistical Package for Social Sciences, version 16.0 (SPSS v16.0). Tables, figures and charts
were used in presenting the various variables earmarked to be measured. The presentation of the
data collected was put to an in-depth analysis using appropriate statistical tools such as line
graphs and bar graphs. In assessing the performance of NAPSA’s portfolio asset allocation the
Sharpe ratio and Jensen measure were used as measures of the portfolio performance. This was
to the compare the outcome from the three measures. The Treasury bill rate for the whole period
was taken and thus, the 91 Day Treasury bill remained in place for the period of study. The
Sharpe measure compares the risk premium on a portfolio to the portfolio’s standard deviation of
the return. It measures returns relative to the total risk of the portfolio returns. On the hand, the
Jensen’s measure calculates the portfolio’s excess returns, the amount by which the portfolio’s
actual return deviates from its required returns. The weights however correspond to the
configuration of the investment portfolio, the allocation investment in each position.

58
4.6 Limitation of the study

The study was limited to the investigation of the returns on investments portfolio assets for some
periods of study. This was due to unavailability of NAPSA’s actuarial department members who
would have been able to release the acquired data at the time of the researcher’s data collection.
Finally, lack of finances was also pertains as a limitation of the study.

Summary

This chapter looked at issues pertaining to the research design used, the sources of data and its
reliability. It also gave an insight of the method used in collecting data and gave a description of
the types of data employed for processing to ultimately give results that would be used in
confirming or disputing the stated theories.

59
 CHAPTER FIVE
DATA ANALYSIS AND INTERPRETATIONS

5.0 Introduction

The study was undertaken to assess the investments returns of NAPSA and their impact on
benefits payments for the period of 2004 to 2013. For this reason, one objective of this analysis
was to examine the performance of the investments made by NAPSA. The data used for this
analysis is of both primary and secondary sources. On the other hand, inflation reduces
purchasing power and so it is used to adjust the nominal return to arrive at the real return of the
Authority. It is for that reason that some data from Bank of Zambia was considered in context of
the general investment performance. Therefore, this chapter discusses the analysis of data
gathered from the study.

5.1 Analysis of Data

The assessment of the performance of NAPSA investments was considered in context of the
general economic performance of Zambia. The Treasury bill rate was used in the analysis
because the risk free rate is a bench mark that one expects all investments to outperform. Risk
premium on lending is the interest rate charged by banks on loans to private sector customers
minus the ‘risk free’ Treasury bill interest at which short-term government securities are issued
or traded in the market.

Table 5.1 Economic Indicators (2004-2013)

Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

91 Day Bill 18.1 11.9 12.8 6.9 5.6 6.7 14.6 9.3 2.0 6.4

Inflation 17.5 14.0 18.1 11..9 9.5 11.8 11.3 6.6 6.9 7.0

Source; Bank of Zambia/Economic Indicators

The table shows an upward movement in Treasury bill rates from 2009 to 2010. However, from
2004 there was a continuous decline in the rates until 2009, and then declined from 2010 to
2012. The inflation rate on the other hand had been unstable over the same period with the

60
highest rate being 18.1% and the lowest being 6.6%. As observed, the Treasury bill yield moved
largely in line with inflation over the period

5.2 Portfolio Investment Performance

The performance of NAPSA’s investment was considered in the context of portfolio asset
allocation as a whole. The Authority has diversified its investments from traditional Bank
deposits to investments in real estate’s development and participation in the equity market. The
investment strategy by NAPSA is in line with Government policy of safeguarding members’
funds and promoting projects that contribute to social and national development. According to
the actual information of NAPSA’s investment performance of 2004 to 2008, the scheme
reported that their social security funds have fallen in value as the share price of the investment
have dropped. Table 5.2 indicates that nominal investment returns fall in synch with global
financial market unstable, yet real returns remained positive (that is; 2 percent real return) and
constant (as of end 2008). In addition, total assets under NAPSA management continued to grow
steadily over time indicating a positive development to help ensure that their future liability can
be met.

Table 5.2 NAPSA investment performance from 2004- 2008

2008 2007 Last 3 years

Nominal return (%) 13 16 23

Real investment return (%) 2 2 3
Total assets (ZMK) 1,900m 1,749m 806,042m
Equities (%) 4 5 3
Bills and bonds (%) 27 50 28
Cash or equivalents (%) 12 7 30
Property (%) 3 4 8
Others (%) (GRZ Bonds) 54 34 31
Source: NAPSA response to ISSA questionnaires

The effect of inflation on the returns has been considered which was significant and this resulted
on rather low real returns for the scheme. Inflation reduces purchasing power and also it is used

61
to adjust the nominal return to arrive at the real return of the Authority. Figure 5.1 below reflects
the trend analysis of portfolio performance from 2004 to 2008. The nominal return dropped
significantly from 23% in 2004 to 16% and then 13% in the year 2008.

Figure 5.1 Trend analyses of investment performance

25%

20%

15%
Nominal Return
real Return
10% InflationRate

5%

0%
2008 2007 Last 3 yrs

Source: Authors' Illustrations 1

The current portfolio asset allocation of NAPSA has showed a well diversification of investment
which is expected to yield significant returns to the Authority. Table 5.3 indicates the NAPSA
portfolio asset allocation performance as at 2013.

62
Table 5.3: NAPSA Portfolio Asset Allocation performance

Investment Type Amount Weight Expected Return Weighted

K’000 % Return
Treasury Bills 249,978,115 3.2 13.44 0.43
GRZ Securities 3,144,940,324 40.0 13 5.2
Real Estate 1,932,685,819 24.6 4 0.98
Equities 721,083,439 9.2 26 2.39
Corporate Bonds 56,859,275 0.7 10 0.07
Term Deposits 1,755,458,233 22.3 11.43 2.55
Start Ups 5,358,111 0.1 10 0.1

Total 7,866,363,316 100.1 12.41 11.72

Source: NAPSA response to Author’s questionnaires

The above table 5.3 reflects the performance of the Authority’s portfolio asset allocation as at
2013, with GRZ Securities holding the highest weight with a weighted return of 5.2%, while
Start Ups holds the lowest weight of 0.1 with a 0.01% weighted return. The second highest
weight of the portfolio asset allocation is held by the Real Estates with 0.98% of weighted return.
However, the GRZ Securities have been regarded as a risk free rate of return and this has made
their market performance to be significantly positive. In addition, the Authority has had a
constant of 12.5% actual return for the last past five years of their investments returns. Further,
the weights of the portfolio assets are arrived at by dividing each individual amount of the
portfolio asset with the total amount of all portfolio assets, and then multiplied by 100. While,
for the expected returns the 12.41 was attributed using the expected return at the beginning of the
investments and not at the end. Finally, for the weighted return the calculation was processed by
multiplying each individual weight of the portfolio asset by its expected return and then divided
by 100. This is also illustrated as follows:
Weighted (W) x Expected Return (ER) / 100 = Weighted Return
Line one of from the table, this is how the WR was calculated: W x ER/100 = WR
T.B: 3.2x13.44/100 = 0.43
The figures below shows the pie charts of NAPSA’s portfolio asset allocations as at 2013. The
first chart shows the portfolio amounts with GRZ Securities holding the largest amount and Start

63
Ups having the lower amount in the asset allocation of the portfolio. While the second chart in
figure 5.3 indicates the weights of the portfolio assets allocation.

Figure 5.2 Portfolio Asset Allocations as at 2013

Asset Portfolio Amounts K’000

5,358,111 249,978,115
Treasury Bills
56,859,275
1,755,458,233 GRZ Securities
3,144,940,324
721,083,439 Real Estate
Equities
1,932,685,819 Corporate Bonds
Term Deposits
Start Ups

Source: Author's illustration 2

Figure 5.3 NAPSA weights of Portfolio Asset Allocation

NAPSA's Investment Weights

0.1

3.3
23
Treasury Bills
GRZ Securities
0.7 41.3 Real Estates

9.5 Equities
Corporate Bonds
Term Deposits

25.4 Start Ups

Source: Author’s illustration 3

64
5.2.1 The performance of investments

Using available information of the return on the market (Rm), weighted portfolio return (Rp),
Risk-free rate (Rf), portfolio beta ( p), portfolio standard deviation (SDp), the result of the
performance evaluation were as follows.

1. Sharpe Ratio

   ( x  x) SR= (Rp – Rf)/SdP

N
SD= (12.41 – 11.72)2 = (11.72 – 12.72)/0.26
7 = -3.85%
SD= 0.26
2. Jensen’s measure

J= (Rp – Rf) – [ p x(Rm – Rf)]

(11.72-12.72) – [0.3x(12.41-12.72)
-1 + 0.093
-0.907%
The 3.85% of the Sharpe Ratio indicates that the returns offered by the pension system
correspond fundamentally to the low-risk asset’s return, since SRs are considerably different
from zero. The Jensen’s measure indicates that the different between the portfolio actual return
and its required return, in that so a positive value is preferred; however a -0.907% negative value
indicated that the portfolio failed to earn its required return.

5.3 Regression Analysis

Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .310a .096 -.085 6.978
a. Predictors: (Constant), v5

65
 ANOVAb
Sum of
Model Squares Df Mean Square F Sig.
1 Regression 25.811 1 25.811 .530 .499a
Residual 243.448 5 48.690
Total 269.259 6
a. Predictors: (Constant), v5
b. Dependent Variable: v4

Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 10.687 3.677 2.907 .034
v5 1.114 1.530 .310 .728 .499
a. Dependent Variable: v4

From the regression tables the width of the confidence interval is proportional to the standard
error of the estimator. That is the 6.978, the larger the standard error, the larger the width of the
confidence interval. A 95% confidence interval coefficient in the long run of a 95% confidence
interval is 2.907 ± 2.907. Indeed, if we find a portfolio that is highly correlated with the short-
term return on the 15-year bond for instance, then it has good hedging properties or low risk
from the long-term horizon perspective. But we cannot say that the probability is 95% that the
specific interval. Therefore, B2 either lies in it or does not, the probability that the specific fixed
interval include the B2 which is therefore 1 or 0.

Hypothesis Testing
H0: Bi=0.5
H1: Bi=0.5
The t calculated (t calc) obtained is greater than the critical value. Therefore, the t values
obtained for both B1 and B2 has enabled to reject the null hypothesis at 0.5% level of
significance. Therefore, B1 and B2 are both statistically significant.

66
5.4 Benefits Payments

The Authority pays benefits to the members on the basis of wage inflation indexes, and currently
the wage inflation is standing at 23% as of 31st March, 2014. Wage inflation is how much ones
salary needs to increase by inflation; it is therefore an increment on the value of benefits.
However, the funds of the members which are received by the scheme in form of contributions
are pushed in future as investments. The investments need current consumption in the future and
NAPSA therefore maintain the value of the money for benefits. In addition, the payments of
benefits since the transformation from ZNPF in February 2000 have been for both ZNPF
members and NAPSA members who at that time meet the conditions of the sliding scale. The
sliding scale was designed to enable members who would not have made the 180 months of
contributions to qualify for a pension subjected to their age as at 1st February 2000. Table 5.4
shows the benefits paid by NAPSA from 2004 to 2013 for both ZNPF and NAPSA members.

Table 5.4: NAPSA Benefits payments

YEAR ZNPF NAPSA

NO. of Claims VALUE (ZMK) NO. of Claims VALUE (ZMK)
2004 12,038 9,324,811.08 4,417 10,918,264.33
2005 10,969 11,107,376.44 3,829 12,912,899.16
2006 9,927 12,740,294.69 5,917 19,786,658.81
2007 9,283 15,892,010.73 6,029 28,262,067.06
2008 15,693 47,491,397.55 6,135 36,645,078.95
2009 20,468 60,133,341.28 6,301 42,208,286.70
2010 15,759 49,548,608.60 8,460 59,721,369.46
2011 13,157 50,926,691.83 12,791 107,989,475.06
2012 12,984 65,813,558.29 15,750 221,162,284.11
2013 18,619 148,391,068.25 16,926 292,067,672.02
TOTAL 138,897 471,369,158.74 86,555 831,674,055.66
Author’s response to questionnaires

In the above table, the numbers of members qualifying for benefits under ZNPF declined from
12038 members in 2004 to 9283 in 2007, and then fluctuated from 2008 to 2013. As for NAPSA
benefits, the number of claims together with the payouts for NAPSA members has been
increasing since 2005 to 2013. This has clearly indicated that a lot more of the Authority’s
members will still continue claiming out their benefits as pensioners. Moreover, the number of
pensioners for NAPSA is expected to grow by 2015 as many members will meet the 180 months

67
contributions to qualify for a pension, thereby, more funds is expected to go out of the
Authority’s reserves. However, the total amount of benefits paid during this period is ZMK
831,674,055.66. The following figure reflects the trend in the number of claims for benefits for
NAPS and ZNPF, while a total of ZMK 471,369,158.74 has been paid to ZNPF as for this
period of study.

Figure: 5.4 Trend in the number of benefits claims for both NAPSA and ZNPF from 2004-
2013.

25000

20000
No.of Benefits Claims
15000 (NAPSA)

No. of Benefits Claims

10000
(ZNPF)

5000

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Author’s illustration

Figure 5.5 Trend in the amount s of benefits paid for both NAPSA and ZNPF from 2004-
2013

350,000,000.00

300,000,000.00

250,000,000.00 Benefits Paid

(ZNPS)
200,000,000.00 Benefits Paid
(NAPS)
150,000,000.00

100,000,000.00

50,000,000.00
68
0.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Author’s illustration

In the above figures, figure 5.4 reflects the movements in the number of claims for benefits paid
both to NAPSA members and ZNPF members, and as observed under NAPSA there has been an
increase in the number of members claiming for benefits from 2009-2013 and for ZNPF an
increase in shown from 2008 to 2009 recording the highest claim for the period. In addition,
figure 5.5 has indicated that NAPSA’s benefits payouts outstands ZNPF. However, ‘NAPSA
further provide those who would like to convert their ZNPF contributions to NAPSA
contributions. The aim is to enhance the chances and thereby enable those who would ordinarily
not qualify for a pension to do so.’

5.4 Summary

This chapter presented the results of NAPSA’s portfolio asset allocation returns, their weighted
returns, weights of portfolio assets and also the nominal returns and real returns of the Authority
for the period of 2004 to 2008. The GRZ Securities under study had been taken as proxy for the
risk-free rate. On the other hand, NAPSA pays benefits based on wage inflation index and
therefore, the benefits paid by NAPSA for both NAPSA members and ZNPF members was
considered for the stipulated period of 2004 to 2013 of the study.

69
 CHAPTER SIX

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

6.0 Introduction

This paper assessed the performance of portfolio asset allocation of NAPSA and their impact on
benefits payments for the period 2004 to 2013. This chapter look at the main finding presented in
chapter five by relating them to the objectives and hypothesis of the study, and also reflects on
the methodologies used to obtain on analyze data. From the findings, conclusions are drawn and
recommendations made. The chapter ends with identifying an area for further research.

6.1 Research Objectives and Hypothesis

In chapter one, the following objectives were identified in this study.

1) To examine the rates of returns obtained from portfolio investments of NAPSA;

2) To determine whether the Authority is able to pay benefits based on their returns made;
3) To assess the returns on investments and their impact on the expected future benefit
payments by the pension fund;
4) To determine how investments returns can be adequately be achieved.

In order to achieve these objectives, an assessment was first made by studying the literature that
associated to the similar studies and identified the concepts and theories that were beneficial to
this study. This was done in chapter two and three. Based on the objectives of this paper the
hypothesis was arrived at as follows:

Ho: There is no relationship between investments returns and benefits payment.

H1: There is a relationship between investments returns and benefits payments.

After developing the hypothesis, the benefits payments were identified as the independent
variable (X) and the investment returns as dependent variable (Y).

We reject the null hypothesis at 0.5% level of significance, and accept the Alternative
Hypothesis. Therefore, B1 and B2 are both statistically significant

70
6.2 Findings

NAPSA’s primary objective of their investments is; Capital preservation, Investment returns and
Liquidity. The Authority aims to ensure that funds are managed prudently within acceptable
parameters of risk. However, when assessed the investment performance of the Authority from
2004 to 2013, the main finds were that:
First, the scheme designates a moderate diversified portfolio asset, which has presented a
constant actual return of the overall portfolio assets allocation of 12.5% per annum since the last
five years. However, the Sharpe Ratio measure of investment performance has presented a ratio
of -3.85% which indicates that the returns offered by the pension system correspond
fundamentally to the low-risk asset’s return, since SRs are considerably different from zero. In
addition to the investment measure, the Jensen’s measure represents a value of -0.907% which
indicates that the portfolio failed to earn its required return.
Secondly, the investments of NAPSA has been on maturity stage currently; it is for reason that
most of the returns the authority gain from its investments is reinvestment and less is added
together with funds from the reserves as payments to retirees. Consequently, when ranked the top
three (3) portfolio assets returns performance of the Authority as at 2013, the researcher found
that; the GRZ have had a significant return over the period as they are regarded as a risk free
rate, then the real estates and thirdly term deposits have been performing well. Real Estates
investments were started in November 2007 and since then, the Authority has reported that the
investments of real estates has suffered a political risk from the public sector which has lessen
the return on the portfolio assets allocation.
Thirdly, the Authority pays benefits based on the indexes of interests of the contribution made by
the members. Pensioners are paid from the fresh monies coming into the reserves as
contributions plus any other monies from the returns on investments. However, seeing that much
reliance is on the fresh monies from the reserves, the reserves are therefore lessened as the
Authority is still young in terms of its investments and still looking forward in expanding their
investments. Moreover, the Authority is expecting the number of pensioners qualifying for a
pension to grow by 2015 as many members will meet the 180 months of their contributions.
In addition, the Authority had since paid a total of ZMK 831,674,055.66 as benefits to the
National Pension Scheme and ZMK 471,369,158.74 as benefits to the ZNPF members from

71
2004 to 2013. Finally, after NAPSA took over ZNPF, the scheme had continued paying out to
pensioners under the ZNPF list. The Authority has also disposed of all Assets and Liabilities of
ZNPF and put them under consideration so that all beneficiaries are either paid off or placed
under NAPSA.

6.3 Conclusion

It is this regard that investments guidelines have been published to guild the trustees of NAPSA
in the manner of investing member’s funds. The contribution revenue which is not immediately
required to pay benefits is invested in order to grow the reserve fund. Further, the Authority is
still not matured in terms of its investments and claims for benefits are still low though they
expects to have a growth in number of claims for benefits by 2015 as many members will be
qualifying for a pension. The Authority however, has to target on reaching its maximum level of
investments in order to adequately meet the rates of benefits payment then, and in future. In
addition, as observed, the levels of benefits paid under NAPSA members are significantly higher
than what was being paid under ZNPF. The benefits are indexed to inflation through the National
Average Earnings that are adjusted annually. However, NAPSA on comparison with ZNPF
responds quickly to a claim for benefits soon after a member leaves employment. Finally, the
weakness of the ZNPF Scheme was mainly caused by the lack of indexation against inflation and
poor management of the scheme prior to the reforms undertaken in 2000.

6.4 Recommendations

The Authority need to be more active on the market to help develop the capital market subject to
review of each individual issue, in that line, there is need to be more collaborative with players
on the market, and review of Investment Guidelines. Under the Real Estates, NAPSA has to pay
much attention to collaborate with utility service providers to make housing units affordable by
the average Zambia. Further, the recruitment of Fund Managers as stated under the Pension
Scheme Regulation Act (No.28 of 1966) to be appointed under investment to stimulate the
Authority’s investment portfolio and to monitor and broad their investment has to be fulfilled.
Since the Authority is expected to have a growth in the number of NAPSA members claiming for
benefits by 2015, the investment managers need to manage the investment portfolio of the
Scheme in terms of the evaluation of portfolio performance and make timely decisions whether

72
to revise the portfolio or continue with the existing asset combination in various portfolios. This
shall contribute in meeting the required payments of benefits as the scheme is expected to grow
in future. It clear that the investment of Real Estates has suffered a political risk and this has
merely affected its investment return, therefore, management has to be cautioned about
investments that contradict the citizens’ empowerment policy or investments that are of a
speculative nature.

6.5 Areas for Further Research

It is important that a research should be conducted to investigate the impact of the levels of
benefits payments on contribution reserves, as this will foster the monitoring of portfolio
investments performance of the Authority. The assessment of portfolio performance on the
market compared with other financial investor in the country must also be looked at to
comprehend whether the Authority is doing much on investments. Further, it would also be good
for the fund managers to study areas of investment opportunities on a consistent basis. In this
way they will be able to take advantage of economic opportunities in the business environment.

73
 APPENDICES
Appendix i NAPSA’s Market Overview: as at 2013

Appendix 1.2 NAPSA Equity Shares as at 2013

SHARES Total Issued Number of NAPSA %

Shares Shares Holding
ZANACO 8,625,000,000 784,577,184 9.10
ZSUG 6,315,063,874 791,261,386 12.53
PumaEnergy 500,000,000 47,494,251 9.50
ZAMEFA 270,900,000 10,890,519 4.02
SCB 1,666,980,000 35,574,565 2.13
Zambeef 126,205,341 7,520,000 5.96
Pamodzi 100,000,000 4,056,473 4.06
REIZ 56,460,198 297,576 0.53
PrimaRE 4,000,000 571,000 14.28
CCH(Z) 35,432,000 546,916 1.54
Lafarge 200,039,904 3,609,101 1.80
BAT 212,456,804 155,000 0.07
NATBREW 63,000,000 1,136,450 1.80
AEL 2,040,600 69,288 3.40

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Appendix 3 NAPSA investment in Bond

YEAR ISSUER TYPE OF TENO AMOUNT

SECURITY R
JAN 2000 PTA BANK NOTE ISSUE 1 YEAR US $100,000
NOV 2000 FARMERS HOUSE PLC CORPORATE BOND 3-4 US$1 MILLION
YEARS
JUNE 2001 BAOBAB TRUST DEBENTURES - US$1.5 MILLION
SCHOOL
MAY 2002 ARCADES CONVERTIBLE 5 US $1.5 MILLIOM
DEVELOPMENT PLC DEBENTURES YEARS
MAY 2002 BARCLAYS BANK CAPITAL NOTES 12 ZMK50 BILLION
ZAMBIA PLC YEARS
NOV 2003 LUNSEMFWA HYDRO CORPORATE BOND 6 US $7 MILLION
ELECTRIC POWER YEARS
COMPANY LIMITED
JULY 2004 C/B FORESTRY LTD CORPORATE BOND 4 US $1MILLION
YEARS
SEPT 2006 FARMERS HOUSE PLC RIGHTS ISSUE - US$10 MILLION
ZMK43 BILLION
FEB2007 DBZ CORPORATE BOND 5YEARS ZMK150BILLION

JUNE 2007 INVESTRUST CORPORATE BOND 3-6 ZMK100 BILLION

YEARS
JULY 2007 CHILANGA CEMENT CORPORATE BOND 4 ZMK200BILLION
YEARS
OCT2007 STANCHART CORPORATE BOND 4 ZMK250BILLION
YEARS
JULY 2008 BAYPORT FINANCIAL PRIVATE PLACEMENT 7 YRS ZMK 200 BILLION
SERVICES –MTNP 3YRS

MARCH 2009 BARCLAYS BANK MEDIUM TERM NOTE ZMK500 BILLION

ZAMBIA PLC PROGRAMME
CORPORATE BOND

2013 IFC TERM NOTE K150M

75
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