THE INTERFACE BETWEEN PENSION FUND REGULATIONS AND INVESTMENT PERFORMANCE: THE ETHIOPIAN EXPERIENCE

Abstract

The overall performance of the pension fund of Ethiopia affects millions of the scheme members. Based on this fact, the study attempts to understand how the pension fund regulations are related with social security fund investment performance with a particular reference to PSSSA and POESSA of Ethiopia. To achieve this aim the methodology employed is a mix of quantitative and qualitative approaches. Basically the analysis mostly depends on the social security agencies’ financial reports. To comprehend the view of employees the research also administered 109 questionnaires with 88.1percent of response rate. Further, the perspectives of two pension fund managers on the subject matter were obtained through interviews. The finding revealed that the Ethiopian pension funds rate of return has been declining continuously. It also identified that the Treasury bills, as a dominant area of investment, have been negatively affecting the portfolio rate of return. Besides this fact, Treasury bill is the only asset the regulations specify as appropriate area of investment of the pension fund. Consequently, the rate of return after the restrictive regulation of the pension fund (0.88%) is significantly lower than that of the period between 1994 and 2003 (2.3%). Examinations on risks- of different assets, via coefficient of variation, asserted that the Treasury bill is scored below its counterparts which are the time deposit and government bond. It is also found that the contribution of the return from investment to cover administrative costs is high where as its contribution to cover the pension payment is very low. The what if analysis based on two scenarios which gave more weights to time deposit and government bond depicted how the opportunity cost of the rigidity of the present pension fund investment regulation is very high. The comparison of the Ethiopian investment performance with other countries also demonstrates the necessity for less restrictive regulations. In line with the findings, the study recommends that the funds should have research based assets mix in the portfolio; the scheme members must have a say right in decisions that can affect them and the regulations should be detailed and comprehensible.