THE POTENTIAL IMPACT OF SSNIT’S DECISION TO IMPLEMENT FIXED-INCOME STRATEGY ON THE EQUITY MARKET AND ECONOMY.

About SSNIT- The Trust

The SSNIT, a statutory public Trust established under the National Pensions Act, 2008 Act 766, is responsible for managing Ghana’s Basic National Social Security Scheme. Its primary role is to handle the First Tier of the Three-Tier Pension Scheme and is currently the largest non-bank financial institution in Ghana.

The Trust's main duty is to provide partial replacement of income for Ghanaian workers in cases of Old Age, Invalidity, or Death, with lump sum payments made to dependents. It also manages the payment of Emigration benefits to non-Ghanaian members leaving Ghana permanently.

The SSNIT-managed Pension Scheme has more than 1.9 million active members as of June 2024, with over 248,742 pensioners receiving their monthly pensions from SSNIT.

Asset allocation is a crucial decision for any pension trust, including the Social Security and National Insurance Trust (SSNIT) of Ghana. Recently, SSNIT’s decision to heavily focus on fixed-income asset classes has garnered significant attention. This article explores the different asset classes for pension funds, the advantages of a fixed-income-biased pension fund, and the potential impacts of this strategic shift on Ghana’s capital market and the overall economy.

Asset Classes and Their Potential Benefits

Asset classes are categories of financial instruments that share similar characteristics, behaviors, and regulations. The primary asset classes include equities (stocks), fixed income (bonds), real estate, commodities, and cash equivalents.

Equities present the potential for high returns through capital appreciation and dividends, but they also carry higher risk and volatility. Fixed-income securities, such as government and corporate bonds, offer regular interest payments and lower risk compared to equities. Real estate can provide rental income and capital appreciation, while commodities (such as gold and oil) can serve as a hedge against inflation. Cash equivalents provide liquidity and safety, although they typically yield lower returns.

Benefits of Fixed-Income Investments bias on a Pension fund.

1. Stability and Predictability: Fixed-income securities provide regular interest payments, which can help pension funds meet their obligation of providing steady retirement income.

2. Lower Volatility: Bonds are generally less volatile than stocks, making them suitable for risk-averse investors like pension funds.

3. Capital Preservation: Fixed-income investments protect the principal amount, ensuring that the invested capital remains intact over time.

The Potential Effects on the Capital Market and Economy of Ghana

1. A Hit on the Stock Market - Low Liquidity

The Ghana stock exchange may take a hit. Stock exchange markets thrive on liquidity, which is significantly influenced by institutional investors like SSNIT. A shift to fixed-income assets can drain liquidity from the stock market. Reduced liquidity can lead to wider bid-ask spreads, increased volatility, and lower overall market efficiency (Osei, 2021).

2. IPOs Stand the Risk of Being Unsuccessful

Initial Public Offerings (IPOs) rely on substantial participation from institutional investors. With SSNIT focusing on fixed-income securities, there will be fewer funds available for investing in new equity issues. This reduced participation can lead to under-subscription of IPOs, discourage companies from going public and limit their access to capital (Mensah, 2020).

3. Share Price Drop

We expect a decrease in stock prices, particularly for stocks held by the trust. Reduced liquidity and lower participation in the stock market may cause share prices to fall. Additionally, SSNIT’s new strategy involves a large sell-off on the GSE, which could lead to price declines. Institutional investors influence equity prices significantly through their buy-and-hold strategies. A substantial withdrawal of such investments can exert downward pressure on stock prices, potentially resulting in losses for both individual and institutional investors (Adjasi, 2019).

4. Sluggish Economic Growth (GDP)

The capital market plays a crucial role in driving economic growth by enabling the transfer of funds from savers to businesses seeking capital. If the stock market experiences a downturn, it can impede businesses’ capacity to secure funding for expansions, innovations, and day-to-day operations. This, in turn, may result in slower economic growth and have the potential to decrease Ghana’s Gross Domestic Product (GDP) as noted by Ackah in 2021.

5. Snail-paced Activity on the Bourse

The Ghana Stock Exchange Composite Index (GSE-CI) serves as a barometer for the overall performance of the stock market in Ghana. If the Social Security and National Insurance Trust (SSNIT) makes a substantial shift towards fixed-income assets, it could lead to decreased market activity and a less dynamic GSE-CI. This deceleration has the potential to influence investor confidence and discourage foreign investment, placing additional pressure on the market, as acknowledged by Antwi-Asare in 2022.

6. Unemployment Rate May Further Rise

In times of a sluggish stock market and reduced economic growth, there is a higher likelihood of an increase in unemployment rates. This is because businesses may struggle to raise the necessary capital for their operations, leading them to scale back and even lay off workers, which in turn slows down job creation. Consequently, this can worsen the existing unemployment issues in the country, ultimately impacting the overall economic well-being (Owusu, 2020).

7. Likelihood of Low Pension but Regular Income

Fixed-income investments, although providing stable returns, may not deliver the high returns required for substantial pension growth. Pre-retirees depending on SSNIT for retirement income may experience reduced pension payouts, resulting in regular but potentially insufficient income. This situation could have implications for their financial security and spending ability in retirement (Anarfi, 2021).

Some considerations for Pre-Retirees

If you are a pre-retiree consider these three things;

1. Asset Allocation and Diversification: Pre-retirees should aim to achieve proper asset allocation and diversification in their investment portfolios, combining fixed-income securities for stability and equities and alternative investments for growth potential.

2. Boosting Savings: Given the prospect of reduced pension benefits, pre-retirees should focus on augmenting personal retirement savings to ensure sufficient financial resources post-retirement. An additional investment pension scheme will be laudable specifically taking advantage of tier 3. This will enable you to reduce your current taxes and allocate the saved tax amount for pensions.

3. Professional Financial Consultation: Engaging with a certified financial planner can aid pre-retirees in crafting a comprehensive retirement strategy tailored to their specific financial circumstances and objectives. This is highly recommended, as seeking financial advice from a licensed professional can boost your lifetime investment returns by nearly 2x (Benitez, 2024)

SSNIT's decision to increase its allocation to fixed-income asset classes could have far-reaching implications for Ghana's capital market and economy. While offering stability and regular income, this shift may lead to reduced stock market liquidity, unsuccessful IPOs, declining share prices, slower economic growth, and increased unemployment. Pre-retirees must adapt their financial strategies to mitigate potential negative impacts on their retirement income.

Disclaimer: This should not be construed as financial advice. If you need financial advice contact a licensed and professional advisor. The writer will not be held liable for any loss

References

Ackah, C. (2021). The Economic Impact of Capital Market Developments in Ghana. Journal of African Economies, 30(3), 450-467.

Adjasi, C. K. D. (2019). The Role of Institutional Investors in Emerging Markets: Evidence from Ghana. African Development Review, 31(2), 190-205.

Anarfi, J. K. (2021). Pension Funds and Retirement Security in Ghana. International Journal of Social Economics, 48(4), 529-546.

Antwi-Asare, T. O. (2022). The Dynamics of Stock Market Performance and Economic Growth in Ghana. Journal of Financial Markets and Portfolio Management, 36(2), 210-229.

Mensah, L. (2020). The IPO Market in Ghana: Challenges and Opportunities. African Journal of Business Management, 14(1), 30-42.

Osei, K. A. (2021). Liquidity and Stock Market Development in Ghana. Journal of Financial Economics, 120(3), 612-635.

Owusu, R. (2020). Unemployment Trends and Economic Growth in Ghana. Journal of African Business, 21(4), 440-459.

SSNIT (n.d.). About us. Ssnit. Retrieved July 10, 2024, from https://www.ssnit.org.gh/about-us/

Benitez, M. (2024, June 24). 7 Reasons You Should Consider a Financial Advisor — Even If You’re Not Wealthy. Retrieved July 10, 2024, from https://www.gobankingrates.com/consider-financial-advisor-not-wealthy-2287035/?utm_term=related_link_2&utm_campaign=1278539&utm_source=yahoo.com&utm_content=3&utm_medium=rss