The Correct Way of Evaluating the Fund Managers of Social Security Funds

It is the Social Security Funds that pay the pensions and pay the health benefits offered by third parties to their insured persons. This is achieved because of the social security contributions paid by insured persons, employers and in some cases by the State respectively throughout the working life of insured persons.

Social Security Contributions paid are the main source of the financial flows of the Social Security Funds. Other sources of funds for the Social Security Funds are the proper exploitation of their real estate and their possible participations in low-risk investment schemes.

by Trust Economics-https://trusteconomics.eu

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The successful management of the reserves of a Social Security Fund aims to achieve positive returns while minimizing any investment risk.

The portfolio return is defined as the percentage change in the price of the investment portfolio under consideration over a specific investment and management horizon.

In this definition, the performance (return) of a portfolio depends on:

  1. From the type of investment strategy implemented by the manager of the Social Security Fund.
  2. From the type of restrictive elements in which the manager invests the liquidity of reserves (e.g. investments in shares, bonds, derivatives, etc.).

As a risk we define the situation in which the future return on the capital under investment is not guaranteed and part or all the initial capital invested may be lost (e.g. capital from a pool of social security contributions paid).

But what are the criteria that should be applied for the Fund Manager of the Social Security Fund to be accurately assessed?

1. The Performance of the Administrator

Each insured person of the Social Security/Pension Fund should know how competent the manager who manages his social security contributions, and his future pension is.

The method of measuring its performance is based on the performance-risk framework it undertakes in the period considered (risk-adjusted performance).

The active portfolio management includes:

  1. The ability to select the assets suitable for investment (stock selection skills).
  2. The ability to correctly predict trends as to where the prices of the market timing skills will move.

2. Risk measurement

Modern risk measurement methodologies should be applied and always on the Basel Accord directives where the Reserved Value at Risk (Conditional VaR) is used, which shows us how much the average loss of the value of the portfolio under management will be in an extreme scenario.

3. Publish Results

Each Social Security Fund should at the end of the management period (management year) draw up an annual report setting out the assessment of the manager’s performance (both in mixed and net terms from the cost of managing the administrator, as measured by the total expense ratio) and the risk it has assumed.

These reports should:

  1. To be posted on the official website of the Social Security Fund
  2. Notify each insured person in any way he wishes.
  3. To be posted on the websites of the official institutions of the fund management industry concerned

This is the only way to compare and make good decisions.

4. Participation of the Insured in the formulation of the following investment strategy

This is achieved by having the right software so that each insured person has a personal digital (online) account. In this way it is possible for the insured person to choose the degree of risk he wishes to assume as well as the type of investment. In addition, the insured should be given the opportunity to make a forecast of the expected returns and risk of the investment strategy.

5. Larger range of assets to be selected

Expanding the palette of investment assets in which the manager can invest if achieved can be beneficial for the insured.

The ESG (Environment Social Governance) criteria that the Social Security Funds consider to some point limit their investment choices and investment strategies. Reserve fund investments should be made in specific asset classes (e.g. shares, government bonds, real estate, etc.) but also in financial derivatives, commodities, and private equity products. This will achieve even more satisfactory returns at a time of negative interest rates.

This expansion can be done not only at the level of assets, but also investment products/factor investing strategies (smart beta products).

6. Scrutiny by the Supervisory Authorities and New Institutional Framework where necessary

The Internal Audit should monitor the annual report of the Insurance Fund and intervene where necessary. The Internal Audit should assess the ability of the VaR and C-VaR mathematical risk measurement models in terms of their accuracy (applying back-testing & stress testing) by allowing the internal model approach methodology.

The institutional framework should be reformed to include the above proposals.

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