Is the lowly De­pen­dent’s Pen­sion Fund be­ing over­looked?

Stabroek News Sunday - - LETTERS -

Chat­ter

There has been much chat­ter sur­round­ing the es­tab­lish­ment of a Sov­er­eign Wealth Fund (SWF) in Guyana. Work has be­gun to­wards achiev­ing that goal and at some point in time Guyanese would want to have their say about the mat­ter. This writer un­der­stands that when the time comes Guyanese will be given an op­por­tu­nity to com­ment on the leg­is­la­tion be­ing pro­posed for the cre­ation of the SWF. To­wards this end, all Guyanese must know and have a clear un­der­stand­ing of the con­cept and dy­nam­ics of the SWF. In­deed, SWFs are grow­ing in pop­u­lar­ity with in­creas­ing num­bers of coun­tries look­ing at ways to es­tab­lish such a fa­cil­ity. Just over one week ago the largest SWF, that of the Govern­ment of Nor­way, topped US$1 tril­lion in value in less than 30 years. Oth­ers are within strik­ing dis­tance of the cov­eted US$1 tril­lion mark which bring many a feel­ing of com­fort. If likened to a marathon, Nor­way would have won the race com­fort­ably. There is great an­tic­i­pa­tion that SWFs soon will be com­mon­place, es­pe­cially among de­vel­op­ing coun­tries. SWFs make up about six per cent of the share of the global as­sets that be­long to in­sti­tu­tional in­vestors. In light of its grow­ing pop­u­lar­ity and emerg­ing promi­nence in Guyana, this week’s ar­ti­cle seeks to shed light on the con­cept, pur­pose and role of the SWF.

Pop­u­lar medium

A sov­er­eign wealth fund is a state-owned in­vest­ment fund or en­tity. It has be­come a very pop­u­lar medium for in­vest­ment and is the new buzz word in Guyana. Within the last five to six years, sev­eral coun­tries in Africa have set up SWFs with the re­sult that about 20 per cent of the coun­tries have or are con­sid­er­ing hav­ing the in­vest­ment medium. Counted among the African coun­tries with re­cent or long­stand­ing SWFs are Al­ge­ria, An­gola, Botswana, Equa­to­rial Guinea, Gabon, Ghana, Libya, Mau­ri­ta­nia and Nige­ria. It is ex­pected that Mozam­bique and Tan­za­nia will soon have SWFs while Sierra Leone is con­tem­plat­ing how to do it. Within the Caribbean, the most promi­nent SWF is the one set up by Trinidad and Tobago.

The key char­ac­ter­is­tic of the SWF is govern­ment con­trol of the funds that are used in the in­vest­ment. As such it is an in­vest­ment that is owned and con­trolled by govern­ment. All the SWFs have that com­mon char­ac­ter­is­tic. Ad­di­tion­ally, the SWF falls un­der the con­trol of the Cen­tral Bank or the Min­istry of Fi­nance of a coun­try. An­other com­mon char­ac­ter­is­tic of the SWF is its time hori­zon. It rep­re­sents long-term in­vest­ments which of­ten do not have a fixed time hori­zon be­yond that of the pur­pose of plan­ning the in­vest­ments. A SWF is thus a pool of money that is in­vested in var­i­ous fi­nan­cial as­sets. These as­sets in­clude things like stocks, bonds, pre­cious met­als and other in­vest­ment in­stru­ments. The suc­cess of a SWF there­fore de­pends heav­ily on how well man­aged the funds are.

De­pen­dants’ Pen­sion Fund

The Nor­we­gian SWF is re­ally the pen­sion fund of the Govern­ment of Nor­way that has been in­vested to reach the enor­mous size to which it has grown. Based on the def­i­ni­tion of a SWF and the ex­pe­ri­ence of Nor­way, a quasi SWF ex­ists in Guyana al­ready and for much longer than many other such funds around the world than peo­ple seem to re­al­ize. It is called the De­pen­dants’ Pen­sion Fund (DPF) which is based on the De­pen­dants’ Pen­sion Act of 1923 with var­i­ous amend­ments over time. It is sur­pris­ing that those who are re­spon­si­ble for man­ag­ing that fund have not stepped for­ward to let Guyanese know that a ba­sis ex­ists for es­tab­lish­ing a wealth fund. In Guyana’s case, the Min­istry of Fi­nance con­trols the De­pen­dants’ Pen­sion Fund and the Ac­coun­tan­tGen­eral is the Chair­man of the Board of Di­rec­tors.

There are lessons that can be learnt from the way in which the Pen­sion Fund has been man­aged over the years. This ex­pe­ri­ence un­doubt­edly con­tains valu­able lessons for the more ro­bust and so­phis­ti­cated SWF that is be­ing con­tem­plated at the mo­ment. In light of this, Guyana might want to re­think its at­ti­tude to­wards the DPF and the role that it can play in ad­vanc­ing the in­ter­est in the new SWF that the govern­ment has in mind. The typ­i­cal prac­tice of the more promi­nent and suc­cess­ful SWFs is to link the money used in the in­vest­ment to re­ceipts from some nat­u­ral re­source. In the case of the very large funds such as those of Nor­way, Saudi Ara­bia, the United Arab Emi­rates (UAE) and Kuwait, they are linked to oil rev­enues. Other nat­u­ral re­sources like di­a­mond and high-in­come gen­er­at­ing pre­cious met­als of­ten make it pos­si­ble for coun­tries to find re­sources to put into the SWF. As a con­se­quence, SWFs have come to be as­so­ci­ated with coun­tries that have bud­getary sur­plus em­a­nat­ing from high rev­enues gar­nered from ex­ports and very lit­tle or no in­ter­na­tional debt.

Search for lessons

From what is known, Guyana has not linked its ex­ist­ing wealth fund (DPF) to any spe­cific source of in­come. The money for in­vest­ments come from the con­tri­bu­tions of its mem­bers and trans­fers from the Con­sol­i­dated Funds, in­clud­ing when­ever there is a short­fall in ex­pected in­ter­est in­come. Any dis­cus­sion about an SWF in Guyana should start with how to treat the DPF. The search for lessons about SWFs can in­clude con­sid­er­a­tion of the rea­sons the DPF in Guyana is not as large as that of Nor­way or any of the smaller suc­cess­ful funds.

SWFs are pop­u­lar in coun­tries de­pen­dent on the ex­port pro­ceeds from nat­u­ral re­sources such as oil and min­er­als as it is a mech­a­nism to guard and cush­ion them against the ad­verse ef­fects of the volatil­ity of those prices. Re­cently, cases of both volatil­ity and ex­haus­tion were ev­i­dent in global com­mod­ity mar­kets. Oil prices dropped sig­nif­i­cantly re­sult­ing in de­clin­ing oil rev­enues in oil-pro­duc­ing economies. But that is not nec­es­sar­ily the only ba­sis upon which to build a SWF. From the ta­ble be­low show­ing the top 10 SWFs, it is clear that not all suc­cess­ful funds are based on set-asides from oil or some other nat­u­ral re­source. An equal num­ber of the top-ranked funds rely on non-com­mod­ity ex­cess rev­enues.

Ta­ble 1: Top 10 SWFs as of Septem­ber 2017

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