TRADE, FINANCE AND INVESTMENT COMPETITIVENESS FINANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT How to Harness Local Investors in Emerging Markets: The Example of Local Pension Funds Richard Davis Robert Rusconi Aaron Levine © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Mai Ky / World Bank >>> Contents Acronyms 4 Acknowledgements 6 Executive Summary 7 I. Background, Structure and Definitions 9 II. The Critical Role of Strong Governance 12 Canadian Pension Funds 13 Market Development and the EPF Malaysia 15 South Africa’s GEPF 17 Private Equity Investing in Namibia 19 III. Improving Governance and Diversification via Investment 23 Pooling IV. Revealing Hidden Areas of Opportunity in Pension Savings 26 Unregulated Provident Funds in Southeast Asia 26 Long-term Savings Arrangements for Informal-sector Workers 27 V. Conclusions 32 References 34 >>> Acronyms APY Atal Pension Yojana (India) B-BBEE Broad-based Black Economic Empowerment CDPQ Caisse de dépôt et placement du Québec CRISA Code for Responsible Investing in South Africa DCP Development Capital Portfolio (Namibia) EDGE Excellence in Design for Greater Efficiencies EMDE Emerging Market and Developing Economies EME Emerging Market Economy EPF Employees Provident Fund (Malaysia) ESG Environmental, Social, and Governance GBI-EM Global Bond Index - Emerging Markets GDP Gross Domestic Product GEPF Government Employees Pension Fund (South Africa) GFC Global Financial Crisis GIPF Government Institutions Pension Fund (Namibia) IFC International Finance Corporation IFI International Financial Institution IHS International Housing Solutions Fund (South Africa) IMF International Monetary Fund J-CAP Joint Capital Market Program KEPFIC Kenya Pension Funds Investment Consortium >>> Acronyms LPF Large Pension Fund NPS National Pension System (India) NSSF National Social Security Scheme (Uganda) OECD Organisation for Economic Co-operation and Development Pension Fund Regulatory and Development Authority PFRDA (India) PIC Public Investment Corporation (South Africa) PPP Public-Private Partnership PPRF Public Pension Reserve Funds SACCO Savings and Credit Cooperative Societies SDG Sustainable Development Goal SME Small and Medium Enterprise SSNIT Social Security and National Insurance Trust (Ghana) TT Taper Tantrum UN PRI United Nations Principle of Responsible Investment US United States USAID United States Agency for International Development >>> Acknowledgments The research team wishes to express its appreciation to the Joint Capital Market Program (J-CAP), and in particular to the Government of Norway, which financially supported this study.[1] [1]. J-CAP’s in-country work is made possible by the support from the Governments of Australia, Germany, Japan, the Netherlands, Norway, and Switzerland. The Governments of Luxembourg and Norway support J-CAP’s related knowledge work. >>> Executive Summary There is a significant gap in financing sustainable development in emerging economies to meet the climate commitments under the Paris Agreement and to fulfill the Sustainable Development Goals (SDGs). The Organization for Economic Co-operation and Development (OECD) estimates that more than US$4 trillion of financing is needed annually. While much of the capital required will come from OECD-country sources, which hold 80% of worldwide financial assets, there is an untapped pool of local investments to be drawn on. Local investor sources can offer a range of benefits. Local investors, such as pension funds, which are the primary focus of this paper, hold over US$2 trillion (OECD 2021, citing size of non-OECD pension funds) in assets and have a long-term investment horizon, a local currency focus, and the local knowledge which can complement foreign capital sources. As seen in the COVID crisis, they are also a steady source of capital. In many cases, these investors have the potential to be long-term, patient investors, which is ideal for financing long-term sustainable investment projects. If even a small proportion of those assets were employed productively in infrastructure and small business investment in the pension funds’ local economies, they would demonstrate a significant impact. This was evidenced in a recent World Bank paper,i which looked at four decades of research and indicated that investment in digital, power and transport infrastructure consistently led to improved growth and development outcomes. The involvement of large local institutional investors such as pension funds also creates increased demand for local investment instruments such as bonds, which in turn further develop local capital markets, leading to potential further investment. Local investment also ensures the benefits flow back to local beneficiaries both in terms of financial returns and the development impact of the funded project. However, these prospective local investors must address several challenges to realize their investment potential. First, they must properly prioritize their objectives. Pension i. The Impact of Infrastructure on Development Outcomes, World Bank 2023 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 funds, as the premier example of potential local investors, establishment of pension fund consortia within countries or are often asked to invest disproportionately into local projects regions, where investment opportunities and comparative intended to fund economic growth. Unfortunately, such knowledge and skills can be shared, and structures can be projects may sometimes be proposed despite questionable established that can draw in foreign institutional investors economics if they are politically favored for other reasons. and International Financial Institutions (IFIs). IFIs can In this situation, it is critical that local pension funds have a also support project structuring and fundraising from stated priority that focuses first on the welfare of pensioners global concessional resources in partnership with local and beneficiaries and second on a complementary goal of investors. The World Bank’s support of such investment growth. Many projects will fulfill both objectives, and the paper pooling examples in Africa and across the Pacific Islands focuses on this frequent possibility, but if pensioner welfare is are elaborated in the paper. not improved, the project should not go forward. 3. Growing the pool of potential local investment Secondly, local investors face certain structural barriers. sources by revealing opportunities through ‘hidden’ A common issue that many of these entities struggle with is local investors that may already exist in some emerging that of inadequate governance. Another area of weakness is markets. Greater regulatory oversight may be required their relatively underdeveloped investment capabilities and for them to invest more efficiently and effectively (for expertise. Given the nature of the investments needed in example, the under-regulated pension arrangements in emerging economies, the investors may not have the requisite South Asia (Chapter IV)). Both policy support and capacity know-how to make well-informed decisions in these areas. building are required to cultivate the development of these new sources of domestic capital (for example, supporting Given these challenges, the paper focuses on three savings arrangements for informal-sector workers actions to further mobilize local investors toward (Chapter IV)). sustainable development: The paper offers three practical directions for policymakers 1. Strengthening the governance of local pension funds, in order to make the promise of local investors contributing including through public policy reform. Ultimately, to sustainable development a reality. While this level of focus investment in sustainable development cannot be effective will require concerted effort to implement, it increases the without this critical precondition being met. Evidence opportunity for local investors to play a crucial role in globally indicates that more effective governance leads to closing the financing gap. improved diversification and more efficient use of assets. Developing effective governance requires moving from a ‘pre-reform entity’ to one with growing expertise, more independence of decision-making, and increasing levels of competence and expertise. The paper shares the examples of strong public funds in Canada, successful pension fund governance improvements in Namibia, and the progress over time exhibited by the Employee Provident Fund of Malaysia. 2. Unlocking the potential impact of local investors with innovations such as consortia that pool expertise, capital and enable further diversification. An emerging example of amplified impact for local investors is the EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 I. >>> Background, Structure and Definitions 1. The magnitude of additional investment needed in the emerging market and developing economies (EMDE) to meet the Sustainable Development Goals (SDGs) and Paris Accord means that both international and local investment will have to be mobilized. The financing gap to meet the SDGs is estimated to have increased to US$ 4.2 trillion per year following the COVID-19 pandemic (OECD 2020). Given this magnitude of need, it will be necessary for international financing sources to play a large role, as more than 80 percent of financial assets are held in OECD countries (OECD 2020). Yet, there are critical reasons why more investment should also be sourced from the EMDE countries themselves. 2. A key reason why EMDEs should look to source more funding internally is the frequent transitory nature of foreign investment. The COVID-19 crisis is just one recent example illustrating that capital flows from overseas can quickly evaporate during times of stress in international financial markets (see figure 1). Significant withdrawals occurred again in 2022, with more than US$ 50 billion withdrawn from emerging market bond funds in the early part of the year, as United States (US) interest rates continued to rise (Asgari 2022). >>> Figure 1: Portfolio Flows to EMEs (2008-2023) (US$ billion) Source: OECD (2020:3), citing in turn Jonathan Fortun, Daily capital flows tracker. ©2020 Institute of International Finance, Inc, All rights reserved Note: Cumulative non-resident portfolio flows to Emerging Market Economies since event start date (t for Global Finance Crisis=9/8/2008; for Taper Tantrum=5/17/2013; for China sell-off=7/26/2015; for COVID=1/21/2020) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 3. In addition to the overall risk of capital flight, the as well as a spike in local currency bond spreads. Figure 2 issuance of additional local currency debt helps to illustrates the average of exchange rate changes and impacts address potentially destabilizing currency mismatches. to local currency bond spreads over the course of the crisis The financial crises of the 1990s made it clear that currency in the early months of the pandemic in 2020 (Hofmann and mismatches in the issuance of debt combined with maturity others 2020). mismatches made developing economies even more vulnerable to these types of capital outflows (Hofmann Given these realities, it becomes clearer that local, long- and others 2020). Although these economies adapted term development priorities will need to be met with a their fundraising behavior to borrow more predominately in balance of international capital and funds from more stable local currency, this has not insulated the emerging market — and if sometimes more expensive — local sources of economies (EMEs) from currency movements, especially long-term capital. given sharp currency declines, record portfolio outflows, >>> Figure 2: EME to US$ Simple Average (lhs) with EME Spreads (rhs) Source: Hofmann and others (2020, p. 2). Note: Exchange rate is the simple average of EME,s excluding China. The increase reflects the US dollar appreciation. Spreads indicate the difference between the yield of Global Bond Index-Emerging Markets (GBI-EM) broad index (for example, China) versus US Treasury yields. 4. Using such local sources of savings to fund sustainable these assets are also growing fast. Indeed, pension savings development may be more available in emerging markets in non-OECD countries doubled between 2010 and 2020, than is apparent at first sight. A common assumption is that that is, from US$ 1 trillion to US$ 2 trillion (OECD 2021). developing economies do not have such sources of long- term, domestic capital available. For example, the amount 5. This paper makes the case that local investors, of pension savings in many non-OECD countries is typically especially pension funds, can play a key role in supporting one of the best sources of long-term sustainable investment, development, while also detailing the necessary steps given the maturity of their liability profile. — However, it seems to enable successful portfolio diversification. For those low in absolute terms, at least at first glance. Nonetheless, local sources of capital to be effective, it will be necessary the amount of pension assets as a percentage of gross to balance the primary need to pay beneficiaries with the domestic product (GDP) are in fact considerable, and are complimentary goal of supporting sustainable economic growing quickly. For example, in Peru, it is at 23.1 percent of growth and development. As such, it will require the following: GDP; in Croatia, at 34.6 percent; and in South Africa, at 92.1 (i) the establishment of strong governance; (ii) a clarification percent (OECD 2021). In addition, OECD data shows that of objectives; (iii) building capacity through co-investment EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 and pooling; and (iv) the cultivation of new and what may development banks in a manner which is inconsistent with otherwise be hidden sources of local investment. Of these their primary mission, this can prove to be at a detriment four principles, some represent the reiteration of important to their returns — ultimately resulting in neither goal being tenets shared before, but others, especially the examples of achieved. However, the examples in this paper will show pooling and cultivation of somewhat hidden new investment that, in some situations, returns and development goals can pools, are relatively new. Each of these four principles is be pursued simultaneously, resulting in a win-win situation. illustrated with examples from across the developed and Indeed, by no means do investments that contribute to developing markets. sustainable development necessarily prove to be inferior – in many cases they can equally provide strong return results 6. Local pension funds are just one of the typical while delivering preferred outcomes in terms of development. institutional investors that can play a role in developing economies. In addition to pension funds, local insurance 9. International evidence shows that supporting local companies can also play a large role, especially with regard capital market development can be consistent with the to their long-term insurance business, for which likely liabilities primary goal of a pension fund to pay beneficiaries, as it are well into the future. Local banks are also typically key helps the diversity of available investments. Evidence exists players. Investment funds may exist locally and have a that capital market development typically goes hand-in-hand significant presence. There may also be government, or third- with increases in investable assets (Catalan and others 2000; party controlled development finance institutions. Finally, Hu 2005; Kolodiziev and others 2021; Thomas and Spataro there are several other, smaller entities that may exist in 2016; and Vittas 2000; Walker and Lefort 2002). As detailed market. The paper discusses a few of these toward the end. by Jackson and Inglis (2021), among others, the development of investment markets follows a certain path. It starts with bank 7. In many ways, pension funds form the ideal match for deposits, and then government debt of increasing duration. This local demand for investment in sustainable development. then grows into loans to other entities and listed shares, and This paper refers to local sustainable development as then an expansion into other private investment classes. This investment which contributes to a closing of the investment sequence represents a reasonable match of the corresponding gaps against the SDGs and Paris Accords. Pension funds incremental needs of the private pension funds for asset classes are long-term and typically patient in nature. They may to deliver returns to their members. have cash ready to deploy and are anxious to avoid asset vs. liability mismatches. Therefore, the case for investment 10. Regarding the broader goal of supporting local in long duration assets that are expected to improve local sustainable development, balancing it with the primary prospects, while also delivering competitive returns, is mission of paying pension benefits requires more care. strong. Often the type of investment assets that fit this Pension fund members cannot be expected to subsidize description involve infrastructure investment, unlisted and sustainable investment for their fellow citizens to the detriment relatively illiquid, but with duration hedging characteristics of the performance of their fund — even when they can be and reliable, predictable and relatively assured cashflows. considered ‘universal owners’ covering a large percentage of Again, it is a good fit as these funds have their long-term the local population (Unwin 2011). However, where the fund obligations to beneficiaries denominated in local currency. In can make a profitable investment in a project that will also aid fact, many pension funds around the world have established in local progress, pension fund members in an EMDE context strong track records of enabling this type of development.1 would likely be more open to such dual mandates than those in high- income countries, given their awareness of significant 8. Yet the provision of local development financing should local needs. A particularly helpful body of guidance on balancing be carefully balanced with pension funds meeting their these various goals is provided by the International Organisation liabilities, as well as providing for adequate pensions for of Pension Supervisors (IOPS) in their ‘Supervisory Guidelines their members. The primary mission of a pension fund is on the Integration of ESG Factors in the Investment and Risk to deliver sufficient returns to be able to pay beneficiaries. Management of Pension Funds.’ When funds are instead used to serve effectively as local 1. It is important both to note that the conclusions in this paper pertain not only to defined contribution (DC) funds but also to other versions of funded pension vehicles. However, for schemes with fundamental design issues threatening their ability to fulfill their core obligations, those design issues must be addressed first before expansion of their investment mandates is entertained. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 II. >>> The Critical Role of Strong Governance 11. International experience shows that strong governance is an important pre-requisite for funds to successfully diversify and take advantage of long-term investment opportunities. A scheme with “strong governance, capable trustees with financial expertise and minimal political interference” (Guven and others 2021) typically has a more straightforward path to fruitful diversification than a scheme without these capabilities. Such a scheme is also better positioned to deliver improved inflation protection (as in figure 3), as well as potential secondary objectives, such as those focused on local development. Investment in short-term, fixed-income investments requires little specialist knowledge. However, as funds move into other asset classes, capacity needs to be built. This includes enhanced capacity for trustees overseeing more sophisticated investment strategies, as well as for external managers. This is even more the case with unlisted securities, which place a high demand on fund governance capabilities as a key prerequisite. Indeed, this is where investment opportunities often lie in emerging markets with under-developed, formal capital markets. In-house management of assets by funds likewise requires even greater governance oversight and control. >>> Figure 3: Investment Vehicle Choices depend on Governance capacity Unlisted Securities Foreign Securities Governance Strength Needed Property Listen Securities: Equity, Debt Longer-dated Short-dated Government Mutual Funds Goverment Securities Securities Bank Deposits Inflation Protection and Diversification Source: Guven and others (2021), p. 73. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 12. Pension governance is similar to corporate governance, local investment but again the investment instruments suitable but with key differences; effective pension governance for those funds to consider may not exist. In this situation, the typically leads to improved investment diversification building of pension fund governance and investment capability and more efficient use of assets. According to IOPS2, in a wider range of asset classes can be a catalyst for new pension fund governance refers to the framework by which investment opportunities to be structured that meet their needs. the governing body makes key decisions about the pension As the international case studies show, well-governed local funds’ business. It includes the structure of the governing funds striving to diversify their portfolios and actively signaling body itself (legally and organizationally); the decision-making a desire to invest in long-term assets on a high quality, fully processes to include risk management, compliance and transparent basis (with appropriate public disclosure) play a oversight; the skills and competency of the governing body; key role in driving such investment opportunities to be created and the means by which the governing body is accountable which match their risk-return profile. to stakeholders, both narrowly and more widely defined. A key difference between typical corporate governance and pension governance would be the stakeholders; in the case Canadian Pension Funds of a corporate entity, the shareholders would take the pre- eminent role whereas in the case of pension funds it would be plan members and other beneficiaries. There is evidence that 14. Although now seen as leading global examples of high quality pension governance leads to greater investment diversified investors in long-term, real assets, a lack of diversification and lower levels of inefficient cash holdings asset diversity was an issue for some of the best-known and (Bregnard and Salva 2022). well-regarded Canadian pension funds in the 1980s. Two of the funds now known for innovative investment approaches 13. Well-governed funds can also play a role in developing (the Caisse de Dépôt et Placement du Québec and the Ontario such long-term investment opportunities in markets Teachers’ Pension Plan, see figure 4) began their journey with where a lack of a pipeline investments is often the binding most of their assets invested in government debt instruments. constraint to their diversification. Although this note will focus However, in both cases, the funds made significant progress on highlighting new local investor opportunities, in many cases during the 1980s and 1990s, thus significantly diversifying their the key issue may in fact be a lack of suitable investments. investments to drive improved returns. Pension funds will often represent a good match for worthy >>> Figure 4: Increasing Diversification of Canadian Pension Fund Asset Mix Source: World Bank (2017), page 53. 2. IOPS (2008), ‘Supervisory Oversight of Pension Fund Governance’ Working Paper Number 8 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 15. A critical element of the increasing diversification of the as a role model in this area in terms of how they deal with risk, and Canadian pension funds was the strong evolution of the how they structure deals. They collectively allocated some 5.2 underlying pension organizations (World Bank 2017). This percent of their assets to infrastructure, the highest rate globally, evolution (see figure 5) demonstrates the critical transition from with some having twice that amount (PwC 2016). The ability to a pre-reform entity to one with a reliable and robust foundation invest wisely in such asset classes requires several preconditions, for decision-making. Ultimately, the funds progressed to become such as strong governance and organizational culture (World independent, professional entities.3 As such, they were better Bank 2017, page XIV)(see also figure 5). Importantly, the equipped to handle increasingly diverse and complex investments Canadian funds largely invest globally in infrastructure, not just in asset classes that were able to deliver secure, diversified in domestic market infrastructure. However, the example they investment returns. Indeed, the example provided by the funds provide in ensuring strong governance first is helpful to show what in Canada best illustrates the reality, as shown in figure 5, that the is needed to implement an innovative and diversified investment development of robust organizational strength and capability is approach. As part of this journey, the Canadian funds have also closely linked to the development of strong governance. begun to make a significant difference in more environmentally sustainable investment. A recent report analyzing 12 of the 16. Beyond simply diversifying their asset portfolios, one large Canadian funds indicates that they collectively have more of the specific innovations that the Canadian funds has than US$160 billion invested in environmentally sustainable led has been a move toward investing in infrastructure, a investments, including renewable energy investments, as well particularly helpful asset class in enabling more sustainable in as green infrastructure and building assets (Smart Prosperity development progress. The large Canadian funds are viewed Institute 2021). >>> Figure 5: The Four-phase Framework for the Evolution of Pension Organizations Independent, Mature, Pre-reform entity A solid foundation professional entity with sophisticated entity strong governance • Reform strategy in place • Part of government - no • Stakeholder buy-in to reform • Mature independent Governance real independence or • Earning trust of government • Independent governance governance model arm’s-length overnight and private sector • Low expertise or • Ability to attract global • Developing in-house staff • Ability to attract qualified People and experience in external top talent • External hires to fill gaps professionals best practice • Ability to develop organization • Developing skills for external • Strong program to develop • Limited procurement top quality internal sourcing internal talent skills expertise • Little diversification- Typical Characteristics • Diversified investments • Highly diversified sometimes 100% • Begin to diversify investment • Increasingly competent investments Investment in nonmarketed • Begin to build investment in-house investment • Sophisticated in-house government debentures expertise capabilities investment teams and 100% domestic • Major administrative errors • Inefficient, and ineffective • Professional plan corrected plan administration • Competent plan administration Administration • Significant errors • Investment in systems to administration • Modern technology reduce costs and improve • Poor member services • Strong client service service • Realistic understanding of • Improved funding Plan design and • Pay-as-you-go or limited • Assets and liabilities liabilities • Realistic understanding of funding well balanced funding • Active dialogue on plan assets and liabilities • Little clarity on liabilities • Funding is sustainable sustainability • Sustainable funding target • Outdated or legacy • Modern legislative • Proactive improvements Regulation and legislation • Updated legislation framework in legislation and • Strict investment limits public policy • Some investment freedom • Limited investment regulation • Little political will for restrictions • No investment limits reform Source: World Bank (2017), page XIII. 3. Another type of example of forging strong governance is provided by some social security organizations that fully separate their investment entity from the balance of theinstitution. Jordan’s SSIF is one such entity. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 17. A review of the investment practices of other large, survey of large pension funds shows a trend of continuing long-term pension investors around the world indicates diversification into more alternative investments. Within these an increasing willingness by these investors to follow alternatives, there is an increasing tendency to invest in more the lead of the Canadian funds and to diversify beyond challenging, yet more fruitful investments for the purposes of simple government debt instruments. The periodic OECD enabling sustainable development, >>> Figure 6: Asset allocation as a percentage of total assets Note: Values are a simple average invested in each asset category for all LPFs, from which actual asset allocation was available in the periods 2014-2017, independently of their size in terms of assets. A total of 35 LPFs submitted asset allocations over the four-year period ending in 2017, a subset of the total survey population. Asset allocation totals may not add to 100% due to rounding. Source: OECD calculations based on responses to the OECD Survey of LPFs and PPRFs. Source: OECD (2019). Note: LPF= Large Pension Fund; PPRF= Public Pension Reserve Funds. such as unlisted infrastructure (see figure 6). This trend sequencing of reforms needed to make such diversified covers pensions funds in other developed countries with low investment strategies a success, and measuring the interest rates and deep capital markets (notably, Australia). success of such reforms. The most important lesson imparted The trend extends to regions with less deep capital markets by the Canadian funds is the focus on strong, independent (for example, in Latin America and Southeast Asia), as well as governance, as well as the other critical preconditions that from leading funds in other regions (for example, in Southern they worked through before they moved to the successful, Africa). Many of the latter are investing in domestic rather than yet complex investment approaches they employ today. international markets due to regulatory restrictions. Measuring the governance progress of schemes at an earlier stage of development will be important; the World Bank has 18. The Canadian funds have set a strong example for developed the Social Insurance Administrative Diagnostic global funds around the world to follow, including the (SIAD) that could be used to measure such progress for EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 Social Security funds; other types of funds could use parallel 2020a). However, the concentrated EPF investment policy processes relevant to their type of scheme. was strongly criticized (Narayanan 2002; Thillainathan 2002). Generally, commentators support the view that the EPF played Market Development and the EPF a significant role in the development of the capital markets: Malaysia “[The] EPF played an important role as an early investor to help take advantage of new opportunities 19. A good example of a pension fund that has been able for its members, which also helped to create the to drive both sustainable development and beneficial market. The development of the Malaysian capital pension member outcomes is the Employees Provident market over the past 15 years has hence helped Fund (EPF) of Malaysia.4 The EPF is a globally significant support the EPF’s developing investment strategy.” institution, ranking 12th on the list of the world’s largest pension (World Bank, 2018a, p. 33). and sovereign wealth funds (Thinking Ahead Institute 2021). Indeed, it is larger than the ATP fund in Denmark, the Ontario 21. Significant diversification has since occurred into the and Texas Teachers in North America, and the Australia’s debt securities of other lenders, as well as other asset Future Fund. Its assets are reported at the end of 2022 at classes (see table 1). Over 40 percent of the EPF’s assets Malaysian Ringgit (MYR) 1,009 billion (approximately US$ in 2018 were allocated to equities, real estate, infrastructure 210.8 billion) (EPF 2022), and representing nearly 62 percent and other assets. Changes in the asset allocation from 2010 of nation’s annual GDP. (World Bank 2022) At that time, the to 2018 show a consistent shift away from debt instruments fund recorded more than 15.7 million members, of whom and into equity, real estate and infrastructure, along with a 8.4 million, working for more than 588 000 employers, were rapid increase in the proportion of assets invested offshore, active contributors.5 The EPF is an interesting case study, mainly in listed equity (World Bank 2018a). Jackson and Inglis given its lengthy history and significant domestic impact. Like (2021) suggest that the diversification of EPF assets across many funds, the EPF has traditionally focused on objectives investment classes, in comparison with its counterparts in involving optimal return, risk, and capital protection. However, other countries (see table 1), reflects the respective countries’ it is considering adding additional objectives that pertain more stages of economic development. This may be true, but the to sustainable development concerns. Additionally, it has sheer size of the fund probably also contributes to its need for signed on to one of the key global Environmental, Social, and an appropriate range of investments, thus naturally stimulating Governance (ESG) Conventions. the development of a wider set of asset classes (World Bank 2020a). This symbiotic process has occurred steadily over 20. In the extensive debate about whether pension funds many years, with consistent yet gradual improvement in EPF stimulate the development of capital markets or capital asset diversification throughout that process. This has been markets provide the foundation for retirement funding,6 supported by the EPF’s commitment to strong, independent the EPF may be a prime example of both dynamics being governance and operational excellence (World Bank 2018a), true. As with the Canadian funds, the assets of the EPF were the critical precondition, as previously noted. The returns heavily concentrated in government bonds in its early years. delivered by the EPF have been solid (Jackson and Inglis In 1960, some 97 percent of EPF assets were allocated to 2021; World Bank 2018a), at 3.7 percent annually in real debt securities issued by the government, and in 1987, the terms from 2009 to 2018, that is, 2.3 percentage points above percentage was still high, at 89 percent (Asher 1999). In fact, the average yield of ten-year government bonds (Jackson and the EPF’s demand for sound, reliable securities stimulated Inglis 2021). the issuance of government debt in the 1980s (World Bank 4. Government provident funds are mandatory, fully funded, government-managed, defined contribution systems. In general, they function often as all-purpose savings programs, often serving other purposes beyond just retirement savings (Jackson and Inglis 2021). 5. The Malaysian EPF is one of several national-level provident fund arrangements in Asia (Holzmann and others, 2000; Jackson and Inglis 2021). These schemes typically do not pay out a fixed pension. Rather, they permit withdrawals at or, in many cases, before retirement age for specific purposes. This somewhat curtails the duration of the investment pool. The EPF does not allocate to member accounts the full returns generated by assets each year, but instead declares dividends representing a proportion of the asset returns of the fund (EPF 2020). In return, the fund guarantees a minimum declaration of 2.5 percent (EPF 2020; Jidwin and others 2011), targeting a real return over a rolling three-year period of 2.0 percent (EPF 2020). Mandatory contributions of up to 24 percent of income, of which 13 percent is payable by employers, are relatively high by the standards of developing countries (EPF 2020; OECD 2021). These high rates of contribution, together with a policy of fully funding the arrangements, go some way to explaining the large accumulation of assets. 6. Refer, for example, to Barr and Diamond (2006); Bonizzi and Guevara (2019); Carvajal and Bebczuk (2019); Catalan and others (2000); Meng and Pfau (2010); Queisser and others (1997); Thomas and Spataro (2016); Vittas (2000); Walker and Lefort (2002); and World Bank (1994). and For research with a special focus on infrastructure investing, consider Inderst and Stewart (2014); Stewart and Yermo (2012); and Sy (2017). Regarding the risks of financial repression of pension funds by government, see Davis and others (2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 >>> Table 1: Asset Allocation, end-2018 (or nearest available date India Indonesia Malaysia EPF JHT EPF Year of establishment 1952 1992 1951 Assets relative to GDP 2% 3% 56% Coverage relative to employment 9% 12% 50% Asset allocation Government debt 79% 63% 28% Non-government debt 8% 0% 22% Deposits 9% 9% 6% Equities 4% 27% 39% Property, infrastructure and other 0% 1% 5% investments Memo: foreign investment 0% 0% 27% Source: Jackson and Inglis (2021), pages 2, 7 and 15. Note: Assets relative to GDP in India are for March 2018. The asset allocation data for India and Indonesia are for the end of 2017. The government debt figure for Indonesia includes non-government debt. 22. The EPF has been steadily increasing its commitment South Africa’s GEPF to becoming a more sustainable large investor and a key enabler of local development. The stated objectives of the 23. The Government Employees Pension Fund of South EPF include the preservation of capital and delivery of stable Africa (GEPF) provides an example of a fund that has and consistent long-term returns at acceptable risk (EPF already stated a specific sustainable development 2020). Beyond this critical foundation, the EPF has been objective. The GEPF is the retirement fund for South Africa’s expanding its additional aspirations. In 2019, the EPF became public servants. It is a fully funded, defined benefit arrangement. a signatory of the United Nations Principles for Responsible With assets under management of South African Rand (ZAR) Investment (PRI.) More recently, in March of 2022, the EPF 2.104 billion (US$ 131 billion), it represents over one-third of took a further step with the launch of its Sustainable Investment annual GDP. As such, the GEPF is one the largest 40 global Policy, Priority Issue Policies and Priority sector Policies. entities by assets. Furthermore, it is the largest retirement These policies will help the EPF to integrate more effectively fund on the African continent by a significant amount, as well environmental, social and governance (ESG) principles as among a handful of leading funds across all developing into its investment management process, by specifically countries (Thinking Ahead Institute 2021).9 targeting key sectors and focusing on both ESG exposures but also opportunities for progress.7 Beyond these specific 24. The GEPF has specifically earmarked a portion policies, EPF has also made commitments to two overarching of its investment portfolio targeted to sustainable sustainable investment targets, namely, to achieve a fully ESG development. In addition to compliance with the Principles compliant portfolio by 2030, and to have a portfolio that is fully of Responsible Investment of the United Nations,10 the fund climate neutral by 2050.8 has announced its intention to allocate up to 5 percent of its asset pool to investing in development, to include transparent 7. Recent EPF reports emphasise the broadening of its portfolio into global assets, listed and private equities, and real estate and infrastructure (EPF 2019; 2020). The EPF has committed itself to the Principle of Responsible Investment of the United Nations (UN PRI). Evidence is emerging that companies that score well in their ESG practices, such as those committed to the UN PRI requirements, have been more resilient to the recent uncertainty associated with the COVID-19 pandemic (EPF 2020). 8. https://www.kwsp.gov.my/documents/d/guest/-download-all-epf-integrated-annual-report-2022-pdf?preview 9. As of September 2021, GDP at market prices is quoted by the South African Reserve Bank at ZAR 6.211 billion. 10. The fund reports two broad approaches to sustainable development investing (GEPF 2021). The general approach is consistent with the ESG foundation underpinning the Principles of Responsible Investment of the United Nations, to which it is one of the founding signatories. The PRI has a South African equivalent, namely, the Code for Responsible Investing in South Africa, typically referred to by its acronym, CRISA. However, to the ESG factors that it applies, it adds the intention to find investment opportunities that contribute to social and environmental objectives, such as job creation, improved energy security, and improved access to sound education and quality healthcare. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 reporting of its progress.11 The GEPF intends to do this without multilayered governance structure, overseen by a Board of compromising its existing objective of obtaining competitive Trustees that is supported by several specialized committees investment returns. The GEPF statement of intent (GEPF (GEPF 2021). It delegates the administration of benefits 2020b) regarding the deployment of its assets includes the to the Government Pensions Administration Agency. The objectives of: (i) providing to members the benefits promised Public Investment Corporation (PIC) is mandated to manage in the fund rules; (ii) delivering investment performance that a significant part of the investment portfolio of the fund.14 exceeds the returns of the benchmark; and (iii) applying ESG However, recent governance failures attributable to overly screening and selection factors to the deployment of assets centralized PIC investment decision-making have posed to ensure a responsible approach to the selection of assets. a significant challenge for the GEPF. A judicial inquiry in However, the statement goes further than this by committing March of 2020 concluded that there had been ‘substantial itself to investment for sustainable development: “To contribute impropriety’ at the PIC, which it connected to the fact that to the development of the South African and other African key internal procedures had been disregarded. Given this economies allocating in an appropriate risk-controlled way to situation, the GEPF toughened its contractual arrangements developmental investments in these regions.” (GEPF (2020b, with the PIC to embed stronger governance requirements into page 11).The investment categories identified as supporting the relationship on a going forward basis. these objectives are economic, social and environmental infrastructure, as well as a fourth category that encompasses 26. In summary, the GEPF’s multilayered objectives are job creation, the development of appropriate new businesses, a work in progress. The fund has started small and will and Broad-based Black Economic Empowerment (B-BBEE).12 likely adapt changes to its objectives carefully over time. As Importantly, it is important to note that the first objective in evidenced by the threefold objectives of the GEPF, strong this list is to earn returns above the benchmark, even while returns continue to remain paramount. However, the efforts delivering on the other objectives.13 of the GEPF to establish clear objectives to contribute more specifically to sustainable development in South Africa over 25. The GEPF’s recent experience has shown that time are an interesting approach to leveraging local assets. unless strong governance is in place, the worthy goals As such, they will provide lessons (positive and negative) for of supporting local economic growth and development others to learn from in the future. cannot be achieved, and the primary goal of paying pensions may be put at risk. The fund itself has a 11. The fund aims to measure the socioeconomic impact of its investments, including the following: • small- and medium enterprises funded, • community trust or employee share schemes established and supported, • jobs created, • student loans disbursed, • hospital beds established and supported, • environmental projects funded, • units built in housing projects for low-income beneficiaries, • indirect jobs reported through its property portfolios, • farms for emerging owners supported, and • farm workers and their children with newly provided access to health care and education. (GEPF 2020a; 2021). 12. Black economic empowerment refers to the legislated and well-established policy of providing appropriate opportunities for skills development and ownership to people in those sectors of society who have been systematically denied these opportunities during the Apartheid era that ended in 1994. In the language commonly used in the country, to contribute towards the transformation of South Africa typically means taking explicit steps to redress past wrongs built on the foundation of racial injustice, inequity and the systematic denial of opportunity. 13. Consistent with its commitment to transparency, the GEPF discloses the private equity firms to which it has allocated assets and, as part of its publicly available financial statements, a full list of debt instruments, properties and listed equity holdings (GEPF 2021). 14. The PIC, which dates to 1911 (GEPF 2021; Hendricks 2014) manages the assets of entities owned by or associated with the State, among them the Unemployment Insurance Fund. This is done though the GEPF and provides the largest proportion of its assets under management. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 Unlisted Asset Investing in Namibia 30. The size of the local institutional investors’ assets dwarfs the potential investment opportunities in the small 27. Namibia provides another example of the importance and illiquid domestic market for listed assets (World Bank of the strong governance needed to successfully diversify 2020b).18 Consequently, whereas 45 percent of pension fund investments and support sustainable development. This assets are invested in Namibia (by regulation), 21 percent example portrays both a cautionary story from the past, as are invested in the Common Monetary Area (South Africa, well as an innovative approach currently being implemented. Namibia, Eswatini and Lesotho), with the remaining third of The inclusion of a statutory minimum investment requirement assets invested outside the country. By investment class, is one that is not normally recommended as good practice by approximately 52 percent of assets are in listed equities, and international standards. As such, it highlights even more the nearly 30 percent are in fixed-interest securities. The financial need for strong governance and oversight of funds. sector regulator, Namfisa (Namibia Financial Institutions Supervisory Authority), which oversees pension funds, reports 28. Namibian policymakers and commentators have a 1 percent allocation to unlisted investments, amounting to long sought to take advantage of the potential to match approximately NAD 1.8 billion (US$ 120 million). An additional the considerable assets of the country’s institutional 3.9 percent (NAD 7 billion, US$ 470 million) are in ‘other’ investors with the financing needs of small businesses. asset classes, the details of which are not disclosed (Namfisa A significant body of literature recognizes the importance of 2021). Even when considering the assets that are listed in the small businesses to the success of economies of developing country, many do not, in fact, represent Namibian interests as countries. This literature explores mechanisms to facilitate they are dual listed with another exchange, in many cases, access to finance for these businesses.15 As a small, middle- with the Johannesburg Stock Exchange in South Africa (World income developing country, helping small business to grow is Bank 2020b). a focus for the country.16 31. Previous, unsuccessful attempts were made to use 29. Like South Africa, Namibia has a large pension industry the capital held by pension funds to support domestic with a dominant public pension fund. The Government investment opportunities. The GIPF established its Institutions Pension Fund (GIPF), which covers the country’s Development Capital Portfolio (DCP) in 1996. This aimed to civil servants, alone holds assets worth 60 percent of GDP. promote socioeconomic development and give entrepreneurs The remainder of the pension fund industry is fragmented entree into mainstream economic activity. The initiative failed, across 250 occupational and personal funds covering around primarily because of poor skills, a lack of capacity and, notably, 30 percent of the workforce (Namfisa 2021). These funds inadequate governance on the part of the GIPF overseeing have total pension assets amounting to over 90 percent of the investments (World Bank 2020b). Specifically, the DCP GDP (OECD 2021). Assets reported for other institutional investments were made without a regulatory framework and investors are also quite significant. Long-term insurers, without any supervision. Due diligence was lacking, and collective investment schemes and investment managers investment decisions were made in a suboptimal manner. reported assets in 2020 of Namibian Dollar (NAD) 147 billion The portfolio was closed in 2010, with 84 percent of the (US$ 9.8 billion), a total equivalent to more than 80 percent of investments written off as of 2010 (IMF 2008; World Bank the assets held by pension funds.17 2020b). The DCP provides a cautionary tale of what can go wrong when governance is insufficient. 15. For examples, refer to Bárcena and others (2011); Dalberg (2011); Herrera (2020); IDB (2014); IFC (2010); OECD (2015); and Powers and Magnoni (2010). 16. Namibia’s GDP stands at NAD 180 billion (US$ 12.2 billion), with a per capita GDP of approximately NAD 70,000 (US$ 4,700). It has a population of approximately 2.6 million (IMF 2021b). Unemployment is cited by the national statistics authority at 33.4 percent for 2018, slightly down as compared to 2016, but sharply up from 2014 (NSA 2019). Inequality is high, with a Gini coefficient for 2015 estimated at 59.1, which is the second worst only to South Africa on the World Bank database. However, it is on a downward trend (World Bank 2021). The Namibian dollar trades to the US dollar at a rate of NAD14.89 to US$ 1.00 at the time of this writing. This rate is used for all currency conversions in this section. 17. These figures are lower than the sum of the corresponding assets reported by each of the entities because Namfisa (2012) reports remove pension fund assets from these amounts to avoid double-counting. These entities typically have less freedom than pension funds to allocate assets to development initiatives. They are generally subject to tighter commitments to their customers, and the outlook for their assets is frequently somewhat shorter than for pension funds. 18. In fact, given the consistent relative large size of the pension market in Namibia, the country is consistently rated first in the annual ‘Absa Financial Market Index’ in terms of local investor capacity (Absa Africa 2023) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 32. Despite the lack of success with the DCP, regulations 34. Market development has been broadly satisfactory were eventually passed requiring all pension funds since the implementation of the regulatory requirements to invest a small percentage of their assets in unlisted (Johns and others 2018; Sherbourne 2018; and World Bank assets in the country. Commentators continued to note 2020b). The capital committed to these vehicles was reported the disconnect between the available assets in the country at NAD 3.3 billion (US$ 220 million) at the end of 2018. This and the inadequately developed market for financing small amounted to approximately 2.1 percent of pension fund businesses.19 By 2008, serious consideration was being given assets at the time, spread over a broad range of industry to the possibility of a minimum allocation to unlisted local sectors (World Bank 2020b). Johns and others (2018) express investments, that is, 5 percent of the assets of pension funds optimism that progress made in this regard contributes to the — despite comments/concerns raised by the International potential for skills development, employment, public-private Monetary Fund (IMF), amongst others (IMF 2008).20 A partnerships, as well as co-investment with foreign institutions stipulation to invest a minimum proportion of fund assets in with an appetite to invest in Namibia. Focused attention on unlisted equities was eventually passed in 2014. This was set small businesses in Namibia has also stimulated research into at a level of 1.75 percent of assets, rather than 5 percent, with their financial and operational needs (Amadhila and Ikhide a stated maximum of 3.5 percent. Although this approach of 2016; Kangombe 2016; and Mukata and Swanepoel 2017). mandating a minimum level of allocation is not generally in line with international best practice,21 the fact that the minimum 35. In the wake of the regulatory requirements, the level of allocation was quite small meant that their projected GIPF, in particular, has continued to play an active part investment returns would not be materially impacted, thus in investing for development. With assets of NAD 108 ensuring they could essentially continue to meet their fiduciary billion (US$ 7.25 billion), representing over 60 percent of obligations to members to seek the best possible returns GDP (GIPF 2020), the GIPF is an enormously influential (World Bank 2020b). player in the market. It expresses its responsibility through its vision “to be a leading and model pension fund globally” 33. Learning from the earlier experience of the GIPF with (GIPF 2020,p. 18). The Development Investment Policy the DCP, Namfisa has insisted on minimum standards of the GIPF describes the aim of the fund as follows: to of governance and licensing for these unlisted local contribute to development in six key economic areas and in investments. Investments can only be made with registered, terms of a broad list of objectives (GIPF 2020, pp.29 and unlisted investment managers, and only through the channel 96). The fund reports a total commitment of NAD 7.4 billion of a special purpose vehicle. This vehicle also had to be (US$ 500 million) to the domestic unlisted sector, including registered with Namfisa, meeting stipulated minimum regulatory investment in renewable energy, affordable housing, health, requirements. In addition, the unlisted investment manager is land-servicing, job-creation and important substitution required to take a stake in the special purpose vehicle (World projects in manufacturing and agriculture.22 In the interests Bank 2020b). The new model has contributed meaningfully of transparency, the fund lists the value of its investments to improving the governance of and within pension funds. In with each of its appointed asset managers (GIPF 2020) and the view of the regulator, Namfisa, the new environment and each private equity holding (GIPF 2021). It also provides structure has improved due diligence of unlisted investments substantial supporting information regarding the social and the investment process. It has also reduced the public benefits of its investments, along with several case studies. perception of corruption (World Bank 2020b). 19. Tonin and others (1998), writing for an economic policy unit, put forward several ideas for developing the provision of credit to small businesses, among them the establishment of specialized micro-finance institutions and strengthened research capacity. Uanguta and others (2004), writing for the Research Department of the Central bank, that is, the Bank of Namibia, described the inconsistency between the significant savings and poor local development. They suggested that long-term insurers and pension funds, with their long-term liabilities, might be in the best position to stimulate investment in the Namibian market. Zaaruka and others (2005), also at the Bank of Namibia, built on this and the policy statements of government in the second national development plan. They proposed a concerted effort to develop the private equity industry. They suggested that this should be underpinned by institutional investors. They also noted the resolution of the Cabinet forcing an allocation by these entities into unlisted entities as a catalyst for the development of private equity. Broader interest in the subject was high, as evidenced by several academic theses exploring different aspects of the matter. 20. Further support for strategies to invest in the development of small and medium enterprises was provided by the Government’s Vision 2030 Strategy Paper (Namibian Presidency 2004), the Fourth National Development Plan (NNPC 2012), and the Financial Sector Strategy for 2011-2021 (NMF 2011). 21. OECD Core Principles for Private Pension Regulation (2016), Core Principle 4. 22. This represents a considerable increase in the total allocation across the industry reported for 2018 (World Bank 2020b). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 36. The initiative to stimulate the development of small to this success appear to lie in the commitment of all parties business in Namibia by mandating the allocation of to the policy objective. Leadership from the highest office, the assets to private equity23 arrangements has not been National Planning Commission and the Ministry of Finance, without challenges (World Bank 2020b). Specifically, the was supported by a commitment to research, to sound commitment period required under the capital drawdown regulation, and to careful implementation by the dominant regulation by the special purpose vehicle is two years, investor. Lessons appear to have been learned along the way, which is short by global standards.24 Additionally, as noted, and the evidence is clear that the impact of better governance the model diverges from known global best practices. can be significant. Nevertheless, given the history of the poorly governed approach to the DCP and the initial market growth under the 38. The preceding country examples portray good new approach, it seems reasonable to conclude that a more examples of how pension funds, as key local investors, strongly governed process has provided the needed impetus can play an important role in contributing to sustainable for a more meaningful set of contributions. development. The example from Canada showed the power of improving governance, while the example from Malaysia 37. A viable, sustainable investment class appears to provided an interesting case of parallel growth in the fund and have been established, with considerable benefit for the local market. The cases from both South Africa and Namibia socioeconomic development, as well as the potential to provided concrete examples of how to approach this work. stimulate a virtuous cycle of further investment. The keys BOX 1. PENSION FUNDS AS INVESTORS IN SMALL AND MEDIUM ENTERPRISES As already noted above, pension funds have a first responsibility of delivering sufficient returns to be able to pay beneficiaries, to whom they have their primary duty. As they fulfill this primary responsibility, they should be looking for opportunities to diversify their investments and match their investments against their long-term liabilities to beneficiaries. Among the types of assets that can sometimes be considered in this important work are investments that contribute toward the development of local small enterprises. The unlisted asset example in Namibia is one approach that was used to encourage more pension fund investment in small and medium enterprises (SME). SMEs are often critical to growth in emerging markets because they constitute 45 percent of employment and 33 percent of GDP in those economies (World Bank 2020d). They are important contributors to job creation and global economic development worldwide, but especially in these economies. Further, bank financing, traditionally the key source of financing for SMEs, has not been sufficient. As such, when the economic case for investment is strong, institutional investors can sometimes help bridge a significant financing gap. In general, the nature of SME investment can often fit well with the needs of pension funds. Pension funds have the capability to be patient, long-term investors. SME investments may provide interesting local diversification opportunities in those cases where appropriate local assets are relatively scarce. More compelling, however, may be the reality that many countries have now implemented non-contributory social pensions. Thus, in a context in which such programs will provide a backstop protection for those with insufficient individual retirement savings, it may be appropriate to allow pension funds to play a role in funding greater current employment (leading to greater individual retirement savings) so that future contingent liabilities are reduced. This type of encouragement requires careful calibration to ensure pension funds are not unduly burdened by such an approach. (Rudolph and Zviniene, forthcoming) 23. Of note, the Namibia approach was described as private equity investing locally but is globally more similar to angel or early-stage seed investing. Therefore we have described this section as ‘unlisted asset investing.’ 24. The commitment period was specified in this way because the regulator, Namfisa, was concerned about incentivizing momentum from the outset. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 An example in Africa serves to illustrate the possibilities. The Uganda National Social Security Fund (NSSF), working in partnership with the Mastercard Foundation (2021), has recently launched an entrepreneur support program. It is known as the Hi-Innovator Program. Under this program, the NSSF will invest in a number of candidate firms, while also providing them with support to assist in their success. The program is intended to create 132,000 new work opportunities in the next five years. Recently 28 of the businesses selected through an initial phase were approved to proceed to a second portion of the program. One of the eligibility requirements for the program includes the participation of the candidate company’s employees in the NSSF retirement scheme. In this manner, if the goals for increased employment take root, the NSSF will also achieve coverage increases, as well as aid in the achievement of national employment goals. Pension funds can become a more significant force in supporting the growth of SMEs and the larger economy in many ways, albeit indirectly. Depending on how these opportunities are structured and governed, they can fit into a diversified portfolio. Ideally, they can contribute to the growth of investable local instruments in a meaningful way, if structured correctly. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 III. >>> Improving Governance and Diversification via Investment Pooling 39. An interesting and innovative approach that has unlocked the potential of local investors in certain countries globally is the concept of pooling – for expertise, for capital, and for diversification. In addition to strengthening their own governance and expertise, pension funds are increasingly working together to pool investments, and sharing resources to achieve their goals of diversifying investments and contributing to economic development and growth. Pooling investment expertise and capital together has recently emerged as a key strategy for pension funds to achieve diversification. As such, they are able to consider investments in a broader range of markets and asset classes. In addition to the diversification benefits, this approach has the potential to aid sustainable development goals. Such collaboration started with pension funds in developed markets, but it has also been spreading to local pension funds in developing economies.25 Importantly, just as it is critical to ensure strong governance for standalone pension funds, it is equally important to preserve good governance arrangements as a part of the various approaches to pooling as well. 40. South Africa’s pension funds have announced the establishment of the Asset Owners Forum South Africa to invest in infrastructure and other development assets. The initiative was established by the funds themselves, who cumulatively manage an estimated ZAR 3 trillion (US$ 158 billion) in assets. This was done through the Batseta Council of Retirement Funds for South Africa, together with the United States Agency for International Development (USAID) and the World Bank. The investment opportunities identified are not expected to be limited to the founding members, as it is hoped that small and medium funds will also contribute to the intended pool of available assets (Citywire 2021). 25. Caisse de dépôt et placement du Québec (CDPQ) in Canada is one such example. It pools the assets of several asset institutional owners to take advantage of the available scale, deliver more sustainable returns, and help develop the Province of Quebec (CDPQ 2020a and 2020b). A case which demonstrates an alternative evolution for domestic pension funds is Industry Funds Management (IFM) Australia. It began as a grouping of pension funds seeking long term infrastructure investments. However, it initially lacked internal skills. Members agreed on its investment strategy, but they relied on external advisors and investment managers for execution. After 15 years, it established a holding company owned by various industry funds, brought investment functions in house, and established a regulated pooled trust, which was used to make investments. It was able to establish the scale and skills to provide a low-cost model, segmenting its funds across infrastructure, debt, and listed and unlisted equities with US$ 129 billion in assets under management (AuM) (IFC 2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 41. Elsewhere in Africa, the Kenya Pension Funds 42. In the Pacific region, the Pacific Islands Investment Investment Consortium (KEPFIC) is a grouping of Kenyan Forum has also begun work to collaborate on key regional retirement funds working collectively to make long-term infrastructure projects (IFC 2021). This network of 18 funds investments in infrastructure and other alternative assets from 12 countries has approximately US$ 8 billion under in the region. With recent changes to the pension investment management. As such, it has the potential to help meet a guidelines in Kenya, funds can invest up to 10 percent of their substantial set of infrastructure needs for the widely scattered assets into infrastructure, potentially unlocking over US$ 1 small independent states represented by its member funds. It billion of possible investments into these asset classes. The is estimated that from 2016 to 2030, these nations will need World Bank has been an active supporter of this effort. In this US$ 46 billion in investments to overcome their infrastructure regard, it has also helped to enable linkages with overseas deficit. However, given the small size of the funds and the pension funds alongside the local pension fund group. The difficulty of obtaining the skills needed to effectively oversee consortium in Kenya has been particularly promising, given complex investments in infrastructure, this need has not yet vast infrastructure needs, a solid commitment from the been well addressed by these funds. For this reason, the funds Kenyan government, and a strong public-private partnership began a collaboration effort, supported by the International (PPP) program pipeline based upon work started originally in Finance Corporation (IFC). As part of this effort, they are 2012 (KEPFIC 2022). studying six possible approaches to co-investment. These >>> Figure 7: Factors to Consider with Co-investment Models Source: IFC (2021). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 approaches range from simple information and collaboration It was seeded initially by IFIs to address the demand for platforms to co-owning a listed company that undertakes credit in Africa, which exceeds supply. Thus, the aim was to a full range of investment activities to meet the needs of build up private credit as an asset class in Africa. It focuses various stakeholders. Following a rigorous assessment of the on investing in leading companies in the financial inclusion, factors outlined in figure 7 above, the funds agreed to take a infrastructure, and telecommunications sectors. Once it had collaborative platform approach, whereby funds pre-agree on built a track record through its publicly listed fund manager, it investment criteria and governance arrangements. They also crowded in local pension funds and international institutional agree to share early co-investment opportunities. However, investors, including Allianz, the global insurer. It follows IFC’s they then co-invest on a case-by-case basis. performance standards for ESG reporting. By partnering with IFIs, the Fund was able to undertake innovative investments. 43. The pooling of funds with international financial institutions (IFIs) and foreign institutional investors 45. Another fund, the US$ 200 million International Housing can also assist in achieving the various goals related Solutions (IHS) Fund II in South Africa, targets affordable to investment returns, development impact, strong housing opportunities and applies the IFC’s green building governance, and risk mitigation. Local investors can standards, Excellence in Design for Greater Efficiencies provide expertise concerning the domestic political economy (EDGE), to all housing projects. The fund invests in acquiring and institutional environment, as well as local currency, and developing affordable and green residential housing in patient domestic capital, and potentially earlier access to South Africa. The fund, denominated in local currency, includes new investment opportunities. Partnering with IFIs, in turn, equity from multiple development finance institutions (including provides: (i) access to foreign currency; (ii) project structuring Germany’s KfW and IFC), grant capital (effectively blended expertise; (iii) long-term international capital; (iv) adherence to finance) from the Global Environment Facility, as well as a loan globally recognized standards; (v) beneficial financing terms; guarantee from the Development Finance Corporation (G7 and (vi) a range of risk mitigation tools, including through Impact Taskforce 2021). blended finance. A particular tool which has been rarely used, but could be leveraged further in emerging economies, is the 46. Pooling offers an additional tool to local pension guarantee. It can serve to improve credit ratings of specific funds that may aid in diversification ambitions and projects, as well as at a fund level (G7 Impact Taskforce return enhancement, as well as the accomplishment 2021). With an IFI entrenched in a project or fund structure, of sustainable development goals. Pooling offers the as well as more favorable financing terms and risk mitigation, advantages of increased scale and expertise so often vital to this can provide the confidence to attract other international the success of an investment. Additionally, the involvement institutional investors. of international partners (especially IFIs) can provide some key advantages. 44. An example of this is the Ninety-One Africa Credit Opportunities Fund 2, which is a senior private credit fund focused on African corporate debt capital markets. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 IV. >>> Revealing Hidden Areas of Opportunity in Pension Savings 47. In addition to known local investors, sources of potential investment may also exist in emerging markets. These sources could be better leveraged, both to the advantage of beneficiaries, as well as for their possible contribution toward sustainable development. Multiple examples are presented here, beginning with instances of underregulated and conservatively invested funds from South Asia, and then moving to cases where further growth in long-term savings has been desired by those in the informal sector. Thus, new schemes have been developed to accommodate those ambitions. Unregulated Provident Funds in South Asia 48. One example of the untapped potential of local investors is the unregulated provident funds which exist in some South Asian markets, such as in Bangladesh and India. The government in India, in partnership with the Pension Fund Regulatory and Development Authority (PFRDA), has held discussions over time on amendments to the law that would increase the regulatory oversight of funds that in some cases are not subject to adequate supervision. Past estimates indicate that there could be a significant number of these funds. (Times of India 2021) Increasing the oversight level of these funds would lead to improved and more diversified investment within their portfolios. 49. Likewise, Bangladesh’s largely unregulated provident funds represent a key opportunity in terms of the prospect for improved investment practices and their potential contribution to sustainable development, as well as improved outcomes for members.26 These funds are estimated to total at least US$ 6 billion (World Bank and IMF 2020). However, currently, they are largely invested only in bank deposits and retail savings certificates (known as National Savings Certificates - figure 8 portrays a stylized representation of a typical provident 26. Although provident funds do need to register with the Revenue Authority to attain tax exemption, this is a one-time exercise. It does not result in ongoing oversight, which means that regulatory supervision is not present on an ongoing basis. Additionally, some of the provident funds are required to report to the Labor Ministry on an annual basis, but without adequate follow-up or effective oversight. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 fund).27 The limited amount of investment into capital market that country, as well as in the potential for improved returns to instruments is an outgrowth of both low demand but also participants. Yet, before dramatic changes to the investment limited supply of appropriate investment instruments. But approach of the Bangladesh provident funds are implemented, if even just a small portion of these pension savings were the quality of governance of these arrangements must be diverted to more productive investment in Bangladesh it would raised. Indeed, this is a critical precondition.28, 29 make a significant difference in the prospects for growth in >>> Figure 8: Stylized Provident Fund Portfolio: Bangladesh 5% Marketable Government Debt Instruments 30% National Savings Certificates (Non-Marketable 35% Government Debt Instruments) Bank Deposits Capital Market Instruments 30% Source: Authors’ calculations based on data from unpublished working paper Long-term Savings Arrangements for developing countries remain high, particularly in Africa (OECD and ILO 2019, see figure 9). In this context, it should be noted Informal-sector Workers that these informal entities contribute to large proportions of economic activity, up to half in many countries (La Porta and 50. A large proportion of the world’s workers survive Scleifer 2014). under very difficult circumstances, especially when their prospects for retirement income are considered. Many of 51. The economic activity of these informal firms — them are employed by unregistered entities that do not pay for including the numbers of workers that they employ and their social security, or meet the minimum standards required the financial lives of these employees — are, almost by of employers in most countries, such as paid annual leave definition, difficult to measure (IMF 2021a). Thus, the policy or sick leave. Despite some signs of improvement (Maurizio debate regarding these companies and their workers and Vásquez 2019), the levels of informal employment in 27. The government has recently limited investment by Provident Funds into National Savings Certificates to no more than 50% of a portfolio. The impact of this new limit is as yet unknown. 28. Ideally, the coherence of the existing fragmented legislative and regulatory universe applying to these funds is improved, with a single regulator and supervisor responsible for oversight. Trustees should be better trained, and their selection processes should be strengthened to include a fit and proper requirement. 29. Given the potential of an estimated US$ 6 billion in total assets (considering both the private and public funds), moving just an additional 10-20 percent of those assets toward more productive and long-term oriented investment would make a meaningful difference in prospects. A recent government study cited by Zaman (2022) indicated that Bangladesh would need approximately US$ 70 billion between 2021 and 2030 to accomplish its SDGs. These prospective amounts of investment would start to make an impact toward meeting this need. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 continues (La Porta 2014). It is increasingly clear that, for the arrangement that is managed by the Rwanda Social Security purposes of providing appropriate social protection to these Board. The Board also administers the scheme provided to workers, they cannot be considered in the same way as their public-sector workers. Ejo Heza membership is based on formal-economy counterparts (Guven 2019). Specifically, national identity numbers. Contributions may be made through they may not have regular incomes or savings of any kind. various electronic media or through a range of physical They are significantly exposed to short-term shocks of various pay points at bank branches or agencies, cooperatives, kinds. Also, they cannot be regarded as homogeneous in their and mobile money providers, to name just a few. Members attributes or needs. In addition, they are typically difficult to may contribute as much and as frequently as they wish. reach, though they are frequently organized in some way. They are granted access to 40 percent of the accumulated These workers also are not likely to retire from their jobs as savings for housing and education. The same amount may their formal-sector counterparts do (Rutherford 2009). be used as collateral for borrowing, and 25 percent may be withdrawn for any purpose.30 The government is also 52. Most importantly, these workers have a need for, offering incentives to encourage individuals to save. These and an interest in, building long-term savings. In many incentives are in the form of matching contributions and free of the countries in which informal-economy employment insurance coverage.31 Long-term savings are expected to predominates, contributory pension arrangements are only grow to some RWF 200 billion (US$ 200 million) within five realistically accessible to formally employed individuals, years (Guven 2019), amounting to some 2 percent of GDP. covering a small proportion of the workforce. Typically, in these Assets are expected to be allocated to liquid securities, such countries, universal old age arrangements either do not exist as Treasury bills, bonds, and bank deposits, thus protecting or are limited in the protection offered. As such, they are likely member savings (Nsengiyumva 2021). To date, although to come under financial pressure as the working population coverage rates have been successful (with over 2 million ages (Guven 2019). The discussion that follows summarizes members), savings amounts remain relatively limited (with the arrangements in several countries, touching on the US$ 20 million accumulated). framework for contributions and benefits; the extent to which members have been attracted and assets have accumulated; 55. The Kenyan Retirement Benefits Authority, as part of and the investment strategies of these plans. its contribution to national strategy (KRBA 2018 and 2019), has also been supporting pension schemes targeted at 53. Among the most notable efforts aimed at long-term informal-economy workers. The Mbao scheme was the savings arrangements for informal workers are initiatives first in the world to target informal sector workers using the in Africa and India (Guven 2019). Key to the implementation digital finance and mobile money platforms. Members may of these arrangements is a recognition that the solution to the contribute whenever they wish to, using mobile technology. problem of poor coverage cannot be formulated by expanding They are subject to a minimum contribution of Kenyan shilling formal-sector arrangements, which are not well suited to the (KES) 20 (US$ 0.20) per working day, or the equivalent needs of these workers. These arrangements are also typically annual contribution of KES 4,800 (US$ 48) (Kabare 2018).32 not attractive to them either. First, variable and uncertain Accumulated contributions may be withdrawn in full after incomes mean that they are likely to find it difficult to meet the three years. Within approximately a year of its launch, the requirements of regular contributions. Second, the financial Mbao scheme had 38,000 members, who had saved KES shocks to which they are exposed call for some access to 37 million (US$ 370,000), largely due to the ease offered retirement savings in advance of old age. by the technology provided by mobile telephony provider, Safaricom (Kwena and Turner 2012). After an initial period 54. Rwanda has tapped into existing capabilities as part of growth in which the arrangement grew to cover just over of its strategy to provide micro-pensions to as wide a 75,000 members and had accumulated assets of US$ 1.3 proportion of its people as possible. The Ejo Heza Long- million (Kabare 2018), interest waned, and the scheme lost term Savings Scheme is a flexible, defined contribution members. The freedom to withdraw the full amount of the 30. Nsengiyumva (2021) notes that these allowances may be subject to the achievement of a minimum level of savings of Rwandan franc (RWF) 4 million (US$ 4,000). 31. Government incentives over the first three years included a contribution of up to RWF 18,000 (US$ 18). These depend on the corresponding contribution of the member and free life insurance of RWF 1 million (US$ 1,000), along with a contribution to funeral costs of RWF 250,000 (US$ 250) (Guven, 2019; Nsengiyumva 2021). The exchange rate as of end-2020 was approximately RWF 1,000 to US$ 1. This rate is used throughout the description. 32. The exchange rate of approximately KES 100 to US$ 1 at the end of 2020 is used throughout. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 savings may have contributed to this decline. An alternative to launch during 2024. The National Social Security Scheme arrangement aimed at employees working in the formal (NSSF) has also launched a scheme known as Haba Haba. economy was registered with the Retirement Benefits It targets workers not currently in formal employment, Authority in December 2021. It is called the Kenya National attracting around 500,000 members to date. Entrepreneurial Savings Trust (KNEST), and it is expected >>> Figure 9: Share of Informal Employment as part of Total Employment Source: OECD and ILO (2019), p. 27. Note: The data applies to the year 2016 and includes agricultural workers. Own-account workers and employers are defined as being in informal employment if the businesses that they run are in the informal sector. Employees are regarded as being in informal employment if their employers do not contribute to social security for them, or if they do not enjoy paid annual leave or sick leave. 56. An example from India encompasses an investment equities and bonds according to a 40/60 ratio. This served as approach most likely to preserve long-term, real a means of retaining the real value of contributions (Mitchell purchasing power. India sought to tap into the economies and Mukherjee 2017). of scale available in the NPS by incentivizing contributions to the NPS-Swavalamban. This is an arrangement established 57. The India schemes have seen good uptake, with for workers in the informal economy. Participants may not inconsiderable assets accumulated to date. Some invest amounts from Indian rupee (INR) 100 (US$ 1.40).33 1 million participants signed up for the NPS-Swavalamban The government offered a top-up of INR 1,000 (US$ 14) in (Sane and Thomas 2015). The scheme was converted to the early years to participants who contributed a total of at the Atal Pension Yojana (APY) in 2015, which provides a least INR 1,000 (US$ 14) in a year (Mitchell and Mukherjee guaranteed pension. Members of the NPS-Swavalamban 2017; Sane and Thomas 2015). Withdrawals before the who were under 40 years of age at the time were given age of 60 are permitted, but they are limited to 20 percent the option to migrate to the APY (Department of Financial of the accumulated assets. Significantly, unlike many similar Services 2022). By March of 2023, APY had 45.9 million arrangements elsewhere, money was not invested in capital- subscribers, with accumulated assets of INR 272 billion guaranteed assets such as cash. Rather, it was invested in (US$ 3.28 billion) (NPS Trust 2023)34. In this context, Mitchell 33. The end-2020 exchange rate of approximately INR 71 to US$ 1 is used in all conversions. 34. https://npstrust.org.in/sites/default/files/annual-reports-document/V16-Annual_Report_of_NPS_2023.pdf EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 and Mukherjee (2017) report high levels of interest among As such, they are not as clearly long-term in their investment surveyed individuals in the opportunity to save in small outlook as many pension funds. Furthermore, in the early amounts. They indicated an appreciation for the inability to years of these schemes, when assets are not large and a access assets until old age and appreciate the government reputation for sound investment is important, an emphasis subsidy. They, too, note the need for improvements in on capital protection may be called for, especially given financial literacy alongside a program such as this one. relatively lower levels of financial literacy. In the long run, however, real returns need to be achieved to preserve long- 58. Other countries have made progress with pension term purchasing power. Also, some allocation to asset classes arrangements offered to informal-economy workers. The that grow with wages and the economy is called for. In this National Social Security Fund (NSSF) in Uganda has had regard, if they exist, they should be appropriately governed some success in retaining the membership of members who and offer suitable return prospects in accordance with their had previously joined on a mandatory basis as employees, level of risk. This need may fit well with concurrent needs to and then shifted into self-employment. They then chose to invest in well-governed initiatives in those same countries remain on a voluntary basis. Launched in 2005, the scheme that could more meaningfully contribute to sustainable of the Social Security and National Insurance Trust (SSNIT) development there. initiative in Ghana targeted informal workers (Guven 2019). It has since spawned others, such as My Own Pension, a 61. As Guven and others (2021) highlight, the investment private-sector initiative that aims to attract contributions from approach depends on the stated goals of the arrangement. formally employed workers, as well as those in the informal Herein may lie the opportunity to communicate to all economy. Nigeria’s retirement regulator recently reported stakeholders the potential offered through an appropriate the registration of 72,000 members to that country’s micro portion of investment in developmental assets, along with pension plan. (Iwayemi 2021). Interest in such arrangements the corresponding risks. Furthermore, the dollar amount of continues to grow all over the world. The government of the risk is low. However, in the early years of a new scheme, Vanuatu has also announced a feasibility study into micro- perhaps governments could play a part in underwriting the pensions for that Pacific Island country (UNDP 2018). arrangement, thus guaranteeing that annual returns will not be negative. This support could be phased out over time. Again, 59. Several studies are cited in this discussion, confirming the message is that a clearly stated commitment to investing the interest among low-income households for long- a portion of assets toward sustainable development must be term savings vehicles. It is estimated in India that some 80 supported by strong governance and clear communication. million workers have the capacity to save for retirement, with a It could also encourage greater participation by those who potential for additional annual contributions of some INR 110 stand to benefit the most, not only from their savings, but billion (US$ 1.55 billion). Not all arrangements that seek to from the investment that it generates. In this way, these meet the needs of informal-economy workers have succeeded ‘hidden’ pools of prospective savings will be best utilized. in equal measure. However, the number of such arrangements is likely to grow as governments, regulators, and private-sector players continue to apply a range of improvements to existing approaches to meet policy objectives. 60. These schemes may begin with a more conservative investment approach; however, ultimately, they should seek to invest in such a way that they can provide for the long-term real income of participants. Many of these schemes aim to provide meaningful access to a portion of the accumulated assets of participants prior to retirement. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 BOX 2. HIDDEN LOCAL INVESTORS This paper contends that local pension funds represent a potentially significant force in providing local currency sources of investment. Beyond these entities, however, there are others that should be considered as possible providers of capital in a local context. Indeed, they would fit appropriately with their stated missions. One example would be the Hajj funds of Southeast Asia. These funds are amassed to help fund an annual pilgrimage to Mecca, Saudi Arabia. The pilgrimage is regarded by Muslims as one of the five pillars of adherence to Islamic practice (Muheramtohadi 2019; Muneeza and others 2018; Rusydiana and others 2021). The accumulated funds set aside for the pilgrimage in both Indonesia and Malaysia are quite large, estimated to exceed US$ 25 billion between the two countries (Munira and Astuti 2019; and Tabung Haji, Malaysia 2020). The Malaysian agency overseeing the funds (Tabung Haji) has a stated stewardship framework with a well-defined strategic asset allocation. The fund is well diversified and invests both domestically and internationally. It has also been a contributor to the strong capital market development in Malaysia (World Bank 2020c). Meanwhile, there has been more debate about such investment in Indonesia, and it has not achieved the same level of impact. It may be possible for Hajj funds in Indonesia and perhaps in other countries with such funds (Maldives as one example; Muneeza and others 2018) to facilitate improved investments of these funds for local purposes that are still respectful of contributor motivations, while also providing improved outcomes. The examples of Savings and Credit Cooperative Societies (SACCOs) in much of the world may also provide another example of an under-utilized potential resource. They play a large part in several African countries in mobilizing savings and providing credit to low-income customers. SACCOs also play a large part in the communities in which they operate. However, their informal nature makes it hard to truly understand and assess their size. In Kenya alone, however, they are estimated to exceed US$ 13 billion in total assets. SACCOs already play a considerable part in enhancing the well-being of individuals across the continent. However, if just a small portion of their assets could be invested more profitably, with improved returns, that would be significant. An allocation of just 2 percent of their assets (equivalent to the allocation of some pension funds) toward productive, infrastructure-oriented assets with strong return prospects would benefit participants, as well as the communities/ countries in which they live. This would be achieved by enabling further growth, leveraging what otherwise might be a partially hidden asset. Importantly, however, like the lesson of strong governance for local pension funds, it would be important to ground any such plans for expansion of SACCO investments with an enhanced regulatory framework (Wong and Lemus 2013). This brief summary simply raises the topic of additional ‘hidden’ asset pools that bear further research and study. Policymakers should reflect on additional examples relevant to their own countries, and how those entities could also contribute further to sustainable development while furthering their stated missions. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 V. >>> Conclusions 62. Leveraging local investors to support economic growth and development while securely meeting their promised liabilities can be achieved if the right governance and oversight are put in place. Multiple examples are presented in this paper regarding how to more effectively and efficiently utilize domestic capital in emerging markets, specifically by diversifying investments into long-term opportunities that can offer both improved returns, as well as contribute to the sustainable development of the local economies. It all begins with strong governance and oversight. Pension funds looking to diversify their investments into instruments with both return prospects, as well as secondary development-oriented goals, will require additional oversight skill on the part of the fund’s governing body. Suitable investment vehicles typically need careful development, particularly for countries unused to these types of initiatives. As illustrated by several of the cases put forward in this paper, establishing a pool of investors, such as well-governed pension funds, actively seeking such opportunities frequently proves to be an important catalyst for such investment opportunities to be created, such as in the case of Malaysia. 63. The initial cases provide some evidence that having a specific mandate to invest in local development can be balanced with the primary goal of the funds to pay their beneficiaries. The EPF in Malaysia, having played a significant part in the development of capital markets in that country, is considering how it might increasingly contribute to social development. South Africa’s GEPF allocates a proportion of its assets to improving the social conditions of the country’s people. Other significant institutions in that country are also following suit. The Namibian regulator requires all pension funds to allocate a minimum percentage of assets to private equity initiatives, many of which contribute to sustainable development. 64. The demand for such local investments in new asset classes may grow by virtue of local funds cooperating and co-investing through partnerships with international investors, as well as ultimately through the growth of the local investor base. The challenge of insufficient governance is often accompanied by an attendant lack of capability and capacity in the local investment entities. In some cases, globally, this issue has been solved first by focusing on governance improvements. These are needed to support the secure diversification EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 of any pension fund. However, they can also be helped by a Additionally, the prospect of partnering with an IFI can pooling approach in which entities work together to assess increase chances for success with such an initiative. potential new investments, sometimes with international partners. Examples of how focusing on providing long-term • Leveraging and growing all sources of local investment savings arrangements for those not currently served well by matters: Countries should seek to identify and appropriately existing pension systems, such as workers in the informal oversee all local investment entities that could potentially sector, can also help to grow the local investor base. aid in driving progress toward sustainable development, as well as in meeting their beneficiaries’ needs. Some 65. The key lessons that have emerged from this examples included in this study were underregulated assessment include the following. The last two lessons pension entities in South Asia and prospective new long- are particularly instructive with regard to furthering term savings schemes for the informal sectors. However, sustainable development: there are other possibilities as well. • Governance matters: All investment arrangements 66. This paper suggests that local sources of financing should be underpinned by a commitment to best-practice for development may be more available than is typically standards of oversight, outsourcing, reporting and assumed. They can best be unlocked by first focusing on operational excellence. Many of the lessons that follow strong governance, regulation and supervision of these depend on this commitment to high-quality governance. schemes. Pension funds will have an important role to play in this regard, including even those funds that are established • Objectives matter: Actions should be formulated around as part of newly developed systems, such as the informal a set of clearly stated goals. A common thread should member schemes. bind these goals together. They should be expressed in clear language that is accessible to stakeholders of various kinds. Objectives should be supported by a set of measurable outcomes. Where a pension scheme is looking to broaden its objectives to include additional goals over and above returns for beneficiaries, those new goals should be secondary. In addition, they should be accompanied by clear, transparent measures of success. • Measurement matters: The measurement of returns is important because it helps to address any concerns that investments that may have a secondary goal of targeting social objectives are inferior in terms of return prospects, or that they do so only at an unacceptable level of risk. • Cooperation matters: Throughout many varied locations globally, local investors have faced the challenge of limited capacity and capability. As such, they are moving toward a relatively new solution focused on harnessing their joint capabilities to better invest in projects locally. Other countries can learn from the examples in Kenya, the Pacific Islands and South Africa by developing their own local investment opportunities more successfully. 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