From the Editor’s Keyboard

Social Security Administrative Costs: a Recipe for Collapse of Sierra Leone’s Pension Program

23 September 2008 at 07:58 | 1183 views

By Kortor Kamara, Guest Writer, USA.

As the nation awaits the second actuarial evaluation of the National Social Security & Insurance Trust (NASSIT), a thorough analysis and understanding of the initial actuarial valuation report conducted by Canadian based actuarial firm Regie Des Rentes Du Quebec (RRQ) for the period ending December 31, 2004, is instructive in assessing the performance and future viability of the nation’s pension scheme.

Pursuant to Article 47 of the National Social Security & Insurance Trust Act, 2001 an actuarial evaluation of the pension scheme is by law required every 3 years during the first ten years of the pension scheme and once every five years thereafter. The scheme was initially implemented in 2002 with the first actuarial valuation performed in 2004. The second statutory valuation should therefore be conducted by 2007/2008 and an actuarial report issued soon thereafter.

The 2004 RRQ actuarial studies report while acknowledging the general good financial condition of the scheme, as expected of start-up schemes without pension payment liabilities, however highlighted areas of concern and deficiencies that both Sierra Leonean policymakers and pension participants must be made aware of and requisite steps taken to address in order to forestall the Trust’s failure and potential bankruptcy.

Aside from the need for growth in the insured population and the need for more scheme experience data, the actuarial report paid especial focus on the exorbitant administrative expenses and costs and the management of investments, as areas of concern requiring corrective measures.

An analysis of the pension scheme’s administrative costs, according to the actuarial report, reveals that NASSIT’s “administrative expenses compared to insurable earnings were higher than the level expected in the inception report ”.

It is worth noting that at inception of the scheme an industry best practice expenditure for administrative costs was pegged at 1% of insured earnings as recommended by the International Labor Organization (ILO).

However, since 2002 when administrative costs were at 1,691 billion Leones, the administrative costs have progressively increased to 3,250 billion Leones in 2003 and to a whopping 6,407 billion Leones in 2004. As noted in the RRQ actuarial report, the 2004 costs exceeded the ILO recommended 1% for the scheme’s administrative costs by a proportion of 230%.

In the recently published annual report for 2006, NASSIT reported general administrative expenses at 15.3 billion Leones while the Trust’s payments in pensions amounted to a paltry 1.9 billion Leones. The 15.3 billion Leones in administrative costs represented an increase from 14.4 billion Leones in the previous 2005 fiscal year. Thus as of the year 2005, administrative costs represented 5 percent of the insurable earnings of the scheme. Such a ratio glaringly is economically untenable as even when compared with other African countries 1.5% for administrative costs, the trajectory of NASSIT’s administrative costs remains one of the highest in the world.

The amoebic growth in the Trust’s administrative costs has continued to balloon as figures for the year ended 2007, revealed that the stratospheric sum of 22.1 billion Leones was expended as administrative costs and expenses.

While acknowledging that nascent pension schemes generally have higher administrative costs at beginning than matured schemes, and factoring that the “initial seed money of 4.5 billion Leones provided by the government for setting up of the Scheme was fully refunded by the end of the third year”, the continued growth in administrative costs with no apparent oversight or checks and balances by the Trustees / Board of Directors reflects a lack of good governance controls and potential inefficiencies that must be addressed and corrected.

For should this trend continue, the Trust will be rendered bankrupt and the country, the statutory guarantor of the pensions will be saddled with unfunded pensions by the time the equilibrium period ends and pension liabilities are at their peek. As fiduciaries, the board members must be seen as exercising their fiduciary duties on behalf of the pension scheme’s participants- the workers of Sierra Leone.

Staff costs represent a large percentage of the administrative costs and were estimated to consume more than 55% of total expenditures of the pension scheme. For example, payroll costs increased from 5.1 billion Leones to 8.2 billion Leones from 2005 to 2006. As at the period ending December 2006, the scheme employed 227 employees representing a net employee increase of 6 from the prior year. In 2005 the scheme reported a total of 221 employees on its payroll. The 6 new employees the scheme employed in 2006 in addition to whatever cost of living increases in salary paid the existing employees could most certainly not explain the exorbitant increase in the wage bill of the scheme.

As of the second quarter of 2008, the Trust reportedly has a total of 275 employees, an increase in its employee rolls from 227 in 2006.

Moreover, in addition to staff costs, the remuneration of key management personnel salaries and allowances substantially increased from 1.6 billion to 2.2 billion Leones from 2005 to 2006.

According to the NASSIT staff matrix, the scheme has 8 executives and 13 senior management positions. If “key management” refers to only these positions, it thus represents 21 personnel who over a one year period received as salaries and remuneration an additional humongous sum of 2.2 billion Leones from the Sierra Leone workers pension fund.

Aside from staff costs as reviewed above, the amorphous category of “General Costs” represents about 30 percent of the scheme’s expenditures. Whilst initially at 543 million Leones in 2002, general costs expenditure had ballooned to 963 million Leones in 2003 and to an exorbitant 2.1 billion Leones in 2004.

It should be noted that while administrative costs by the year 2004 represented 95.4 percent of total benefit expenditures and 24.0 percent of contribution income of the entire pension scheme, the continued fiscal viability of the pension scheme is greatly at stake as an inordinate amount of contributions of workers hard earned wages seem to be spent on the scheme’s management and staff expenses.

Since a major source of financing for the Trust is investment income, which derived from the right investment mix and returns determines and ensures the scheme participants level of pension benefits, this article will not be complete without an analysis of the NASSIT’s current investment strategy.

The scheme’s investment strategy policy has been adjudged in the actuarial report as economically and actuarially well designed. The devil however is in the implementation of this well designed policy. Especially as relates to stocks in companies, the absence of an adequate financial infrastructure where shares and stocks can easily be traded to free up cash flow exposes the Trust to additional investment risks.

Despite this shortcoming in the country‘s financial environment, the Scheme has poured over 39 billion Leones into equity investments, even though the country does not have a functional stock exchange.

A review and analysis of the types of businesses and ventures the Scheme’s equity investment has been directed into causes risk concerns for achievement of the expressed strategic objectives of the investments portfolio and for the continued viability of the scheme.

The Scheme in 2006 increased its equity asset mix from 11.4% in 2005 to 20% in 2006. This category represented, aside from Treasury Bills, the largest percentage investment by the Scheme.

As of 2006, the Scheme’s long term investment portfolio totaled 39.6 billion Leones, comprised of equity investments in the following:

1) Debentures in SierraBlocks of 8.2 billion Leons.

2) Equity investment in SierraBlocks of 7.1 billion Leones.

3) Equity investment in Barock Investment of 7,268,000

4) Equity in Regimanual Gray SL Limited of 6,000,000.

5) Equity in Gouji Property Investment of 9,129,992.

6) Equity investment in Eco Bank of 3,033,917 Leones.

7) Equity investment in Kimbima Hotel of 5,296,414.

8) Equity investment in Sierra Leone Brewery of 7,005.

The scheme’s investment liability exposure in the cement block making company, SierraBlocks represents a 60% ownership shares with a concomitant 60% of liability. Such exposure of the scheme’s capital and considering the high costs of the homes Regimanuel Gray is selling in Goodrich must serve as a warning signal that returns from this venture are likely to fail to conform to minimization of costs and risks associated with investments-a core objective of the scheme‘s investment policy.

The scheme’s experience with the Gouji Property Investment when it prematurely recalled its equity investment and reportedly only received a portion of the Trust’s initial capital investment is highly instructive.

Currently, contribution accumulation represents the main source of asset increase in the scheme’s portfolio. Since the scheme is young and growing this trend will continue. However, the laws of diminishing returns will very soon set in and contributions not only will remain stagnant but will inevitably regress resulting in an adverse impact on the scheme’s investment mix.

As a mandatory pension scheme all employers and employees are required to contribute into the Trust. However, an alarming trend witnessed over the past five years of the Trust’s existence shows that government departments and parastatals are the greatest delinquents with mounting arrears of contributions owed to the Trust on behalf of their workers. For example, as recorded in the Trust’s 2006 annual report, total contribution delinquency increased from 9.1 billion Leones in 2004 to 12.9 billion Leones in 2006. This amount subsequently increased to 16.2 billion Leones in 2007 and as of the second quarter of 2008, the contribution arrears stood at 19.4 billion Leones.

The main reason adduced for this delinquency is the non-compliance by government ministries, departments and parastatals whose contribution arrears rose from 2.1 billion Leones in 2004 to 5.5 billion Leones in 2006. The trend of non-compliance by parastatals especially continues unabated as recent statistics for the second quarter shows that their non-compliance is currently at 10 billion Leones.

With all the statutory instruments at its disposal, the Trust must be aggressive in ensuring outstanding contributions are immediately recouped. A reduction and elimination of the arrears must be a benchmark in assessing management’s productivity and efficiency. The Sierra Leone landscape is dotted with government services institutions and companies that have failed by their inability to ensure user-service payments are timely collected for services, be it insurance, electricity, water supply and other public services. At this rate and trending, NASSIT is setting itself up for the same demise.

The participation of Sierra Leone’s diasporas in the country’s pension scheme, the NASSIT, represents one such creative and out of the box thinking that management and the government must urgently explore.

Diaspora participation in NASSIT could be achieved by a system of purchase of credits in foreign currencies, into the pension scheme, modeled on the concept of “Diaspora Bonds”; where countries raise financing from their overseas diasporas through a debt instrument .

However, unlike a debt instrument, the sale of credits into the NASSIT pension scheme allows diasporas to participate in the nation’s social security system with benefits inuring to both the diaspora participant and the NASSIT. In the case of the diasporas it ensures:

Patriotism, as participation affords continued connection to the home country.

Satisfaction of contributing to and participating in the home country’s national economic growth.

Protection as a risk management tool, as the survivor’s benefit component of the pension scheme will afford benefits to beneficiaries in the home country, in the event of the death or disability of the diaspora participant.

In the case of the country and NASSIT, it provides:

Extension of the covered population, providing additional private sector capacity, which the scheme desperately needs to meet actuarial projections.

Access to foreign capital remittances, as contributions would be made in foreign currencies.

Risk diversification, as the foreign capital infused into the scheme could be invested in foreign investments and international bonds, stocks and indexes.

Needed capital for developmental programs such as the current NASSIT low cost housing project.

The establishment of the pension scheme in Sierra Leone represents a singular achievement in public policy implementation over the past 30 years and if properly executed and managed long-term will serve generations of workers and contribute positively to economic and social development of the country. It is thus in accord with the tremendous expectations for success of the scheme that the above critique and suggestions for curtailing the run away administrative costs of the Trust are been proffered not only to management but especially the Board of Directors.

About the author:
Kortor Kamara(photo) has over 25 years experience in the insurance industry both in Sierra Leone and the United States. He is a Chartered Property & Casualty Insurer and holds the Workers Compensation Claims Professional (WCCP) designation. He is a Member of the Chartered Insurance Institute ( London); Certified Self-Insurance Claims Administrator-State of California; Registered World Bank Consultant and has served as a Consultant on various Insurance initiatives in Sierra Leone, including design of the country’s first Title Insurance Policy.

In addition, Mr. Kamara is a graduate of Fourah Bay College, University of Sierra Leone, 1978-1981; studied Law at both the Univerisity of West Los Angeles School of Law and the California Southern School of Law in Riverside. He is currently a Doctoral Candidate in Insurance and Risk Management.

Through association with Saddleback Re, were he serves as the Regional Manager, Africa Division, Mr. Kamara is intimately involved in the provision of reinsurance coverage, policy design, loss control, training and risk management services to the African Insurance marketplace. Mr. Kamara can be contacted via e-mail at: