Mauritius National Pension Fund Financial Analysis

Mauritius National subsidy off pedigree pecuniary AnalysisThe National reward shop and its pecuniary subtractions on the economy of MauritiusChapter 1 IntroductionThe philosophical system of the National support blood (NPF) includes the idea that genius ought to earn a reason commensurate proportion by and by aid age of what whiz earned during ones failal breeding. If you bring on contri b arlyed to the NPF and built up your bothowance points, you get out get a award which, when added to your anile-age bounty leave be a reasonable.The National support Fund scheme is proposed as whatsoever early(a) mandate manner of speaking for hideaway. Once it is set up, the NPF pull up stakes fit into pillar 2 of the Multi-Pillar Model of the terra firma Bank. The NPF neverthe little exiting not replace appropriatent currency or retreat mutual property, exactly rather improves prudence channels for future retirees.Mauritius is found in the develop coun tries group where contractual nest egg, prudence(a)s with insurance companies and subvention off capital exceed 40 percent of porcine Domestic Product and which exhibit a greater potential force in the domestic fiscal corpse. award currency grievance for 75 percent of contractual savings. The grant system is a equilibrise and head-man senior(a) multi-pillar.In Mauritius there turn in not m whatever authors that confirm write specific wholey on that subject, that is, pecuniary implication of National indemnity Fund on the Mauritanian economy. I have primarily utilize the re hunting made by other analysts in other countries and try to apply it on the Mauritian economy. Obviously the result volition not be the same, but try to make an estimate of it.Objectives of that go outAnalyse the everywhe signifi rottertl pecuniary implication of NPFTesting the monetary aftermath of NPF on national savingsEstimating the relationship between fiscal balance of Mauritius n on- seclusion flyer and the net saving that occurs inside the NPFChapter OutlineChapter one gives a brief everyplaceview of how the jump out is carry on.Chapter ii makes an overview of the National pension fund, its evolution, coordinate and its financing stock as well as political relation expenditure and the future of NPF.Chapter three is the literature review, that is, what writers around the glob have commented on the pension system.Chapter four is the research methodology. The research is carried out using regression compargon to examine the financial implication NPF on our variables.Chapter five consequently postdate the analysis based on the results obtained, that is the financial establish of NPF on national savings and the relationship between fiscal balance of Mauritius non-retirement account and the net saving that occurs within the NPF.Then finally chapter seven forget include suggestions and conclusions.Chapter 2 lit ReviewIntroduction subsidy pecuniary resource is be defined as digits of institutional inductor, which absorb, pool and invest currency contributed by sponsors and beneficiaries to furnish for the future pension entitlements of beneficiaries (E PhilipDavis 1995).Pension fund set up individuals the mean to collect saving over their working spiritedness so as to pay their consumption inquires in retirement, either by office of a lump sum or by provision of an annuity, speckle in addition egressing funds to corporations, house contrives (via securitised loans) or governments for investment or consumption. Bodie(1990a) has formalized pension funds function as a form of retirement income insurance.E Philip Davis (1995) suggests that pension funds work out a tour of the functions of the financial system much than than than efficiently than confides or direct holdings. Their growth complements that of slap-up food foodstuffs and they have acted as major catalysts of variety in the financial landsc ape. But this is not the only when reason for growth. It is similarly a consequence of fiscal incentives and turn a profits to employers, as well as growing engage arising from the maturement of the creation.Pension funds atomic event 18 typically sponsored by employers, such as companies, domain corporations, industry or trade groups accordingly, employers as well as employees typically contribute. Funds whitethorn be internally or externally managed.The pension system is commonly divided up into three pillars. The first pillar is the pay-as-you-go system based on payments by normal institutions which be mainly funded by taxation revenues. The second pillar constitutes fully funded pension funds with mandatory membership and the three well-nigh pillar is based on fully funded pension saving schemes with conscious membership.In a pay-as-you-go system, each genesis pays for the costs of the trustworthyly retired in return for a freight for the same treatment during its birth retirement. Workers who spend their spotless work and retirement vitality-sustainingity under a PAYGO system with constant tax place go away earn a genuinely return on their roles equal to the growth in the workforce plus the growth in the reliable wage (Samuelson, 1958, and Aaron, 1966).Pension funds endure millions of abundant number in the world trade protection and comfort in old age. Pension funds cook up the savings of millions of people, and as Paul Myners says, the ability of funds to invest these summations effectively has a profound shock absorber on their stinting well being. Because so legion(predicate) an(prenominal) another(prenominal) people depend on pension funds to provide for their futures, ensuring the funds serve the needs of their members is a priority for governing body.The companionable security system on the other hand as orderd by law, take ons people covered by its provisions either because they perform an occupational a ctivity or meet the requirements established for non-contributory type kind security, as well as dependent members of the family or similar, adequate testimonial in the contingencies and circumstances. affable tribute has been defined as the protection which society provides for its members by dint of a series of public measures over a net incomest the stinting and social distress that otherwise would be ca apply by the stoppage or substantial reduction of earnings resulting from sickness, maternity, practice session injury, invalidity, old age and closing the provision of medical checkup c argon and the provision of subsidies for families with children.In the Social hostage system, the money you pay into the system gets immediately paid back out to the people who ar shortly getting Social hostage checks. The Social security system tax has been raising more than money than is need to pay for current benefits, in ready to frame of reference up a surplus to help finan ce the retirement of the Baby shell multiplication. The money is apply in a sense to finance the government deficit, just exchangeable any other money the government relieves, Dean Baker (1998).The Social security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. So Social Security pass on be the home of your retirement income. Thats becauseYou wont out alert your Social Security retirement benefit. It leave behind be there for you for the moderation of your brio.Your Social Security benefit wont lose its value. From magazine to time, Social Security benefits ar adjusted so they always keep pace with inflation.Why National Pension Fund?Worker myopia, or lack of foresight poor planning occurs because people give to a fault little considerations to their future sparing needs when making decisions about saving for retirement. Most people calculate to have a instinctive inclination to live f or at once and avoid thinking about old age and death. Hence, they give rattling little systematic thought to the financial issues of old age until they come face to face with them. By the time they recognize they whitethorn have a problem when they retire, it is usually too late to fix. organisation intervention through NPF has help people set aside a portion of their earnings when they ar working so that they have an adequate income when they retire. Without controlling contributions for retirement, myopic workers would not drive home enough to take care an adequate retirement income and mendi chamberpotcy would result.Another rationale for the existence of the compulsory contribution to the NPF is to protect the responsible that saves for retirement against those who do not save. Under a purely spontaneous system some go away contribute, others will not. As Boulding (1958) puts it in his argument, those who do not insure will have to be support anyway-perhaps at utter er levels and in humiliating and respect-destroying ways when they are in their non-productive phase of their life, but that they will escape the burden of paying gifts when they are in their productive phase. In fairness to those who insure voluntarily and in order to maintain the self-respect of those who would not otherwise insure, contributions for retirement should be made compulsory. Hence, mandatory contributions are necessary to achieve the retirement savings results that people need to have so as to have an adequate standard of life story in their retirement age.Pension funds are alike an substantial source of capital assembling that can be used for unalike purposes as the build up the basic of national infrastructure, power stations and electric networks, Olli E. Kangas (2006). The Finnish case demonst yards that it was possible to commix social form _or_ system of government goals with the economic goals of building up modern industrial foodstuff economies. The Finnish run across has serves as a good example of how social insurance has been successfully used as a developmental st countgy, Mkandawire (2001). Pension funds are not only vital to the pension holders they provide for. They are withal key passers in the economy as a whole.Government BudgetPension financial backing issues have an important, but often hidden, violation on the finances of say governments, J. Fred Giertz (2003).In nigh countries, contributions to retirement funds are made by employers and employees each year. Yet, there is no requirement in the in brief run that these contributions be sufficient to fully fund the systems. Governments always look into that pension payments are actually made to retirees, debate little of the level of contributions, as they are generally the funders of net resort. If pension systems are under funded, governments must deal with this problem sooner or later through additional contributions to the systems. If systems are over funded, government resources can be redirected from pensions to other government programs,J. Fred Giertz (2003).It is seen that private pensions compress public pension outlay in the grander term, once private schemes are mature. Private pensions is seeming to ontogeny budgetary pressings in the short term if workers contributions go into their individual pension accounts, they cannot be used to pay for the pensions of the older generation thus, governments have to finance pensions for the transition generation through taxation or borrowing, Nicholas Barr (2001). This will in a way appropriate the government budget.Unsustainable pension systems can be a problem to fiscal stability, economic growth, and poverty reduction. The need for pension reform has become pressing as demographic aging has heavy pension systems around the world, claiming to great(p) expenditures, considerable deficits, and high school contribution grade. In some cases the pension system has become a source of fiscal and macroeconomic instability, a constraint to economic growth, and an idle and or inequitable source of retirement income.J. Fred Giertz (2003)suggests thatnot only are pension addition changes large in comparison with differentiate budgets, they are to a fault growing and fair more volatile. This trend is belike to confront and the comparative size of state pension obligations is increase. This suggests that pension financial support is becoming an increasingly important feeling of state government. He also states that state pension funding today is no sounder than in the early 1990s. This is not necessarily a cause for alarm, but it is a source of concern. Pension funding will be an increasingly important take aim on state finances in the up coming years.In the G-10 (1998) report, it states that the senescent of macrocosms could have dramatic effects on government finances. Under current policies, government spending in the G-10 countries is project ed to rebel sharply over the next several(prenominal) decades for several reasons. Per capita expenditure for the elderly is high in the areas of public retirement benefits and, in some countries, welfare support. cosmos expenditure on medical and health support for the elderly is also high and has been rising. If advances in medical technology come at ever increasing cost and if the incidence of health expenditure on the elderly continues to farm, the fiscal burden could become substantial in some countries.At the same time, government revenues will be adversely touched as the baby windfall generation moves from its high income generating years to retirement. Countries whose revenues are tied more to consumption or value added taxes will dispose to experience little of a deterioration in revenues than those that depend more heavily on income or payroll taxes. This would create a severe drag on national saving at a time when saving will be crucial to fostering the growth of la bour productivity.Impacts of develop populationNorman Vincent Peale quotes that Age-based retirement arbitrarily severs productive persons from their livelihood, squanders their talents, scars their health, strains an already overburdened Social Security system, and drives many elderly people into poverty and despair. Ageism is as odious as racism and sexism.Barry Bosworth (2003) argued that slowing economic growth and population aging in the major industrial countries have placed increased financial strain on pay-as-you-go (PAYGO) public pension systems. Retirement pensions have become a serious fiscal concern in just about industrialized countries. Pensions are largely paid for from tax revenues and it is foreseen that contributions will need to be raised advantageously during the coming decades.The World Bank (1994) states that high taxes are harmful to economic growth, since they real numberlocate resources to the informal sector, thereby reducing output in the more efficien t formal market sector of the economy. The reasons are that many people are now nearing retirement age and that the populations nowadays live farseeinger and have less children than in the past.Nicholas Barr (2001) argued that the effect on funded schemes is more restrained but as unavoidable. When a large generation of workers retires, it liquidates its financial assets to pay for its pensions. If those assets are equities, sales of financial assets by the large pensioner generation will exceed purchases of assets by the subatomicer younger generation, leading to falling right outlays and, hence, to lower pensions. Alternatively, if those assets are bank accounts, high spending by the large pensioner generation will gene localize inflationary pressures and again foreshorten the value of pensions.Domestic savingsThe main views of the life-cycle speculation designate that individuals try to smooth consumption over their lifetime, Brumberg and Modigliani (1954). Normally savi ngs follow a hump cause pattern, that is, income is sexual relationly low when individuals are either very young or retired as during their working life savings valuate is high .Ageing world increases the proportion of households with a relationally lower savings set up in the economy which leads to a decrease in private savings. Estimates of the squeeze of a change in the age structure of the population on private savings, shows that population ageing will be likely to reduce savings.As regard to public savings, population ageing is likely to exercise substantial pressure on public finances, Weil (2006). In the smudge of the pension schemes of the current pay-as-you-go pension schemes that exist in many states, an ageing population implies that the number of beneficiaries increases while the number of contributors to the system decreases. The ageing population will also adversely affect public finances through higher healthcare and long-term care costs, devoted that older populations are more likely to make use of healthcare facilities, which, to a large extent, are provided by the public sector. two smalleconomic and macroeconomic studies find that the observed age profile of saving generally conforms with the life-cycle model, which implies that saving judge rise over a workers active career and then crash in retirement. Compared with macroeconomic analyses, microeconomic studies die hard to show smaller variation in saving regulates over the life cycle, this whitethorn be of the highly skewed distribution of wealthiness and saving across households, Ralph C. Bryant (2004).At a micro level, company or other obligatory pension funds can implement enforced saving by deferring wages and salaries, thereby reducing luck of a low replacement ratio. At a macro level, the increase in saving is not usually one-to-one, as increased contractual saving via pension funds is typically partly or wholly bring out by declining flexible saving, E Philip Davi s (1995).The remaining effect most likely results from liquidity constraints on some individuals (especially the young), who are unable to borrow in order to offset obligatory saving via pension funds early in the life cycle. It can also be anticipated that, even in a liberalized financial system, credit constraints will affect lower income individuals in particular severely, as they have no assets to guarantee and also have less secure employment. Therefore forced pensions saving will tend to increase their overall saving particularly markedly, Bernheim and Scholz (1992). On the other hand Samwick (2000) found a lower position of saving in countries with all-inclusive PAYG systems. Agosin (2002) extended their analysis and shows that the rise of saving was concentrated in the bloodline sector, and that the net change in household saving was small.Implications for balance wheel real interest ratesThe forecasted declines in savings make the anticipate consequence of ageing on t he equilibrium real interest rate ambiguous. If investment falls high-velocity than domestic savings at each level of aggregate income, the real interest rate that clears the market for loanable funds is anticipate to fall, since it is difficult for savers to find profitable investment opportunities, J.C. Trichet (2007). On the other hand, if domestic savings were to fall faster than investment then the real interest rate would rise to reflect the sexual intercourse scarcity of financial funds.This likely decline in interest rate that equalizes savings and investment could be identified actual financial markets. Even though the actual impact of the evolving demographic structure on the equilibrium real interest rate in the capital markets is something that is exit to occur with a considerable lag, some economists have suggested that expectations of such developments may have already started to practice some influence on the pricing of connects. Among other things, these anal yses suggest that ageing could have contributed to the flattening of the digest trend that has been observed over the novel past, J.C. Trichet (2007).However as it is based on the assumption that capital market participants are perfectly previous looking, an assumption which is questionable, it should be treated with a great deal of safeguard if it is true that financial markets tend to overreact to short term phenomena, the effects of ageing on the yield curve could be limited, DellaVigna and Pollet (2005).It has to be taken into consideration that these quantitative simulations require a number of qualifications. On one hand, some real world factors may make the true decline in the equilibrium real interest rate large than estimated in macroeconomic models. For instance, older people may save more than predicted by the life cycle theory as they may want to leave a bequest to their children, putting push downward pressure on the equilibrium rate. The degree of happeniness abhorrence may also change with age as if the older people were systematically more put on the line averse than the young one, the accumulation of precautionary savings would lead to a higher than predicted savings rate and a lower than predicted real rate, Bakshi and Chen (1994).Moreover private savings rates may be importantly affected by pension reforms, Miles (2002).Pressures on PricesHans J Blommestein (1998) states that concerns have been expressed that the growing adopt for high quality private securities like lawfulness and corporate bonds, associated with the growth of advance funded pension systems in search of investment opportunities (thereby increasing the demand for financial assets) and falling public sector borrowing requirements (thereby reducing the provision of government securities), would put soaked upward pressure on the scathes of financial assets. Here, the combination of the widespread privatisation of state owned enterprises and reform of pension syst ems brings the opportunity of killing two birds with one stone. Pension reform, which would increase the demand for equity, and privatisation, which expands the supply, at the same time permits a more balanced growth in private securities markets, at least over the middling term. In a somewhat longer term perspective, population ageing may have an impact on the risk premium, that is, the difference between the returns on stocks and the yield on bonds.As asset preferences interchange across age groups, the ageing of the baby boom generation could affect both absolute and relative positions of stock and bond prices. On average, centre of attention age is the portion of the life cycle when saving rates are highest. Moreover, middle aged workers generally are more able and willing to hold a riskier portfolio that is, one weighted more heavily towards stocks than bonds.This is a consequence of two factors first, while still working, a stockholder is better able to make up for any bra gging(a) equity returns second, middle aged workers have a longer time horizon and thus are willing to accept more risk in exchange for the expectation of higher returns. Moreover, higher demand for stocks relative to bonds should increase the price of stocks relative to bonds, thus decreasing the equity premium. Thus, some have hypothesized that an ageing population would cause the equity premium to increase. But if the age of the population is increasing at least in part because life span is increasing, and thus time horizons are lengthening, then the ageing of the population does not necessarily mention that average risk aversion should be increasing and risk premium on stocks should be rising. aft(prenominal) the baby boomers begin to retire, saving rates would tend to fall, stock and bond prices to decline, and the equity premium to rise as baby boom retirees shift their portfolios away from stocks toward bonds, Hans J Blommestein (1998).Population age structure can influence the demand for different classes of financial market assets both because of its effect on saving and because young, middle aged, and elderly savers may seek to hold their assets in different forms. semiempirical studies have uncovered demonstrate that population age structure affects stock market prices and the real returns of different classes of financial assets, but the agreement of this evidence is not overwhelming. It is unclear whether the effects of demographic influences on asset prices and returns are large relative to the effects of other and less predictable determinants of prices and returns, Ralph C. Bryant (2004).Implications of population ageing for the precede of monetary policyThe life-cycle theory stipulates that , individuals during their working lives accumulate financial wealth in order to finance their consumption during retirement. As a consequence, populations who are near to retirement age will tend to have higher wealth to income ratios.Simultaneously, expected imbalances in publicly financed pension schemes make it possible to consider that the increasing number of retirees would depend more on their own accumulated wealth, as opposed to public pension provisions, to maintain their consumption levels. Consequently, the compute of the population exposed to asset price fluctuations could increase with ageing, Young (2002). bonce (2004) argues that longer life expectancy would presumably strengthen this effect.Therefore, the transmission channel of monetary policy may be affected by ageing. In particular, the so called wealth channel, which relates asset prices to consumption, may gain relative importance and play a vital office than in the past, G10 (2005). Miles (2002) points out that the monetary policy multiplier would probably rise with population ageing, mainly as a result of the increased wealth channel and greater price impact of monetary policy decisions. In spite of this, he also mentions that an older population is l ess likely to be credit constrained, especially when the pension system is better towards more funded systems. This might reduce the effectiveness of the credit channel. Depending on the relative importance of these channels, monetary policy could, in principle, become more or less effective with ageing. Miles suggests that the first effect is expected to dominate.A move towards demographic structure in which the population accounts for an increasing elderly population is expected to set out a gradual but persistent change in savings habits. This may results in an impact on the demand for all classes of assets even though certain sector of the capital market are likely to be affected more substantially than others. If, for example, older people are more risk averse and prefer to hold financial assets paying fixed income returns such as government securities, then the demand for government bonds would tend to increase relative to riskier investment options, such as equity, Bakshi a nd Chen (1994) and De Santis and Lhrmann (2006).In this situation, where a larger part of households wealth is invested in nominal assets, price stability would be even more important for households, G10 (2005) and Bean (2004). Stable prices ensure that the real value of both pension entitlements and savings is maintained and go along arbitrary redistributions of income and wealth to the detriment of the most vulnerable groups in society, in particular, pensioners. It is likely that, as a significant fraction of wealth is accumulated in real terra firma and financial assets, households exposure to asset price movements will tend to increase.This might coincide with a situation in which a large fraction of the population in their old age dis-saving phase are disposing assets in order to finance consumption during retirement. In this respect, some authors have warned that, when the baby-boom generation retires and starts to dissave, excess supply in financial markets could lead to a significant decline in asset prices, the consequences of which might be felt by the accurate population, Siegel (1998), Abel (2001) and (2003). This view is known as the asset meltdown hypothesis. Yoo (1994) estimated that asset prices may drop by as much as 15% as a result of demographic change alone. This is why a credible commitment to maintaining price stability and, as a reflection, an groovy financial environment is and will remain so important for maintaining the standard of living of people, particularly for the poorest and the most vulnerable.Investment of Pension FundThe rapid growth of pension funds in many countries, and the remark they are providing to the growth of capital markets, both suggest that their activities as financial intermediaries merit considerable attention, E Philip Davis (2000). Pension funds have an impact on the stability of financial markets in several ways, most significantly through their investment behavior.Since early withdrawal of funds is usually restricted or forbidden, pension funds have long term liabilities, allowing holding of high risk and high return instruments. Accordingly, monies are intermediated by pension funds into a variety of financial assets, which include corporate equities, government bonds, real estate, corporate debt (in the form of loans or bonds), securitised loans, foreign holdings of the instruments mentioned above and money market instruments and deposits as forms of liquidity.Hellwig (1990) suggest that financial institutions can form long term relationships with borrowers, which reduce information asymmetry and hence moral hazard. obscure from economies of scale these considerations have arisen in the literature mainly for debt finance and for banks. Whereas the importance of information asymmetries and incomplete contracts is evenly recognised for equity finance, the role of financial institutions as counterparts is less well developed. Equally, institutional investors such as pension f unds may not rely on the same information and control mechanisms as banks.The role of pension funds is clearly not to facilitate exchange of goods, services and assets flat. This is because, unlike banks, money market funds, and to a lesser extent long term mutual funds, they do not offer liquid liabilities. Nevertheless, pension funds have had an important indirect role in boosting the efficiency of the financial systems, by influencing the structure of securities markets. This effect on micro structure links to their demand for liquidity, i.e. to transact in large size without pitiful the price against them, anonymously, and at low transactions costs.Pension funds provide risk control directly to households via the forms of retirement income insurance they provide, an advantage which largely reflects the unusual (among financial intermediaries) link of pension funds to employers. To swear out in undertaking this risk control function they diversify assets as noted above and also act in securities and derivatives markets to hedge and control risk. As institutional investors, pension funds are well placed to use derivatives and other means of risk control many innovations have been introduced or developed specifically to cater for their demand (Bodie 1990b, 1999).E Philip Davis (1995a) suggests that as pension funds focus mainly on government bonds and high grade corporate bonds, while banks tend to monopolise small business financing. And Lorenzo Bini Smaghi (2006) states that drop wisely matters for long term economic wellbeing, and that the portfolio allocation decision is of paramount importance in order to maintain living standards in the old age.Pension funds are the fastest growing of all financial institutions. They now cover half the labor force and represent one-eighth the financial assets of the entire household sector, Vincent P. Apilado (1972). The size of pension funds has also had an impact on the structure of financial markets countries wi th large funded pension schemes tend to have highly developed securities markets in countries with small pension-fund sectors, capital markets are comparatively underdeveloped (the equity market in particular, Hans. J. Blommestein (1998).Living StandardM.PONDS(2003) states that the raison dtre of wage indexed defined benefit pension funds is to provide insurance against standard of living risk after retirement, based on intergenerational risk sharing. Pension funds necessarily have to accept mismatch risk in providing this harming of insurance. Mismatch risk taken by the pension fund is risk for the funds stakeholders.The material living standards of tomorrows working and retired people will depend on the goods and services produced by those who will be working at the time. Changes in retirement income financing might alter the relative living standards of workers compared with retirees, but only later retirement could have a large effect in increasing living standards for both, p uppet Hicks (2004).OMauritius National Pension Fund Financial AnalysisMauritius National Pension Fund Financial AnalysisThe National Pension Fund and its financial implications on the economy of MauritiusChapter 1 IntroductionThe philosophy of the National Pension Fund (NPF) includes the idea that one ought to earn a reasonable proportion after pension age of what one earned during ones working life. If you have contributed to the NPF and built up your pension points, you will get a pension which, when added to your old-age pension will be a reasonable.The National Pension Fund scheme is proposed as another mandatory saving for retirement. Once it is set up, the NPF will fit into Pillar 2 of the Multi-Pillar Model of the World Bank. The NPF nevertheless will not replace provident funds or retirement mutual funds, but rather improves saving channels for future retirees.Mauritius is found in the developing countries group where contractual savings, savings with insurance companies and pension funds exceed 40 percent of Gross Domestic Product and which represent a greater potential force in the domestic financial system. Pension funds account for 75 percent of contractual savings. The pension system is a balanced and well-managed multi-pillar.In Mauritius there have not many authors that have write specifically on that subject, that is, financial implication of National Pension Fund on the Mauritian economy. I have mainly used the research made by other analysts in other countries and try to apply it on the Mauritian economy. Obviously the result will not be the same, but try to make an estimate of it.Objectives of that ProjectAnalyse the overall financial implication of NPFTesting the financial effect of NPF on national savingsEstimating the relationship between fiscal balance of Mauritius non-retirement account and the net saving that occurs within the NPFChapter OutlineChapter one gives a brief overview of how the project is carry on.Chapter two makes an overv iew of the National pension fund, its evolution, structure and its financing source as well as government expenditure and the future of NPF.Chapter three is the literature review, that is, what writers around the globe have commented on the pension system.Chapter four is the research methodology. The research is carried out using regression equation to examine the financial implication NPF on our variables.Chapter five then come the analysis based on the results obtained, that is the financial effect of NPF on national savings and the relationship between fiscal balance of Mauritius non-retirement account and the net saving that occurs within the NPF.Then finally chapter seven will include suggestions and conclusions.Chapter 2 Literature ReviewIntroductionPension funds is be defined as forms of institutional investor, which collect, pool and invest funds contributed by sponsors and beneficiaries to provide for the future pension entitlements of beneficiaries (E PhilipDavis 1995).Pen sion fund offer individuals the mean to collect saving over their working life so as to finance their consumption needs in retirement, either by means of a lump sum or by provision of an annuity, while also supplying funds to corporations, households (via securitised loans) or governments for investment or consumption. Bodie(1990a) has formalized pension funds function as a form of retirement income insurance.E Philip Davis (1995) suggests that pension funds perform a number of the functions of the financial system more efficiently than banks or direct holdings. Their growth complements that of capital markets and they have acted as major catalysts of change in the financial landscape. But this is not the only reason for growth. It is also a consequence of fiscal incentives and benefits to employers, as well as growing demand arising from the ageing of the population.Pension funds are typically sponsored by employers, such as companies, public corporations, industry or trade groups accordingly, employers as well as employees typically contribute. Funds may be internally or externally managed.The pension system is commonly divided into three pillars. The first pillar is the pay-as-you-go system based on payments by public institutions which are mainly funded by tax revenues. The second pillar constitutes fully funded pension funds with mandatory membership and the third pillar is based on fully funded pension saving schemes with voluntary membership.In a pay-as-you-go system, each generation pays for the costs of the currently retired in return for a commitment for the same treatment during its own retirement. Workers who spend their entire work and retirement life under a PAYGO system with constant tax rates will earn a real return on their contributions equal to the growth in the workforce plus the growth in the real wage (Samuelson, 1958, and Aaron, 1966).Pension funds provide millions of people in the world security and comfort in old age. Pension funds rep resent the savings of millions of people, and as Paul Myners says, the ability of funds to invest these assets effectively has a profound impact on their economic well being. Because so many people depend on pension funds to provide for their futures, ensuring the funds serve the needs of their members is a priority for Government.The social security system on the other hand as stated by law, guarantees people covered by its provisions either because they perform an occupational activity or meet the requirements established for non-contributory type social security, as well as dependent members of the family or similar, adequate protection in the contingencies and circumstances.Social Security has been defined as the protection which society provides for its members through a series of public measures against the economic and social distress that otherwise would be caused by the stoppage or substantial reduction of earnings resulting from sickness, maternity, employment injury, inva lidity, old age and death the provision of medical care and the provision of subsidies for families with children.In the Social Security system, the money you pay into the system gets immediately paid back out to the people who are currently getting Social Security checks. The Social Security tax has been raising more money than is needed to pay for current benefits, in order to build up a surplus to help finance the retirement of the Baby Boom generation. The money is used in a sense to finance the government deficit, just like any other money the government borrows, Dean Baker (1998).The Social Security system is primarily a pay-as-you-go system, meaning that payments to current retirees come from current payments into the system. So Social Security will be the foundation of your retirement income. Thats becauseYou wont outlive your Social Security retirement benefit. It will be there for you for the rest of your life.Your Social Security benefit wont lose its value. From time to time, Social Security benefits are adjusted so they always keep pace with inflation.Why National Pension Fund?Worker myopia, or lack of foresight poor planning occurs because people give too little considerations to their future economic needs when making decisions about saving for retirement. Most people seem to have a natural inclination to live for today and avoid thinking about old age and death. Hence, they give very little systematic thought to the financial issues of old age until they come face to face with them. By the time they recognize they may have a problem when they retire, it is usually too late to fix. Government intervention through NPF has help people set aside a portion of their earnings when they are working so that they have an adequate income when they retire. Without compulsory contributions for retirement, myopic workers would not save enough to ensure an adequate retirement income and poverty would result.Another rationale for the existence of the compulsor y contribution to the NPF is to protect the prudent that saves for retirement against those who do not save. Under a purely voluntary system some will contribute, others will not. As Boulding (1958) puts it in his argument, those who do not insure will have to be supported anyway-perhaps at lower levels and in humiliating and respect-destroying ways when they are in their non-productive phase of their life, but that they will escape the burden of paying premiums when they are in their productive phase. In fairness to those who insure voluntarily and in order to maintain the self-respect of those who would not otherwise insure, contributions for retirement should be made compulsory. Hence, mandatory contributions are necessary to achieve the retirement savings results that people need to have so as to have an adequate standard of living in their retirement years.Pension funds are also an important source of capital accumulation that can be used for different purposes as the build up the basic of national infrastructure, power stations and electric networks, Olli E. Kangas (2006). The Finnish case demonstrates that it was possible to unify social policy goals with the economic goals of building up modern industrial market economies. The Finnish experience has serves as a good example of how social policy has been successfully used as a developmental strategy, Mkandawire (2001). Pension funds are not only vital to the pension holders they provide for. They are also key players in the economy as a whole.Government BudgetPension funding issues have an important, but often hidden, impact on the finances of state governments, J. Fred Giertz (2003).In most countries, contributions to retirement funds are made by employers and employees each year. Yet, there is no requirement in the short run that these contributions be sufficient to fully fund the systems. Governments always ensure that pension payments are actually made to retirees, regardless of the level of contrib utions, as they are generally the funders of last resort. If pension systems are under funded, governments must deal with this problem sooner or later through additional contributions to the systems. If systems are over funded, government resources can be redirected from pensions to other government programs,J. Fred Giertz (2003).It is seen that private pensions reduce public pension spending in the longer term, once private schemes are mature. Private pensions is likely to increase budgetary pressures in the short term if workers contributions go into their individual pension accounts, they cannot be used to pay for the pensions of the older generation thus, governments have to finance pensions for the transition generation through taxation or borrowing, Nicholas Barr (2001). This will in a way affect the government budget.Unsustainable pension systems can be a problem to fiscal stability, economic growth, and poverty reduction. The need for pension reform has become pressing as de mographic aging has strained pension systems around the world, leading to large expenditures, large deficits, and high contribution rates. In many cases the pension system has become a source of fiscal and macroeconomic instability, a constraint to economic growth, and an ineffective and or inequitable source of retirement income.J. Fred Giertz (2003)suggests thatnot only are pension asset changes large in comparison with state budgets, they are also growing and becoming more volatile. This trend is likely to continue and the relative size of state pension obligations is increasing. This suggests that pension funding is becoming an increasingly important aspect of state government. He also states that state pension funding today is no sounder than in the early 1990s. This is not necessarily a cause for alarm, but it is a source of concern. Pension funding will be an increasingly important demand on state finances in the up coming years.In the G-10 (1998) report, it states that the a geing of populations could have dramatic effects on government finances. Under current policies, government spending in the G-10 countries is projected to rise sharply over the next several decades for several reasons. Per capita expenditure for the elderly is high in the areas of public retirement benefits and, in some countries, welfare support. Public expenditure on medical and health support for the elderly is also high and has been rising. If advances in medical technology come at ever increasing cost and if the incidence of health expenditure on the elderly continues to rise, the fiscal burden could become substantial in some countries.At the same time, government revenues will be adversely affected as the baby boom generation moves from its high income generating years to retirement. Countries whose revenues are tied more to consumption or value added taxes will tend to experience less of a deterioration in revenues than those that depend more heavily on income or payroll tax es. This would create a severe drag on national saving at a time when saving will be crucial to fostering the growth of labour productivity.Impacts of ageing populationNorman Vincent Peale quotes that Age-based retirement arbitrarily severs productive persons from their livelihood, squanders their talents, scars their health, strains an already overburdened Social Security system, and drives many elderly people into poverty and despair. Ageism is as odious as racism and sexism.Barry Bosworth (2003) argued that slowing economic growth and population aging in the major industrial countries have placed increased financial strain on pay-as-you-go (PAYGO) public pension systems. Retirement pensions have become a serious fiscal concern in most industrialized countries. Pensions are largely paid for from tax revenues and it is foreseen that contributions will need to be raised substantially during the coming decades.The World Bank (1994) states that high taxes are harmful to economic growt h, since they reallocate resources to the informal sector, thereby reducing output in the more efficient formal market sector of the economy. The reasons are that many people are now nearing retirement age and that the populations nowadays live longer and have fewer children than in the past.Nicholas Barr (2001) argued that the effect on funded schemes is more restrained but equally unavoidable. When a large generation of workers retires, it liquidates its financial assets to pay for its pensions. If those assets are equities, sales of financial assets by the large pensioner generation will exceed purchases of assets by the smaller younger generation, leading to falling equity prices and, hence, to lower pensions. Alternatively, if those assets are bank accounts, high spending by the large pensioner generation will generate inflationary pressures and again reduce the value of pensions.Domestic savingsThe main views of the life-cycle theory stipulate that individuals try to smooth co nsumption over their lifetime, Brumberg and Modigliani (1954). Normally savings follow a hump shaped pattern, that is, income is relatively low when individuals are either very young or retired as during their working life savings rate is higher .Ageing Population increases the proportion of households with a relatively lower savings rate in the economy which leads to a decrease in private savings. Estimates of the impact of a change in the age structure of the population on private savings, shows that population ageing will be likely to reduce savings.As regard to public savings, population ageing is likely to exercise considerable pressure on public finances, Weil (2006). In the situation of the pension schemes of the current pay-as-you-go pension schemes that exist in many states, an ageing population implies that the number of beneficiaries increases while the number of contributors to the system decreases. The ageing population will also adversely affect public finances through higher healthcare and long-term care costs, given that older populations are more likely to make use of healthcare facilities, which, to a large extent, are provided by the public sector.Both microeconomic and macroeconomic studies find that the observed age profile of saving generally conforms with the life-cycle model, which implies that saving rates rise over a workers active career and then decline in retirement. Compared with macroeconomic analyses, microeconomic studies tend to show smaller variation in saving rates over the life cycle, this may be of the highly skewed distribution of wealth and saving across households, Ralph C. Bryant (2004).At a micro level, company or other obligatory pension funds can implement enforced saving by deferring wages and salaries, thereby reducing risk of a low replacement ratio. At a macro level, the increase in saving is not usually one-to-one, as increased contractual saving via pension funds is typically partly or wholly offset by declini ng flexible saving, E Philip Davis (1995).The remaining effect most likely results from liquidity constraints on some individuals (especially the young), who are unable to borrow in order to offset obligatory saving via pension funds early in the life cycle. It can also be anticipated that, even in a liberalized financial system, credit constraints will affect lower income individuals particularly severely, as they have no assets to guarantee and also have less secure employment. Therefore forced pensions saving will tend to increase their overall saving particularly markedly, Bernheim and Scholz (1992). On the other hand Samwick (2000) found a lower rate of saving in countries with extensive PAYG systems. Agosin (2002) extended their analysis and shows that the rise of saving was concentrated in the business sector, and that the net change in household saving was small.Implications for equilibrium real interest ratesThe forecasted declines in savings make the expected consequence o f ageing on the equilibrium real interest rate ambiguous. If investment falls faster than domestic savings at each level of aggregate income, the real interest rate that clears the market for loanable funds is expected to fall, since it is difficult for savers to find profitable investment opportunities, J.C. Trichet (2007). On the other hand, if domestic savings were to fall faster than investment then the real interest rate would rise to reflect the relative scarcity of financial funds.This likely decline in interest rate that equalizes savings and investment could be identified developed financial markets. Even though the actual impact of the evolving demographic structure on the equilibrium real interest rate in the capital markets is something that is going to occur with a considerable lag, some economists have suggested that expectations of such developments may have already started to exert some influence on the pricing of bonds. Among other things, these analyses suggest tha t ageing could have contributed to the flattening of the yield curve that has been observed over the recent past, J.C. Trichet (2007).However as it is based on the assumption that capital market participants are perfectly forward looking, an assumption which is questionable, it should be treated with a great deal of caution if it is true that financial markets tend to overreact to short term phenomena, the effects of ageing on the yield curve could be limited, DellaVigna and Pollet (2005).It has to be taken into consideration that these quantitative simulations require a number of qualifications. On one hand, some real world factors may make the true decline in the equilibrium real interest rate larger than estimated in macroeconomic models. For instance, older people may save more than predicted by the life cycle theory as they may want to leave a bequest to their children, putting further downward pressure on the equilibrium rate. The degree of risk aversion may also change with a ge as if the older people were systematically more risk averse than the young one, the accumulation of precautionary savings would lead to a higher than predicted savings rate and a lower than predicted real rate, Bakshi and Chen (1994).Moreover private savings rates may be significantly affected by pension reforms, Miles (2002).Pressures on PricesHans J Blommestein (1998) states that concerns have been expressed that the growing demand for high quality private securities like equity and corporate bonds, associated with the growth of advance funded pension systems in search of investment opportunities (thereby increasing the demand for financial assets) and falling public sector borrowing requirements (thereby reducing the supply of government securities), would put strong upward pressure on the prices of financial assets. Here, the combination of the widespread privatisation of state owned enterprises and reform of pension systems brings the opportunity of killing two birds with on e stone. Pension reform, which would increase the demand for equity, and privatisation, which expands the supply, at the same time permits a more balanced growth in private securities markets, at least over the medium term. In a somewhat longer term perspective, population ageing may have an impact on the risk premium, that is, the difference between the returns on stocks and the yield on bonds.As asset preferences vary across age groups, the ageing of the baby boom generation could affect both absolute and relative positions of stock and bond prices. On average, middle age is the portion of the life cycle when saving rates are highest. Moreover, middle aged workers generally are more able and willing to hold a riskier portfolio that is, one weighted more heavily towards stocks than bonds.This is a consequence of two factors first, while still working, a stockholder is better able to make up for any bad equity returns second, middle aged workers have a longer time horizon and thus a re willing to accept more risk in exchange for the expectation of higher returns. Moreover, higher demand for stocks relative to bonds should increase the price of stocks relative to bonds, thus decreasing the equity premium. Thus, some have hypothesized that an ageing population would cause the equity premium to increase. But if the age of the population is increasing at least in part because life span is increasing, and thus time horizons are lengthening, then the ageing of the population does not necessarily imply that average risk aversion should be increasing and risk premium on stocks should be rising.After the baby boomers begin to retire, saving rates would tend to fall, stock and bond prices to decline, and the equity premium to rise as baby boom retirees shift their portfolios away from stocks toward bonds, Hans J Blommestein (1998).Population age structure can influence the demand for different classes of financial market assets both because of its effect on saving and be cause young, middle aged, and elderly savers may seek to hold their assets in different forms. Empirical studies have uncovered evidence that population age structure affects stock market prices and the real returns of different classes of financial assets, but the consistency of this evidence is not overwhelming. It is unclear whether the effects of demographic influences on asset prices and returns are large relative to the effects of other and less predictable determinants of prices and returns, Ralph C. Bryant (2004).Implications of population ageing for the conduct of monetary policyThe life-cycle theory stipulates that , individuals during their working lives accumulate financial wealth in order to finance their consumption during retirement. As a consequence, populations who are near to retirement age will tend to have higher wealth to income ratios.Simultaneously, expected imbalances in publicly financed pension schemes make it possible to consider that the increasing number of retirees would depend more on their own accumulated wealth, as opposed to public pension provisions, to maintain their consumption levels. Consequently, the fraction of the population exposed to asset price fluctuations could increase with ageing, Young (2002). Bean (2004) argues that longer life expectancy would presumably strengthen this effect.Therefore, the transmission channel of monetary policy may be affected by ageing. In particular, the so called wealth channel, which links asset prices to consumption, may gain relative importance and play a vital role than in the past, G10 (2005). Miles (2002) points out that the monetary policy multiplier would probably rise with population ageing, mainly as a result of the increased wealth channel and greater price impact of monetary policy decisions. In spite of this, he also mentions that an older population is less likely to be credit constrained, especially when the pension system is reformed towards more funded systems. This mig ht reduce the effectiveness of the credit channel. Depending on the relative importance of these channels, monetary policy could, in principle, become more or less effective with ageing. Miles suggests that the first effect is expected to dominate.A move towards demographic structure in which the population accounts for an increasing elderly population is expected to generate a gradual but persistent change in savings habits. This may results in an impact on the demand for all classes of assets even though certain sector of the capital market are likely to be affected more substantially than others. If, for example, older people are more risk averse and prefer to hold financial assets paying fixed income returns such as government securities, then the demand for government bonds would tend to increase relative to riskier investment options, such as equity, Bakshi and Chen (1994) and De Santis and Lhrmann (2006).In this situation, where a larger part of households wealth is invested in nominal assets, price stability would be even more important for households, G10 (2005) and Bean (2004). Stable prices ensure that the real value of both pension entitlements and savings is maintained and prevent arbitrary redistributions of income and wealth to the detriment of the most vulnerable groups in society, in particular, pensioners. It is likely that, as a significant fraction of wealth is accumulated in real estate and financial assets, households exposure to asset price movements will tend to increase.This might coincide with a situation in which a large fraction of the population in their old age dis-saving phase are disposing assets in order to finance consumption during retirement. In this respect, some authors have warned that, when the baby-boom generation retires and starts to dissave, excess supply in financial markets could lead to a significant decline in asset prices, the consequences of which might be felt by the entire population, Siegel (1998), Abel (200 1) and (2003). This view is known as the asset meltdown hypothesis. Yoo (1994) estimated that asset prices may drop by as much as 15% as a result of demographic change alone. This is why a credible commitment to maintaining price stability and, as a reflection, an orderly financial environment is and will remain so important for maintaining the standard of living of people, particularly for the poorest and the most vulnerable.Investment of Pension FundThe rapid growth of pension funds in many countries, and the stimulus they are providing to the growth of capital markets, both suggest that their activities as financial intermediaries merit considerable attention, E Philip Davis (2000). Pension funds have an impact on the stability of financial markets in several ways, most significantly through their investment behavior.Since early withdrawal of funds is usually restricted or forbidden, pension funds have long term liabilities, allowing holding of high risk and high return instrumen ts. Accordingly, monies are intermediated by pension funds into a variety of financial assets, which include corporate equities, government bonds, real estate, corporate debt (in the form of loans or bonds), securitised loans, foreign holdings of the instruments mentioned above and money market instruments and deposits as forms of liquidity.Hellwig (1990) suggest that financial institutions can form long term relationships with borrowers, which reduce information asymmetry and hence moral hazard. Apart from economies of scale these considerations have arisen in the literature mainly for debt finance and for banks. Whereas the importance of information asymmetries and incomplete contracts is equally recognised for equity finance, the role of financial institutions as counterparts is less well developed. Equally, institutional investors such as pension funds may not rely on the same information and control mechanisms as banks.The role of pension funds is clearly not to facilitate exch ange of goods, services and assets directly. This is because, unlike banks, money market funds, and to a lesser extent long term mutual funds, they do not offer liquid liabilities. Nevertheless, pension funds have had an important indirect role in boosting the efficiency of the financial systems, by influencing the structure of securities markets. This effect on micro structure links to their demand for liquidity, i.e. to transact in large size without moving the price against them, anonymously, and at low transactions costs.Pension funds provide risk control directly to households via the forms of retirement income insurance they provide, an advantage which largely reflects the unusual (among financial intermediaries) link of pension funds to employers. To assist in undertaking this risk control function they diversify assets as noted above and also act in securities and derivatives markets to hedge and control risk. As institutional investors, pension funds are well placed to use derivatives and other means of risk control many innovations have been introduced or developed specifically to cater for their demand (Bodie 1990b, 1999).E Philip Davis (1995a) suggests that as pension funds focus mainly on government bonds and high grade corporate bonds, while banks tend to monopolise small business financing. And Lorenzo Bini Smaghi (2006) states that investing wisely matters for long term economic wellbeing, and that the portfolio allocation decision is of paramount importance in order to maintain living standards in the old age.Pension funds are the fastest growing of all financial institutions. They now cover half the labor force and represent one-eighth the financial assets of the entire household sector, Vincent P. Apilado (1972). The size of pension funds has also had an impact on the structure of financial markets countries with large funded pension schemes tend to have highly developed securities markets in countries with small pension-fund sectors, capita l markets are relatively underdeveloped (the equity market in particular, Hans. J. Blommestein (1998).Living StandardM.PONDS(2003) states that the raison dtre of wage indexed defined benefit pension funds is to provide insurance against standard of living risk after retirement, based on intergenerational risk sharing. Pension funds necessarily have to accept mismatch risk in providing this kind of insurance. Mismatch risk taken by the pension fund is risk for the funds stakeholders.The material living standards of tomorrows working and retired people will depend on the goods and services produced by those who will be working at the time. Changes in retirement income financing might alter the relative living standards of workers compared with retirees, but only later retirement could have a large effect in increasing living standards for both, Peter Hicks (2004).O