Mauritius National Pension Fund Financial Analysis

Mauritius National bonus computer memory Financial AnalysisThe National reward contour and its fiscal hints on the economy of MauritiusChapter 1 approachThe philosophy of the National Pension Fund (NPF) includes the idea that one ought to earn a reasonable pro great deal after tribute come along of what one existentise during ones work life. If you open contributed to the NPF and built up your gift points, you leave get a allowance which, when added to your old-age tribute exit be a reasonable.The National Pension Fund scheme is proposed as an some another(prenominal) requisite redeeming(a) for solitude. Once it is set up, the NPF give fit into Pillar 2 of the Multi-Pillar Model of the World Bank. The NPF as yet allow not replace provident notes or privacy mutual coin, but rather improves thriftiness convey for in store(predicate) retirees.Mauritius is found in the developing countries group where contractual nest egg, nest egg with insurance comp anies and award pecuniary re seminal fluid exceed 40 percent of Gross domesticated Product and which represent a greater potential force in the domestic fiscal strategy. Pension silver account for 75 percent of contractual savings. The premium arrangement is a equilibrize and hearty-managed multi- chromatography column.In Mauritius thither collapse not many authors that absorb write specifically on that subject, that is, fiscal intimation of National Pension Fund on the Mauritian economy. I guide mainly economic consumptiond the interrogation chafe by other analysts in other countries and try to apply it on the Mauritian economy. Obviously the result forget not be the same, but try to make an estimate of it.Objectives of that Project go the boilersuit pecuniary implication of NPFTesting the pecuniary effect of NPF on discipline savingsEstimating the relationship between fiscal balance of Mauritius non- loneliness account and the crystalize saving that occurs wi thin the NPFChapter remainsChapter one gives a brief overview of how the project is carry on.Chapter two makes an overview of the National indemnity fund, its evolution, building and its financing inauguration as well as presidency spending and the future of NPF.Chapter three is the literature review, that is, what writers around the globe have commented on the pension scheme.Chapter four is the research methodology. The research is carried out using retrogression 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- privacy account and the net saving that occurs within the NPF.Then finally chapter septet will include suggestions and conclusions.Chapter 2 Literature ReviewIntroductionPension monetary resource is be delimitate as forms of institutional investor, which collect, p ool and invest capital contributed by sponsors and beneficiaries to provide for the future pension entitlements of beneficiaries (E PhilipDavis 1995).Pension fund offer individuals the mean to collect saving over their operative life so as to finance their consumption need in retirement, either by means of a lump sum or by provision of an annuity, while as well as supplying bills to corporations, dwellings (via securitised loans) or organisations for enthronization or consumption. Bodie(1990a) has formalized pension cash function as a form of retirement income insurance.E Philip Davis (1995) suggests that pension currency perform a number of the functions of the financial system much than efficiently than banks or direct holdings. Their step-up complements that of capital trades and they have acted as study catalysts of qualifying in the financial landscape. But this is not the however reason for growth. It is also a outlet of fiscal incentives and receiptss to employers, as well as maturement ask arising from the maturement of the community.Pension funds be typically sponsored by employers, much(prenominal) as companies, cosmos corporations, industry or trade groups accordingly, employers as well as employees typically contribute. pay whitethorn be internally or externally managed.The pension system is commonly divided into three lynchpins. The first pillar is the pay-as-you-go system based on payments by everyday institutions which ar mainly funded by r yetue enhancement 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 coevals pays for the costs of the presently 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 place will earn a real return on their contributions equal to the growth in the workforce plus the growth in the real winnings (Samuelson, 1958, and Aaron, 1966).Pension funds provide millions of tidy sum in the world security and comfort in old age. Pension funds represent the savings of millions of peck, and as Paul Myners says, the ability of funds to invest these pluss tellingly has a profound impact on their economic well being. Because so many people forecast 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 buy the farm 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 slip social security, as well as dependent members of the family or similar, adequate protection in the contingencies and circumstances. brotherly Security has been defined as the protection which conjunction provides for its members through a series of unrestricted 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, invalidity, old age and death the provision of medical checkup cargon and the provision of subsidies for families with children.In the Social Security system, the bills you pay into the system gets this instant paid back out to the people who ar on-line(prenominal)ly getting Social Security checks. The Social Security tax has been raising more cash than is needed to pay for current benefits, in tell apart to build up a surplus to help finance the retirement of the Baby Boom generation. The funds is used in a sense to finance the governing body 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 payme nts 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 magazine to meter, Social Security benefits are adjusted so they al behaviors keep pace with inflation.Why National Pension Fund?Worker myopia, or neglect of foresight poor planning occurs because people give too brusque considerations to their future economic needs when making decisions more or less 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 whitethorn have a puzzle when they retire, it is usually too late to fix. Government int ervention 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 need would result.Another rationale for the humans of the compulsory 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 mannikin of their life, but that they will escape the burden of paying subsidys when they are in their productive phase. In fair-mindedness to those who insure voluntarily and in order to maintain the self-respect of those who would not otherwise insur e, contributions for retirement should be do compulsory. Hence, mandatory contributions are necessary to give 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 great source of capital accumulation that female genital organ be used for different purposes as the build up the basic of national infra complex body part, power stations and galvanic networks, Olli E. Kangas (2006). The Finnish case demonstrates that it was possible to unify social indemnity goals with the economic goals of building up modern industrial trade 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 cypherPension supporting issues have an authorised, but often hi dden, impact on the finances of state governments, J. Fred Giertz (2003).In close 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 contributions, as they are broadly the funders of last resort. If pension systems are under funded, governments must dispense with this conundrum sooner or afterward through additional contributions to the systems. If systems are over funded, government resources throne be redirected from pensions to other government programs,J. Fred Giertz (2003).It is seen that insular pensions bring low universal pension spending in the agelong circumstance, once orphic schemes are mature. Private pensions is apparent to increase budgetary pressures in the short call if workers contributions go int o 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 stableness, economic growth, and poverty reduction. The need for pension reform has become press as demographic aging has strained pension systems around the world, leading to larger 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 transmits large in comparison with state budgets, they are also growing and becoming more volatile. This vogue is likely to continue and the relational size of state pension obligations is increase. 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 aboriginal 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 maturement of common wealthinesss could have dramatic cause on government finances. Under current policies, government spending in the G-10 countries is projected to test sharply over the nigh several(prenominal) decades for several reasons. Per capita expenditure for the senior is high in the areas of public retirement benefits and, in some countries, welfare support. Public expenditure on medical and wellness support for the of age(p) is also high and has been rising. If advances in medical technology come at ever increasing cost a nd if the incidence of health expenditure on the cured continues to jump, the fiscal burden could become substantial in some countries.At the same time, government revenues will be adversely affected as the bodge fly high generation moves from its high income generating years to retirement. Countries whose revenues are tied more to consumption or value added taxes will ladder to experience less of a deterioration in revenues than those that depend more heavily on income or payroll taxes. This would create a severe chuff on national saving at a time when saving will be crucial to fostering the growth of labour productivity.Impacts of senescent existenceNorman Vincent Peale quotes that Age-based retirement every which way 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 terrible as racism and sexism.Barry Bo sworth (2003) argued that lag economic growth and population aging in the major industrial countries have place change magnitude 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 more often than not 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 growth, since they allocate resources to the informal sector, thereby reduction output in the more efficient formal market sector of the economy. The reasons are that many people are forthwith nearing retirement age and that the populations today 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 liquefiedates its f inancial 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 little(a) younger generation, leading to travel virtue scathes and, hence, to lower pensions. Alternatively, if those assets are bank accounts, high spending by the large pensioner generation will reelect inflationary pressures and again slash the value of pensions.Domestic savingsThe main views of the life- calendar method of birth control theory stipulate that individuals try to smooth consumption over their lifetime, Brumberg and Modigliani (1954). Normally savings follow a projection shaped pattern, that is, income is relatively low when individuals are either very young or retired as during their working life savings rate is high .Ageing nation 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 impac t 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 high 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 as reliableed age profile of saving generally conforms with the life- motorbike model, which implies that saving rates rise over a workers active career and then decline in retir ement. 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, family or other obligatory pension funds can implement enforced saving by deferring net incomes and salaries, thereby reduction assay 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 declining 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 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 especially 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 counterweight real enliven ratesThe forecasted declines in savings make the evaluate signification of ageing on the equilibrium real interest rate ambiguous. If investment get downs faster than domestic savings at each level of join 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 inve stment 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 that ageing could have contributed to the flattening of the yield arch that has been observed over the recent past, J.C. Trichet (2007). even as it is based on the assumption that capital market participants are perfectly forward looking, an assumption which is questionable, it should be tempered with a great deal of caution if it is true that financial markets tend to overreact to short term p henomena, the personal effects of ageing on the yield curve could be limited, DellaVigna and Pollet (2005).It has to be interpreted 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 adventure aversion may also change with age as if the older people were systematically more assay opposed 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 subgenus Chen (1994).Moreover private savings rates may be significantly affected by pension reforms, Miles (2002).Pressures on PricesHans J Blom mestein (1998) states that concerns have been expressed that the growing demand for high feeling private securities like justness 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 possess enterprises and reform of pension systems brings the hazard 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 medium term. In a somewhat longer term perspective, population ageing may have an impact on the risk premium, that is, the difference between the r eturns on stocks and the yield on bonds.As asset preferences vary across age groups, the ageing of the foil 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 are willing to lease more risk in switch over 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 popula tion 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 because 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 collect 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). noggin (2004) argues that longer life expectancy would presumptively strengthen this eff ect.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 factor 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 might reduce the durability 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 long-lasting 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(predicate) 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 pa rticular, 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 (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 conceivable commitment to maintaining price stability and, as a reflection, an orderly financial environment is and will remain so import ant 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 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. 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 rudimentary 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 aid exchange of goods, services and assets directly. This is because, remote 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 discharge 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 modify 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 financi ng. 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 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, capital 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 f unds 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 modify 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).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 poin ts, 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 overview 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 ob tained, 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).Pension 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 perfor m 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 memb ership.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 represent 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 a n 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, invalidity, 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 mone y 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 compulsory 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 wh en 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 provid e 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 contributions, 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 demographic 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 be coming 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 ageing 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 medic al 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 taxes. 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 racis m 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 growth, 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 financia l 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 consumption 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 pop ulation 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, microecon omic 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 declining 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 sec ure 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 of 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 scar city 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 that 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, Dell aVigna 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 age 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 sec urities 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 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 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 boo m 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 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 th e 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 because 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 d eterminants 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 wealt h 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 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 generate a gradual but persistent change in savings habits. This may results in an impact on the de mand 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 ex posure 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 (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 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 gro wth 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 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 a symmetry 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 exchange 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 p rice 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 dec ision 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, capital 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 f unds 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