ZAMBIA CATHOLIC

UNIVERSITY
FACULTY OF BUSINESS MANAGEMENT AND
FINANCE
DEPARTMENT OF BANKING AND FINANCE
THE PENSION SCHEME (INVESTMENT GUIDELINES)
REGULATIONS, 2011; ITS INFLUENCE ON INVESTMENT AND
GROWTH OF PENSION FUNDS.
A CASE STUDY OF THE PENSION INDUSTRY IN ZAMBIA
This Research Proposal was submitted in partial fulfilment of the requirement for
the award of a Bachelors Degree in Business Administration of the Zambian
Catholic University.
By

NAME

: WEZI N. BANDA

STUDENT NUMBER : 120124

2015

Table of Contents
CHAPTER ONE............................................................................................................ 1
1.0

INTRODUCTION AND BACKGROUND OF THE STUDY.........................................1

1.1

INTRODUCTION............................................................................................. 1

1.2

BACKGROUND TO THE CASE STUDY..............................................................1

1.2.1

THE PENSIONS INDUSTRY IN ZAMBIA......................................................1

1.2.2

PENSION SCHEME REGULATION IN ZAMBIA............................................2

1.2.4

DERIVATIVES MARKET IN ZAMBIA..........................................................3

1.3

PROBLEM STATEMENT...................................................................................3

1.4

RESEARCH OBJECTIVES................................................................................5

1.4.1

MAIN OBJECTIVE...................................................................................... 5

1.4.2

SPECIFIC OBJECTIVES.............................................................................5

1.5

RESEARCH QUESTIONS..................................................................................5

1.6

SCOPE OF THE STUDY.................................................................................... 6

1.7

SIGNIFICANCE OF THE STUDY.......................................................................6

1.8

LIMITATIONS TO THE STUDY.........................................................................6

CHAPTER 2................................................................................................................. 7
2.0

INTERIM LITERATURE REVIEW.....................................................................7

2.1

INTRODUCTION............................................................................................. 7

2.2

RELATED LITERATURE.................................................................................. 7

2.3

EMPIRICAL STUDIES...................................................................................... 8

CHAPTER 3............................................................................................................... 11
3.0

THEORETICAL AND CONCEPTUAL FRAME WORK........................................11

3.1

THEORETICAL FRAMEWORK.......................................................................11

3.1.1

MODERN PORTFOLIO THEORY.................................................................11

3.1.2

STRATEGIC ALLOCATION AND TACTICAL ALLOCATION OF ASSETS..........12

3.1.2.1

STRATEGIC ALLOCATION OF ASSETS.....................................................12

3.1.2.2

TACTICAL ALLOCATION OF ASSETS......................................................12

3.2

CONCEPTUAL FRAME WORK.......................................................................14

3.2.1

EXPECTED RETURN...............................................................................14

3.2.2

DIVERSIFICATION..................................................................................15

3.3

STUDY VARIABLES....................................................................................... 15

3.4

RESEARCH HYPOTHESIS..............................................................................16

CHAPTER 4............................................................................................................... 17

4.0

METHODOLOGY.......................................................................................... 17

4.1

INTRODUCTION........................................................................................... 17

4.2

RESEARCH DESIGN...................................................................................... 17

4.3

THE STUDY POPULATION..............................................................................17

4.4

SAMPLE SIZE................................................................................................ 17

4.5

SAMPLING TECHNIQUE.................................................................................17

4.6

RESEARCH INSTRUMENTS........................................................................... 18

4.7

DATA COLLECTION....................................................................................... 18

4.7.1

PRIMARY DATA....................................................................................... 18

4.7.2

SECONDARY DATA................................................................................. 18

4.9

DATA ANALYSIS............................................................................................ 18

Bibliography............................................................................................................. 20

CHAPTER ONE
1.0

INTRODUCTION AND BACKGROUND OF THE STUDY

1.1
INTRODUCTION
The pension fund industry, in both developed and emerging market economies had been
experiencing rapid growth during the 1990s and early 2000s. Pension funds in the group of
seven (G-7) countries had pension funds accounting for about 45% on average for these
countries GDP in 2001 alone. In 1991, the GDP proportion of pension funds was standing at
29%, it is notable with such figures that pension fund assets grow by over 20percent of GDP. In
Zambia the pensions industry has been showing growth in terms of assets under management and
the number of members (IOPS, 2011).
The rapid aging population of countries, the world over has increased the fiscal burden of
pension systems and pension fund managers have to face challenge of investing in even more
risky investments to yield returns that are higher. The pension funds have increased their risk
appetite and so have government and regulators tightened investment and portfolio regulations
that have constrained the participation of pension funds in capital markets. This research will
focus on the statutory instrument No. 141 of 2011 under the pension scheme regulation act with
specific attention being paid to the prohibition of pension funds from buying or dealing in
derivative products despite efforts to further deepen the Zambian capital markets and enhancing
financial liquidity for investors.
1.2
1.2.1

BACKGROUND TO THE CASE STUDY

THE PENSIONS INDUSTRY IN ZAMBIA

The PIA is the regulatory and supervisory body of the pensions and insurance industry in Zambia
and is responsible for protecting pension scheme members and insurance policy-holders through
regulation and prudential supervision of industry players. Pension and insurance activities have
existed in Zambia prior to its independence. Among the oldest pension schemes are the Barclays
Staff Scheme and Local Superannuation Fund (LASF) while on the insurance side we had Old
Mutual and a few other South African and European insurance companies which had branch
operations in Zambia. Occupational pension schemes have continued to grow in terms of
numbers of schemes, membership and net asset size. As at end of June 2014, the Pensions and
Insurance Authority (PIA) had a total of 238 schemes on its register and 110,503 membership.

This increase in numbers over the years has been matched with growth in contributions from
both employees and employers (K663 million in 2013), although a few schemes still report
unremitted contributions. This is a worry to the industry as such schemes can end up in deficit
(PIA, 2013). Similarly, the industry has also recorded continued significant growth in net assets
of and at the end of 2013; the amount stood at K4.29 billion as compared to K625 million in
2002. The return on net assets has also continued to grow and in 2013, the industry achieved a
return on average net assets of 17.8 percent. Investment performance of pension schemes was
remarkable last year leading to 110% percent growth in investment income. The largest
investment portfolio of pension funds is in listed equity and as at December 2013, the market
value of tradable equity held by pension schemes was K1.21 billion while investments in
unlimited equity stood at K283 million. In 2002, both listed and unlisted equities only stood at
K68, 065 (PIA, 2013).
When you talk about the contribution of the pensions industry contribution to Zambia, the first
thing that comes to mind is infrastructure. Undeniably so, the industry has contributed
immensely to infrastructure development and some of the buildings constructed using pension
funds include the Mulungushi International Conference Centre, Mukuba Pension House,
Premium House, Kwacha Pension House on Church Road, Levy Mall all in Lusaka and a
myriad of office buildings and houses across the country. As of December 2013, the value of
pension fund investments stood at K999 million compared to K159, 538 in 2002. To protect the
interest of pension scheme members and insurance policy-holders, Parliament established the
PIA through the enactment of the Pension Scheme Regulation Act No. 28 of 1996 (amended by
act No. 27 of 2005) and the Insurance Act No. 27 of 1997 (amended by act No.26 of 2005).
1.2.2 PENSION SCHEME REGULATION IN ZAMBIA
Pension funds were for a long time unregulated until the pension regulation act into being. This
act however is flamed and has a lot of areas that used stream lining. Prior to this act, pension
schemes were only required to register with ZRA for tax exemption purpose but their operations
were largely unregulated. With the establishment of the Pensions and Insurance Authority (PIA)
under the pension scheme act No. 28 of 1996 there is now some limited supervision being
undertaken, although the regulatory body itself has got some limited capacity. Areas of conflict
still exists in the pension area, as there are multiple regulators and organs concerned with the

management of pension funds. However, these regulatory conflicts have created ripple
effects in the deepening of the Zambian financial markets as there are still a lot of
opposing registration toward this same noble cause.

1.2.4 DERIVATIVES MARKET IN ZAMBIA

Prior to the global financial crisis of 2007/2008, all derivative instruments were routinely and
unfortunately tarred with the same brush. Post the global financial crisis, derivatives were seen in
a very different light. The world of derivatives was essentially divided into two separate camps.
That of Over-The-Counter (OTC) derivatives and that of regulated, exchange traded,
derivatives. The case for a derivatives exchange in Zambia is a compelling one. Derivatives
exchanges globally have demonstrated their usefulness and stability in prosperous as well as
calamitous times. In Africa the need for derivatives exchanges are no more diminished than
anywhere else in the world. Prior to the establishment of new derivative exchanges is this being
the Bonds and Derivative exchange in Zambia, it is imperative that the necessity and usefulness
of derivatives be understood as they may be very useful for all financial institutions in Zambia
and Pension funds are not of particular exclusion as they hold full amounts of capital in the form
of pooled contributions from members. It is an unfortunate fact that all derivatives the world over
and specifically in the developing and emerging market economies, are unnecessarily tarred with
the same brush. Derivatives can be divides into two types (Mulumba, 2015). The first type being
that of unregulated over-the-counter derivatives, which have caused severe disruptions to the
global economic system, and have justifiably attracted much negative press. The second type is a
well regulated, guaranteed and transparent market which provides equal and fair access to all
participants. In Zambia the Bonds and Derivatives exchange has been set up in order to enhance
the liquidity of financial assets and instruments to Local companies as well as international
investors. The Zambia pension industry can benefit from such development as this will not just
enhance the liquidity of financial asset but will also be very useful for hedging purposes and for
tactical asset allocation which is the short term asset investment for pension funds.
1.3
PROBLEM STATEMENT
On the one hand, investment guidelines and investment regulation may be very important to any
industry as they help regulator make sure that the regulated entities comply with them. While on
the other hand, the same regulations may hinder the growth of the entire industry. The
quantitative limits outlined in the Statutory Instrument No. 140 under the pension scheme

regulation act of 1996. The pension scheme (investment guidelines) regulation which is also
known as the Statutory instrument (SI) number 141 of 2011 under the Pension Scheme
Regulations Act 1996 is undermining efforts to develop capital markets in Zambia, Bonds and
Derivatives Exchange (BaDEx) as said by chief executive officer Peter Sitamulaho. (Mulumba,
2015) This statutory instrument in its current form, grossly undermines efforts to develop and
further deepen the capital markets in Zambia because of its far reaching prohibition. The SI
explicitly states under part 13 (other investment), number 1 and 2 as follows:
13. Other investments
1

A pension scheme may invest in such other instruments as the registrar may
approve for purpose of this Act.

A pension scheme shall not invest in derivatives, hedge funds or other speculative
investments.

All Pension Insurance Authority (PIA) licensed pension schemes in Zambia are not allowed to
participate in the purchase, sell, investment of derivatives such as foreign exchange contracts,
swaps, exchange traded currency contracts, exchange traded funds, and many other financial
instruments. As a result of this SI, institutions and corporations such as National Pension
Scheme Authority (NAPSA), Madison asset managers, and all other licensees under the PIA
cannot use derivative products offered by financial institutions and exchanges such as the Bonds
and Derivatives Exchange (BaDEx). The BaDEx and other capital market players are of the view
that the SI is incorrect and retrogressive with respect to derivatives, further added the chief
executive of the fore mentioned exchange (Mulumba, 2015).
It is alleged that the SI erroneously describes all derivatives and all investments in derivatives as
speculative. As instruments of risk, derivatives can be traded for outright exposure and/or
speculation, hedging existing exposure to change a risk profile, or for enhancing a portfolios
expected return.
At present, pension schemes and fund managers in Zambia cannot hedge risks such as exchange
rate and interest rate risks. Therefore with such prohibitions being present in the legislation of
pension schemes portfolio managers and asset managers cannot effectively optimize their

portfolios using forward exchange contracts, currency swaps, interest rate swaps, currency
futures and options, indices and other financial products falling into the category of derivatives,
because of SI 141. The existence of the SI 141 has also made it impossible for exchanges to
introduce exchange traded funds (ETFs) which are widely used all over the world, and are very
popular with investors. BaDEx is advocating for establishing a limit of between 5-10 percent
exposures to derivatives as an asset class, but also allowing pension and insurance entities to use
derivatives for hedging and investments. (Mulumba, 2015)

1.4

RESEARCH OBJECTIVES

1.4.1 MAIN OBJECTIVE

In this study, the researcher will try and analyze the investment behavior of pension funds in
Zambia and try to focus on factors that determine asset allocation and investment performances
of pension funds. The researcher will try to ascertain whether or not the use of derivatives and
other speculative financial securities would be useful trying to enhance portfolio performance
and the return of these such portfolio investment.
1.4.2 SPECIFIC OBJECTIVES
Specific objectives of the study will be to:
1) Investigate what lead to the prohibition of derivative and speculative
products bt the regulations and on governments part.
2) Investigate the effect investment limitations of assets under
management for pension funds in Zambia.
3) Examine the growth and performance of pension funds in Zambia over
a period of time.
4) Establish possible scenarios that pension funds may help deepen the
financial markets i.e. the bonds and derivatives market

1.5

RESEARCH QUESTIONS
1) Do pension funds consider the use of investment and the use of derivative products as
part of their hedging options?
2) What type of hedging practices are currently being employed by pension funds to
mitigate the risks?

3) Despite the production of derivative products how have pension funds performed and
shown positive growth over these past years?
4) To what extent do pension funds participate in the financial markets?
1.6

SCOPE OF THE STUDY

This study will seek to investigate the extent to which the Prohibition of Pension fund to deal in,
buy or sell derivative products and other speculative investment as guide by the pension scheme
(investment guidelines) regulation of 2011 has affected both the investment and the growth of
pension funds in Zambia and the probable causes that led to the enactment of the investment
guideline prohibiting pension funds from investing in derivative and speculative investments.
Data to be used in this research will be obtained from the pensions regulating authority the PIA,
Pension scheme administrators and Investment managers from the pensions industry by way of
interviews and questionnaires. Due to the nature of the study to be carried out and the data
needed, the research will consider only data from the past ten years over a period from 2005 to
2014 as they will be essential to carry out the study. This period is chosen as it holds a lot of
events that happened in both the Zambian and the global financial markets in as far as investment
of pension funds and changes in the regulatory instruments and pension reforms across the
world. The research is limited to on the pensions Industry in Zambia and will consider
stakeholders and other key and strategic players in the industry.
1.7

SIGNIFICANCE OF THE STUDY

The study will be very significant to the pensions industry and Law makers as we are living in a
constantly changing financial and globalized financial environment. It is of the essence to note
that no such study has ever been conducted in Zambia and information is lacking in this arrear of
the industry. It will also give key insight to how the pension industry has been performing amid
political and economic changes that have taken over in the past. It will help in explaining the
changes in growth patterns and investment behaviors of pension funds and how they contribute
to the development of the Zambian financial markets and the Gross Domestic Product (GDP)
the study will further help pension funds knowing effectiveness and efficiency that adding
derivatives to a pensions portfolio on a strategic and tactical asset allocations point of view.

1.8

LIMITATIONS TO THE STUDY

The researcher is anticipating factors that may limit this study as being limited financial
resources, the ease of collecting information from pension schemes and their regulators and the
short time Period needed to conduct the study.

CHAPTER 2
2.0

INTERIM LITERATURE REVIEW

2.1

INTRODUCTION

In today's largely globalized economy, the borders between countries have been eliminated as
funds are able to move from one country to the other in just a few minutes. Pension fund as
institutional investor are some of the institutions that set up investment in overseas portfolios
thus may prawn to a lot of risk factors. However government and regulators have been forced to
equally tighten regulation on investments overseas and domestic investments like wise, as they
seek to further protect the interest of the pension members.
This chapter focuses review of related theoretical and empirical literature by authorities and
other researchers in other countries. The chapter will explain the various approaches adopted to
manage assets and investments for pension funds and further assess the performance of pension
schemes that adopt the different types of investment strategies.

2.2

RELATED LITERATURE

Viceira conducted a discussion about the effects of other sources of retirement income on
portfolio composition of mandatory pension schemes, which may help to explain differences in
portfolio allocation across countries. Because the structure of benefits offered by first pillar
mandatory pension plans could be seen as equivalent to a bond, in terms of individual wealth,
contributors in countries with multipillar (a combination of both the Mandatory and the
Voluntary pension schemes) systems are expected to have a higher proportion of equity
compared with countries with a single second pillar (the voluntary pension scheme). The author
also observes that the rate of contribution and the regulatory requirements are an important factor
explaining the portfolio allocation among countries, and therefore, two similar countries that
differ only in terms of the contribution rate are expected to have different portfolio allocations if
both aim to have similar rates of return. Viceira (observes that no fixed-income instrument is
fully adequate for pension portfolios. Although cash instruments, such as Treasury bills, are a
risk-free asset for short-term investments, they are not risk-free assets for long-term investors
such as pension funds, because of the reinvestment risk and inflation risk. Although government

long-term bonds provide protection against reinvestment risks, they do not protect the real value
of the investments. Inflation is still a major threat to the value of assets in both developed and
emerging markets. Therefore long-term inflation indexed bonds are the only true riskless asset
for long-term investors and portfolio diversification may be the only resort to maintain portfolio
returns. As earlier alluded to, although inflation-indexed bonds such as government bonds and
treasury bills provide the safest investment option for working investors, in the absence of these
instruments it is suggested that in pension funds hold short term bonds denominated foreign
currencies in countries with stable inflation and real interest rates. In the case of equity, the
author observes that the evidence about the long term benefits of investing in equities is not
associated with a particular instrument but to international well-diversified portfolios. National
equity markets are subject to country risk, and therefore excessive reliance on local equity
markets imposes a risk on the value of the pension funds. The question of currency exposure is
also discussed. The conventional practice of fully hedging currency exposures is optimal only
when excess returns to equity are uncorrelated with those to currency. However, currencies in
emerging economies tend to be negatively correlated with the dollar and tend to appreciate when
global stock markets fall. The Zambian kwacha can be evidence as the purest example of this
theory. Therefore, contrary to conventional practice, pension funds in most emerging economies
should keep unhedged positions in their equity exposure. The short-term volatility created by
unhedged currency positions is more than compensated by the natural hedge and returns that are
achieved in the medium and long term.
2.3

EMPIRICAL STUDIES

As widely reported during the 2008 global economic crisis, the pension fund industry had been
suffered low returns due to negative equity returns and low interest rates, leading to a serious
underfunding of pension plans. The general response to the situation from the pension fund
industry has been two-fold. Many funds resorted to reduced equity investment allocation in
favour of fixed income investments that more closely matched their liabilities. Others had begun
to invest in hedge funds and fund-of-funds. The theory is that by investing in absolute return
investment strategies, pension funds benefit from increased alpha and beta in portfolio
diversification by having exposure to asset classes that have a low correlation with the traditional
pension fund investments of equities and bonds. Most pension funds tend to invest via a fund-of-

funds that charges additional management and performance fees. Therefore, pension funds also
had to consider the use of derivatives within their existing traditional portfolio.
A survey entitled Facing the Future: a survey of derivatives in fund management conducted by
(Berenson E, 2012), found that more than half (52.5% of those fund managers surveyed stated
that they did not use derivatives. However, the usefulness of incorporating derivatives into
portfolio risk and asset management cannot be over-emphasized. This view is supported by Ros
Altman, adviser to the Myners Review on Institutional Investment, 2002, and a leading authority
on the UK pensions industry. Emphasizing on the role of derivatives in pension fund
management, she said: Derivatives allow fund managers more freedom and flexibility to apply
their talents, reduce the risk of making mistakes, and allow them to be corrected more easily.
However when it comes to derivatives as they a very risky financial assets to deal with. The key,
is to know how to use them properly as managers of Pension funds need to be concerned about
minimizing downside risk and also about matching pension assets and liabilities, not just about
maximizing returns. This means that derivative strategies can significantly assist in acquiring
acceptable returns for the pension funds.
In this fluid and volatile world, financial markets have evolved a range of strategies for
dealing with that fluidity. One of these has to do with the incredible fluidity and liquidity of
financial markets. Financial derivatives are not just about insurance and commensuration. They
are about liquidity, as the chart below shows. The importance in liquidity of derivatives.
figure 2.3 1

1 (Franzen, 2010) showing the importance in liquidity of derivtives

CHAPTER

3.0THEORETICAL AND

CONCEPTUAL FRAME WORK

This chapter will focus

concepts

surrounding

performance
relation to

and

on the underling theories and

the

Pensions

portfolio

pension fund

investment

Investment

criteria. The theories that will be reviewed in

portfolio investment and their performance with regard to the

regulations that exist at present and to possible scenarios if the regulations had to change..
3.1 THEORETICAL FRAMEWORK
3.1.1

MODERN PORTFOLIO THEORY

There are several authors Markowitz (1991), Elton and Gruber (1997) that discuss the main
issues that an investor faces when investing, for example how to allocate resources among the
variety of different securities. These issues have led to the discussion of portfolio theories,
especially the Modern Portfolio Theory (MPT), which is developed by Nobel Prize awarded
economist Harry Markowitz (Markowitz, 1991). This theory is the philosophical opposite of
traditional asset picking. The Modern Portfolio theory is the philosophical opposite of traditional
asset picking. It is the creation of economists, who try to understand the market as a whole,
rather than looking for what that makes each investment opportunity unique. The asset allocation
problem is one of the fundamental concerns of financial theory according to (Sharpe, 2000)
Asset allocation and risk are vital components in the MPT. Investments are described
statistically, in terms of their expected long-term return rate and their expected short-term
volatility. The volatility is equated with "risk", measuring how much worse than average an
investment's bad years are likely to be. The goal is to identify the acceptable level of risk

12

tolerance, and then find a portfolio with the maximum expected return for that level of risk
(Elton & Gruber, 1997).
MPT holds that diversification of assets may increase returns at given risk levels or at least
provide the same results at a reduced risk level. Applications of the theory use volatility of
returns implied by market price fluctuations as the composite of risks. It is most certainly the
dominant theory in portfolio strategies. It is a theory on how risk-averse investors can construct
portfolios in order to optimize market risk for expected returns, emphasizing that risk is an
inherent part of higher reward.

3.1.2
3.1.2.1

STRATEGIC ALLOCATION AND TACTICAL ALLOCATION OF ASSETS

STRATEGIC ALLOCATION OF ASSETS

A strategic asset allocation specifies the proportion of various asset classes in a portfolio
designed to provide an investor with an appropriate risk to return profile over a longer period of
time. A strategic asset allocation framework will specify a range of allocations appropriate for
various levels of risk tolerance (UBS on the new financial world, 2009). For example, those with
lower risk tolerance will tend to have lower exposure to more volatile, higher-risk assets such as
stocks and commodities, and higher allocations to less volatile, lower-risk assets, including
bonds and cash. Lifecycle changes may impact an individuals risk tolerance, which may at times
suggest an adjustment to an individuals strategic asset allocation. However, the long-term nature
of strategic asset allocation implies that changes should take place infrequently. Strategic asset
allocation is driven by long-term return and risk expectations for various asset classes. One of the
key reasons why strategic asset allocations dont often change is that the long-term risk and
return expectations that are the basis for those allocations dont often change either (UBS on the
new financial world, 2009). Although markets tend to be volatile and returns often diverge
sharply from year to year, viewed over the longer term, the returns tend to become more stable,
with gains in some years offsetting losses in other years. This suggests that the return and risk
assumptions that form the framework of the strategic asset allocation process should be
periodically evaluated and modified when the investment landscape has a material change, e.g., a
shift in longer-term growth rates, a change in inflation expectations or a shift in risk premiums.

13

3.1.2.2

TACTICAL ALLOCATION OF ASSETS

The right place to take into account near-term market activity is within a tactical asset allocation
framework, which is designed to identify opportunities to periodically tilt the strategic asset
allocations (UBS on the new financial world, 2009). Whereas the key drivers of strategic asset
allocation are long-term risk and return expectations for various asset classes, tactical asset
allocation focuses on such drivers as valuation, momentum, sentiment, the business cycle, and
fiscal and monetary factors, among others, to identify asset classes that are expected to
outperform in the near term or underperform their longer-term expectations. Temporary
overweighting or underweighting of components of the strategic asset allocation can help
enhance performance over time. This includes not only overweighting those asset classes or
sectors that may provide better near-term return prospects, but also underweighting those that
appear overvalued or are vulnerable to near-term event risk (UBS on the new financial world,
2009). These tactical allocation decisions vary with much greater frequency than changes in the
strategic asset allocation weightings. However, even tactical rebalancing must be done in a
disciplined manner, with consideration of the benefits, risks and costs.
A solid investment strategy highlights the role of both strategic and tactical asset allocation by
specifying a strategic asset allocation as well as identifying a range for each component that
specifies the boundaries of tactical overweighting or underweighting. The table below provides a
simple example to help illustrate the distinguishing features of strategic and tactical asset
allocation.

14

2 (UBS on the new financial world, 2009) on the table above the differences
between strategic and tactical asset alocation

15

3.2CONCEPTUAL FRAME WORK

The major variables for this research include: Investment performance (in portfolio returns on all
asset classes), growth of the pension scheme industry (portfolio asset size), and Investment
regulations in the pensions industry. In relation to this research investment performance is
regarded as a major factor that needs to be paid attention to as it shows and determines the
growth of the entire pensions industry and has the ability to influence changes in the regulations
or investment regulation of all countries in the world. As indicated in the theoretical frame work
above, the riskiness of the portfolios asset classes is a major determinant of the portfolios
expected return and the actual return. Therefore, for pension schemes to enhance their portfolio
returns it is if the essence to take note of the following operationalized concepts. Firstly for
Investment performance in relation to the use of derivatives
3.2.1

EXPECTED RETURN

Depending on the weight of an individual asset this asset will have a larger or smaller impact on
the return of the portfolio. Alternative assets differ in their terms of expected return, but the
expected return is only a part of the assets future performance. What may influence the expected
return is how volatile the asset is. There are different approaches to estimate the expected return
of an asset. One approach is to estimate the probability of different return outcomes, opposed to
making estimates based on historical data. To compose a portfolio, it is crucial to make estimates
of the returns of assets included in the portfolio. If an accurate measurement of the return of each
asset can be made, the return of the whole portfolio can be predicted with the same accuracy.
Unfortunately it is not possible to state the rate of return of an asset with certainty. The objective
is to make a prediction about each asset in order to produce predictions about the whole
portfolio. Without estimations of the individual assets, it is impossible to make a prediction of
the portfolio (Sharpe, 2000). The following equation shows the expected return of the portfolio,
while the equation 2-2 shows the actual return of the portfolio.

Where:

16

E (rp) =

expected return of the portfolio

Xi =

proportion of security i

Ei =

expected return of asset

3.2.2 DIVERSIFICATION
Putting much emphasis on the modern portfolio theory it can be clearly put that adding
derivatives to the pension funds asset menu increases the portfolios returns on a tactical asset
allocation point of view. Diversifying in several securities decreases the exposure to firmspecific factors, this leads to portfolio increases returns as the volatility continues to decrease.
But even with a large number of assets, it is not possible to avoid all risk. All portfolios are
affected by the macroeconomic factors that influence the market (Bodie et Al., 2004). When
allocating the assets it is important to understand how the uncertainties of the different assets
interact. The key determinant of the risk from the portfolio is the extent to which the returns on
the different asset classes tend to vary either together or in the opposite direction. Risk depends
on the correlation between returns on the different securities in the portfolio. The performance of
assets within a given portfolio tend to follow the market, if there is a recession or a growth the
asset will move in a certain direction. If one asset goes up in a growth period, the chance that a
similar asset will go up is almost certain. This is what correlation states and this is also why there
have to be a variety of assets within the portfolio in order to provide a portfolio that can handle
recessions and growth (Sharpe, 2000). The problem is to measure the tendency of the returns
from the different assets, if they move together or in the opposite direction. The measurements to
solve these problems are the covariance and the correlation coefficient. The covariance2 is
calculated similar to the variance, but instead of measuring the difference of an asset from its
expected value, it is measured to the extent of the returns from the different assets reinforce or
offset each other.
3.3

STUDY VARIABLES

The study variables will be as follows:

17

Investment (portfolio investment) will represent the first dependent variable. While growth in
terms of asset size of the pension funds will be the second dependent variable.
The independent variable in this study will be the Regulatory Instruments
3.4

RESEARCH HYPOTHESIS

The research will test the following hypotheses, (H 0) for the null hypotheses and (H 1 and H2) as
the alternative hypotheses.
In the first test
H0:

Investment regulation does not affect the investment decisions of Pension Funds

H1:

Investment regulation affect the investment decisions of Pension Funds.

And in the second test

H0:

Investment regulation does not affect Pension fund growth

H2:

Investment regulations affect Pension fund growth

18

CHAPTER 4
4.0

METHODOLOGY

4.1

INTRODUCTION

This chapter presents the methodology that will be used for the study that includes; the research
deigns, Identification of the population, sample selection methods and size, data collection
instruments and lastly data collection procedure. The methodology constitutes as the frame for
the thesis
4.2

RESEARCH DESIGN

The research will utilize both qualitative and quantitative tools to analyze the data that will be
will be collected from questionnaires, interviews and secondary data that will be collected from
the area of study on this research. The quantitative method will be employed since the data will
be gathered from historical data of the pensions industry. I must emphasize that this research is
based on existing theories, and the deductive approach aims to use these theories in order to
accomplish a valid and accurate analysis.

4.3

THE STUDY POPULATION

The study population is the entire pensions industry and there for it will be imperative to
collect the aggregate figures for the population from relevant authorities tasked to
regulate the pensions industry in Zambia. There are a total number of xxx pension
schemes in Zambia and these figures include both private and government pension
schemes.

4.4

SAMPLE SIZE

The researcher will target pension fund administrator, investment managers from a
sizable number of pension schemes and the regulators.

4.5

SAMPLING TECHNIQUE

In this research, the researcher will use purposive sampling. Purposive sampling is also known as
judgmental, selective or subjective sampling is a type of non-probability sampling technique.
The main goal of purposive sampling is to focus on particular characteristics of a population that
are of interest, which will best enable the researcher to answer the set research questions. This

19

research study, in relation with the questionnaire used, pension administrators from different
pension funds, Investment managers and regulators were best fit to respond to the questionnaires
at and interviews. It is from this chosen sample that the desired needed data and information will
be obtained.

4.6

RESEARCH INSTRUMENTS

The instruments used will be questionnaires and interviews. The researcher will use
both face to face interviews for correspondent. The combination of two instruments will
enable the researcher to access enough information suitable for the research.

4.7

DATA COLLECTION

4.7.1 PRIMARY DATA

This type of data is also significant in that it provides the study up to date information
that will be useful in drawing answers to the problem at hand. Therefore, primary data
will be collected from fund managers and the point of view of the regulator and this will
be accomplished through questionnaires and interviews.
4.7.2 SECONDARY DATA
Secondary data will be collected from the PIA from the period 2005 to 2014. This data
will be used to ascertain whether regulation changes have affected the performance of
pension funds during this time period.

4.9

DATA ANALYSIS

The data collected from all possible sources will be analyzed by the use of quantitative
method using tables, statistical charts and graphs, and data analysis programs. This will
be done in order to provide a comprehensive understanding of the research data
collection and findings.

20

GANTT CHART

ITEM

NOTE

UNITE

QUANTITY (estimated)

AMOUNT

PRICE (K)
Printing & Photocopying
Transportation
Airtime
Internet

1
2
3
4

Contingency (20%)

0.5

1000

K 500
K 600
K 350
K 300
K 350

Total

K 2100

PROPOSED BUDGET

21

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