How Social Security is investing in Jordan?? ….Jordan Business Magazine interviews Mr.Akel

Which National Interest?
The SSC Investment Unit, Pension Funds, and Economic Development

Following the passage of bylaw No. 111 of the year 2000, the Investment Unit at the Social Security Corporation (SSC) began functioning in early 2003. Charged with the investment of pension funds, the Unit has seen negative growth in the value of its total holdings between 2005 and 2006, while also attracting fresh criticism for a profit-oriented business model. The Investment Unit has defended its strategy, professionalism, and operational autonomy, recently opening its doors to Jordan Business to discuss objectives, results, and dueling “national interests.” Marwan A. Kardoosh and Anne Mariel Peters ask: are the Kingdom’s pension funds in goods hands?

“The Social Security Corporation Sells Its National Assets!” screamed a headline from the pages of the May 26, 2007 edition of Al-Arab Al-Yawm. Though only a page-long screed, the article’s criticism of recent transactions executed by the SSC’s Investment Unit, namely the sale of an equity stake in a Jordanian bank to a foreign one, framed a deep-seated debate regarding the role of pension funds in the Jordanian economy. There is no doubt that pension funds are one of Jordan’s most precious national assets. However, what does good stewardship over these assets entail?

One position is that investment of pension funds should first and foremost ensure that payments can be made to future pensioners, focusing the investment unit’s activities firmly on profit maximization in the long run. The other position is that pension funds should be invested in such a way that benefits the national economy more broadly, in both the short and long term. That is, they should be diverted to “productive investments” that result in the creation of jobs, goods, and services; in other words, the SSC Investment Unit should not allocate its investments purely on the basis of profit maximization “like any businessman would do.” Neither side is wrong: both national economic development and financial security for the elderly and infirm can be considered a “national interest,” although impassioned calls for “productive investment” and job creation may also run the potential risk of sinking pension funds into low-yield or failing projects, thus threatening the interests of pensioners.

The Mandate

Mufleh Akel, who was appointed Chairman of the SSC Investment Unit in November 2005 following 24 years as executive regional manager at the Arab Bank, sits in a sunny, well-appointed boardroom at the new SSC headquarters on Mecca Street in Amman. He is flanked by a dozen young, sharp-looking professionals, of whom he claims, “They all speak one language: that we are investing for the future of generations.” Mr. Akel explains, “I want to create jobs, but I also want to increase returns and minimize risk. My responsibility is to grow this money and protect it, as well as to generate income sufficient to pay people who are retiring. Our mission is to increase investment and double it six years from now.” He further expounds, “We don’t want to be good, we want to be excellent. We have to distinguish ourselves with results. We have to have clarity of vision and an excellent organizational structure. You will not find an institution [in Jordan] that can have a weekly meeting with this many MBAs…and we are investing like hell in training [staff].”
The Social Security Law No. 30 of the year 1978 established the Social Security Corporation to address the needs of workers who were not enrolled in any other pension plan at the time, such as civil or military retirement plans. This law came into effect in the early 1980s, when the SSC was formally established, and was in force until the enactment of the Social Security Law No. 19 of the year 2001. Although public, the SSC is a financially and administratively independent organization governed by a 15-member board. Until 2003, decisions regarding the investment of pension funds were made by this board, which includes representatives from labor unions, the Central Bank, the chambers of Commerce and Industry, and the ministries of Labor, Health, Finance, as well as Industry and Trade.

In 2003, the SSC Investment Unit was established for the purpose of investing SSC surpluses. The organization is governed by a 2001 bylaw originating from the Office of the Prime Minister and is overseen by a nine-member commission. The commission has 3 permanent positions for representation of the SSC, trade unions, and the Chamber of Industry. The other six members, including Chairman Akel, come mostly from the private sector; they are nominated by the Minister of Labor and approved by the Council of Ministers. The Prime Minister reserves the right to dissolve the commission.

The bylaw sets aside a basic framework for the SSC Investment Unit. Under Article 4, the Unit must apply international standards of securities management to maintain the real value of the SSC’s assets; maintain the real value of investments; minimize risks through diversification; and provide the necessary liquidity to meet SSC’s dues and obligations. Article 5 requires the Unit to manage the financial portfolio through public and private trading of local company shares; establish cooperative projects with the public and private sectors; buy and sell stocks, bonds, and treasury bills; participate in the financing of national projects that are economically feasible through providing long-term loans; as well as to buy, sell, and develop real estate projects, whether through ownership, partnership, investment, or trading.

Despite this relatively broad mandate, the bylaw prohibits the SSC’s Investment Unit from investing abroad without approval from the Council of Ministers, de facto placing the Unit’s investments at risk for overexposure in the domestic market. Mr. Akel explains, “The Unit submitted a request [to the Council of Ministers] and there was an opinion that it is not the time to invest outside. We have a responsibility to the country to guard savings, but we also have a responsibility to use investment for economic development and job creation. Once we do this, we will start looking outside the country. Diversification is an issue, I agree.” He adds, “We insist on adhering to best practices in international pension funds. We do not want to re-invent the wheel.”
Even if investment in foreign markets is eventually approved by the Council of Ministers, the Unit’s bylaw will still prohibit the Unit from investing in real estate projects abroad for fear of access to liquid capital.

The SSC’s Investment Unit has set benchmarks to evaluate the performance of its holdings, and reviews its strategic portfolio every 3 months to decide on asset allocation and re-allocation. The Unit is also charged with conducting economic feasibility studies, and is permitted to outsource this work as needed.

The Unit performs internal feasibility studies in its Project Finance Department, but it contracts this work out if it does not have the required skills in-house, such as that required to evaluate an electricity generating plant. The Unit has also contracted outside advisors to review its strategies and procedures (Mercer) and human resources plan (Hewitt).

While the SSC’s Investment Unit is in charge of formulating, implementing, and monitoring investment plans, as well as of contracting investment companies and producing its own organizational plan, it is not entirely autonomous from the SSC on paper. The bylaw requires the SSC Board to endorse all investment policies formulated by the Unit, and the Unit must also submit special reports on its activities to the SSC Board every 3 months. Mr. Akel explains, “We claim that we are independent, but our independence is still challenged by the Social Security management. The Social Security board believes that they have the control and the direction. We admit they have to decide about the strategy; we present our strategy, policy, and performance and we believe it has to stop there. Anything beyond that has to be for the Unit itself and its Board of Directors.” He adds, “We are working for them and we are obliged to report to them. They have the right to evaluate our performance. If they aren’t happy, I don’t know what they would do.” As for the Ministry of Labor, which appoints two-thirds of the Unit’s commission, Akel stresses that it is “committed to the autonomy of the Social Security Investment Unit” and does not interfere in its investment decisions.

A Tough Year

Between January 1 and December 31, 2006, the Amman bourse contracted by 34%, hitting a variety of stakeholders hard. Many of these stakeholders were pensioners whose surplus funds were invested in the market by the SSC’s Investment Unit. In 2006, the Unit’s total assets declined by 16.1%, from JD4.4 billion to JD3.7 billion, as net income plunged by 41.9%.

Assets and Net Income of the Social Security Corporation, 2004-2006 (JD million)

Declaration 2004 2005 2006 Change since 2005
Value %
Total Assets 2465.4 4441.0 3728.1 -712.9 -16.1%
Net Income 83.4 259.5 150.7 -108.8 -41.9%

“The deviation mainly came from the drop in the stock market,” Mr. Akel explains, qualifying, “the drop in the stock market last year was 34%, but the drop in our assets was lower than the 34%. We believe we were able to beat the market by 2-3%. Our performance was better than the market. We managed to minimize the loss.”

In 2006, the value of the Unit’s investments in stocks dropped by JD939 million, constituting 21% of the SSC Investment Unit’s total assets as of January 1, 2006. The greatest losses came from a decline in the value of stocks available for sale (by JD662 million), although money market instruments also lost JD94.1 million in value. The best-performing holdings came from real estate, whose value rose by JD56 million, a 53.7% increase.

Akel says, “We have started to be more active in real estate. Real estate has a very good return, and investment in real estate gives a hedge against inflation. When we put our money into real estate, we are talking about a 20-25% return.”

Changes in SSC Asset Value, FY2006 (JD million)

Item Quantity (JD million)
Total Assets as of Jan.1, 2006 4441.0
Transfers from the SSC + 100.4
Net Inflows +150.7
Change in Overall Value of Investment in Stocks - 939
Income Transferred from Cumulative Change in Fair Value -7.3
Change in Liabilities and the Social Security Current Account -17.7
Total Assets as of Dec. 31, 2006 3728.1

Structure of SSC Assets, 2005-2006 (JD million)

Type of Asset Value as of Dec. 31, 2005 Value as of Dec. 31, 2006 Change
Value %
Money Market Instruments 332.4 238.3 -94.1 -28.3%
Bond Portfolio 771.4 762.2 -9.2 -1.2%
Loan Portfolio 92.5 85.3 -7.2 -7.7%
Stocks/ Trading 85.5 66.6 -18.9 -22.1%
Stocks/ Available for Sale 2650.5 1988.2 -662.3 -25%
Stocks/ Associate 364.3 386.5 22.2 6.1%
Real Estate 105.6 162.3 56.7 53.7%
Assets from Related-Parties 20.9 20.0 -0.9 -4%
Permanent Assets and Other 17.9 18.7 -0.8 4.4%
Total Assets 4441 3728.1 -712.9 -16.1%

Let’s Talk Strategy

The year 2006 was a poignant one. Not only did the SSC Investment Unit’s portfolio perform poorly, these losses also drew an onslaught of criticism from the public, whose complaints extended well beyond the effects of a bad year for the Amman bourse. In addition to a renewed concern for over-exposure in the domestic market and asset diversification, the SSC Investment Unit has also had to address demands for a more central role in the economic development of the country, which is burdened by rural under-development and stubbornly high levels of unemployment.
The Investment Unit “is now trying to be more active and to play a role that will benefit the economy and create jobs,” says Mr. Akel. “Social Security funds are not just to be deposited in banks. They have to contribute to creating new projects and creating new jobs. Investing in the secondary market is not as productive as investing in the first market. If you buy the shares of another company, you are creating liquidity in the market, but not contributing directly to economic growth. This is why we are shifting; this role is too conservative. We go into projects where the project has high certainty and high chances of success. You can’t avoid risk 100%, but you can hedge against it.”

One such project is the Mafraq Special Economic Zone (MSEZ), a $750 million development zone situated in the Mafraq Governorate, which suffers from a poverty rate of 37.2%. The MSEZ is intended to serve as a transport, logistical and industrial hub for the region, and is expected to create 13,000 new jobs by 2015. The project is paired with the JD100 million Mafraq Development Company, a joint venture in which the SSC Investment Unit has 80% ownership.

Of the MSEZ and other joint ventures, such as those in tourism and real estate lending that were concluded with Jordan Dubai Capital during the World Economic Forum last month, Akel insists that the term “public-private partnership” is misplaced. He claims, “We look at it as a private-private partnership because we are managing our business as a private entity. We observe the government regulations because Social Security funds are governed by regulations, but the decision-making process is much more like a business than a government bureaucracy.”

While the SSC Investment Unit has certainly placed national economic development and “productive investment” on its agenda, the Unit is also obligated to produce returns that will support future pensioners. With regards to projects such as the MSEZ, Akel insists that the goal of the Unit is not welfare, but simply to make a good investment. The MSEZ, for example, has the potential to form a synergistic cluster with high-technology companies in Irbid.

He also precludes any speculation that SSC Investment Unit’s strategy is influenced by demands from the government: “I have never been under pressure from the government to invest in any project. Coming from commercial banking, I want to see my investment grow and produce a return, and I want it liquidated quickly if I need it,” Akel claims.

Akel has no qualms about withdrawing SSC funds from unprofitable ventures, arguing, “If a company is not adding value for us, why maintain it? In what business sense? If I sell a share, this does not mean that I am against the national interest. Social Security funds are the national interest. We are looking out for the people who are going to depend on social security and we have to protect them.”

“Don’t forget that the aging population is adding a heavy burden on the funds,” Akel notes, recalling that by 2024 SSC profits and liabilities are expected to reach equilibrium. “After that, we have to eat from our fat, but it is not fate. We can do a lot not to face it, and this is part of our responsibility here at the Unit to invest assets and generate income better than the average in [previous years]. Although 7% has been mentioned, you have to consider inflation, and so we are therefore targeting a 10% nominal rate of return.”

Akel stresses the need to invest outside of the Jordanian market to reach this goal. He says, “I think it is maintainable if we can re-allocate our assets in a different way, meaning investing some of the assets outside of the country. We are hoping that the government will approve one day to allow us to invest some of the funds outside of the country. As for those who are claiming that we are a country that imports capital and we shouldn’t export it, I tell them we are investing excess money and it will add to risk reduction and improve return. When there is a need for it, we can bring it back in to the country because we are going to be investing in cash and semi-cash.”

On a similar note, the SSC’s Investment Unit has also invested considerably in the Arab Bank (of which it owns 15%) as an indirect means of diversifying assets abroad. “When we invest in the Arab Bank, the share of Arab Bank is not supported only by Jordanian income, it is also supported by the bank’s international network, which is all over the world. 80% of Arab Bank assets are outside Jordan. This is actually an indirect diversification; we are investing in an international share,” he explains. Akel also expresses confidence in the Jordanian banking sector, recalling, “In the 1960s, the total assets of the banks were about JD30 million. Now we have JD25 billion and the sector is highly profitable.”

Is More Investment Always Good?

The SSC is a giant in the financial market; by the end of 2006, assets managed by the SSC’s Investment Unit topped JD3.7 billion, equivalent to 36.6% of GDP for that same year. Although there is a correlation between economic growth and the development of financial markets, is there any concern that the sheer size of SSC funds relative to the domestic economy could exert a distorting effect on the market? Can the SSC be a market leader?

Akel and his team admit that this is a concern, particularly as regards domestic capacity: “We want to balance the situation. Our opinion is that we have to have part of this money invested outside. One reason is that there are limits to capacity. However, these are also the assets of the country and its citizens, and we must have a role in economic development. At the same time, we are not in the charity business; we do not invest if the return is going to be low. I have a very tough board.”

The SSC’s Investment Unit also has internal regulations that govern the distribution of SSC assets in the domestic economy. The Unit’s “Strategy and Policies of Investment” notes that floating SSC’s cash surplus may cause a distortion in Jordan’s interest rate market and would carry with it partiality towards SSC deposits. It states, “such a discrimination, if not rectified through additional tools for investment in Jordan and appropriate external tools, would inhibit the capability of the commission to achieve the aspired investment return objectives.” The SSC’s Investment Unit strategy also includes ceilings on investment in individual issues of bonds, ceilings for investment in economic sectors in the Amman Stock Exchange, as well as in private shareholding companies. The regulations also forbid “unacceptable speculation,” such as that in the derivatives market, foreign currency speculation, and futures, as well as negative selling. On a risk scale of 0 to 10 (10 being the highest), the regulations specify “6” as acceptable for the SSC portfolio.

It is also possible that SSC involvement in a project increases the confidence of private investors. However, Akel insists that this confidence is based on the SSC’s reputation as a good business partner, adding, “We don’t want to be perceived as a reservoir of cash. [In the case of Mafraq] we are selling a business model based on creating a competitive special economic zone.”

Is a “business model” indeed compatible with the task of investing Jordanian pensions? The SSC’s Investment Unit has come a long way in terms of hiring qualified staff, designing an organizational strategy, and attempting to elevate its professional autonomy from other parties in the government and even the SSC itself. These qualities should enable the Unit to make sound investment decisions and maximize profit, thus securing the long-term interests of pensioners. However, two barriers may exist. The first consists of broader restrictions on the allocation of SSC’s investments, namely the moratorium on investment abroad. The Unit has vehemently argued that such investment is necessary to minimize risk and avoid overexposure to the (small) Jordanian market; in this sense, the Unit can hardly be blamed for the poor performance of its portfolio in 2006, given that it was not allowed to diversify risk through foreign investment. The second consists of popular demands for “productive investment.” Although the Unit can play an important role in economic development due to its high concentration of financial resources and sound management, caution must be taken that money is not sunken into projects simply because they reduce unemployment in the short term or are guarded by special interests. These two potential obstacles are real indeed. Although the SSC’s Investment Unit is well-equipped to deal with them, a great deal also rides on the decisions of the Council of Ministers, the Unit’s relationship with the SSC, and the passionate demands of the public.

Pull Text:

There is no doubt that pension funds are one of Jordan’s most precious national assets. However, what does good stewardship over these assets entail?

“I want to create jobs, but I also want to increase returns and minimize risk. My responsibility is to grow this money and protect it, as well as to generate income sufficient to pay people who are retiring.

In 2006, the Unit’s total assets declined by 16.1%, from JD4.4 billion to JD3.7 billion, as net income plunged by 41.9%.

The year 2006 was a poignant one. Not only did the SSC Investment Unit’s portfolio perform poorly, these losses also drew an onslaught of criticism from the public, whose complaints extended well beyond the effects of a bad year for the Amman bourse.

“If I sell a share, this does not mean that I am against the national interest. Social Security funds are the national interest. We are looking out for the people who are going to depend on social security and we have to protect them.”