THE RELATIONSHIP BETWEEN INVESTMENT STRATEGIES OF PENSION FUNDS AND GROWTH.

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

Over the years, the South Africa pension funds have experienced different phases of growth and development through the implementation of various strategies.

According to (OECD 2008, Yermo, 2002) stated that a pension fund is a kind of a legally separated pool of assets that are brought with the contributions to a pension funds for the exclusive purpose of financing pension funds retirement benefits.

The activities of the pension funds strategies has increased overtime in South Africa; effective pension funds investment strategies are always needed to ensure the protection of pension assets against all externalities in the investment universe; it is evident that investment is the productive employment of capital.

The qualification of productive therefore means the production of return on the various capitals to the investor and not the nature of the particular use of capital. The above statement means that an investment should of course produce income and therefore they should be considered a process with the aim of producing income or return; thus all the action displayed by investors will simply be directed towards producing income.

According to (Prime 1967) simply defines investment strategy as the assortment of investments made by pension funds.

The investment strategy determines the investment mix of the sum of funds of a pension fund which aims at having a careful balance between investment risk and returns (stanko, 2002; Eichholtz and Margaritova, 2009).

According to (Eaton and Nofsinger, 2001) stated that the positive relationship between risk and return causes a dilemma since to be able to get more returns, pension funds have to take more risk; it is therefore suggested that pension funds should adopt an appropriate investment strategies that will provide high returns on investments with moderate or little risk because the performance of the strategies has significant effect on the GDP of South Africa.

In South Africa today, the investment management industry is linked directly to the financial services industry and the pension funds is completely dependent on the economy.

1.2 STATEMENT OF PROBLEM

What really instigated the study was due to the economic, financial and social uncertainties in the current pension systems and financial crises in South Africa which has increased the concern about the retirement prospects of many citizens of South Africa.

Some of the problems faced by most workers and citizens of South Africa are fallen assets, job loss, unemployment, falling salaries, increasing cost of living, longevity, HIV endemic, high indebtedness although the effect is noticed more on the worker above 30 years of age.

It is evident that savings in the form of pension funds and assets management traditionally rests on three main pillars which are stated as follows:

1. Investment listed shares
2. Investment in property and,
3. Interest earning

A large number of the pensioners in the world and those saving from retirement may never see a recovery of the value lost in their assets as at 2007/ 2008 crises. The share price in South Africa in the year 2010 were still about 10% lower than their peak   according to (Allen Gray 2010)

1.3 AIMS AND OBJECTIVES OF STUDY

The main aim of the research work is to examine the relationship between investment strategies of pension funds and growth in South Africa. Other specific objectives of the research works are stated below as follows:

1. To examine the effect of strategies of pension funds on the economy
2. To examine the effect of pension funds strategies on the retirement prospects of many citizens of South Africa
3. To examine the relationship between the strategies of pension funds and the rate of unemployment in South Africa
4. To investigate on the factors affecting the implementation of pension funds strategies in South Africa
5. To proffer solution to the above stated problems

1.4 RESEARCH QUESTIONS

The study came up with following research questions in order to ascertain the above stated objectives. The research questions are stated as follows:

1. What is the effect of strategies of pension funds on the economy?
2. What is the effect of pension funds strategies on the retirement prospects of many citizens of South Africa?
3. Is there any relationship between the strategies of pension funds and the rate of unemployment in South Africa?
4. What are the factors affecting the implementation of pension funds strategies in South Africa?

1.5 STATEMENT OF RESEARCH HYPOTHESIS

Hypothesis 1

H0: there is no significant relationship between investment strategies of pension funds and growth in South Africa

H1: there is significant relationship between investment strategies of pension funds and growth in South Africa

Hypothesis 2

H0: the strategies of pension funds has no significant effect on the retirement prospects of many citizens of South Africa

H1: the strategies of pension funds has significant effect on the retirement prospects of many citizens of South Africa

1.6 SIGNIFICANCE OF STUDY

The study will be of immense benefit to the federal government of South Africa, the citizens especially those above the ages of 30. The study will also benefit the pension office and other research students that wishes to carryout similar research on the above stated topic since the study will discuss in detail the relationship between investment strategies of pension funds and growth in South Africa

1.7 SCOPE OF STUDY

The study the relationship between investment strategies of pension funds and growth in South Africa will cover from the time of crises (2007-2010) till date.

REFERENCES

Amana, R.2006. Investment of Pension Fund Assets in Kenya, www.rba.go.ke. Ambachtsheer, K. 2001. A Framework for Public Pension Fund Management. Public Pension Fund Management Conference. World Bank. Baker, Logue, D. & Rader, J. And Clap, N. 2005. Managing Pension and Retirement Plans: A Guide for Employer, Administrators and other Fiduciaries. Oxford University Press. Asher, M. & Nandy, A., 2006. Reforming Provident and Pension Fund Regulation in India. Journal of Financial Regulation and Compliance.

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