The Government Service Insurance System in investing $1 billion abroad seeks to diversify the sources of its income and extend the actuarial life of the fund.

The Philippine equities market, GSIS president Winston Garcia said, is too small.

GSIS expects to earn the minimum of eight percent yield or $80 million annually from its $1-billion global investments, or $240 million between now and 2011.

Cerge Andal, vice president of GSIS, said the fund’s investment strategy is to lengthen actuarial solvency that it will have the funds after 47 years, its current actuarial life.

The foreign investments will help the fund attain the hurdle rate of 11 percent, meaning it must earn 11 centavos for every peso of member’s money remitted to the GSIS.

"If we’re not able to meet that, the hurdle rate will be lower and so the actuarial life of the fund will be lower also," Andal said.

Garcia said the domestic capital market is too small and that the market allows very little room for diversification.

"The market is so small, there is no liquidity, you just can’t get out if you want," he said.

So, if the stock market plunges tomorrow, the pension fund can’t just pull out its funds, but instead take in the losses until the prices recover and appetite for the shares return.

Last year, the fund fortunately was able to reverse 2006 losses in stock investments. It earned P9 billion from the sale alone of San Miguel Corp. shares last year.

The limited capital market, he said makes it difficult for the fund to turn around its money, he said.

Also, the instruments available are just too few, with investors alternating just between the fixed-income and equity markets, so there’s little room to spread the risks.

The $1-billion fund, Garcia said, will be invested "across the global markets" in a variety of instruments including global bonds, Asian stocks, global equities fund, global property securities and alternative investments.

"It will be across all markets so we’ll diversification. The exposure should be balanced – not all markets go down or up – so you spread the risks," Garcia said.

But the pension fund’s 1.3 million members, workers in the public sector, should not expect immediate benefit in terms of increases in pension or dividends.

At most, what the fund can guarantee is that it can meet its obligations to its members for the next 47 years or until 2055.

Winston Garcia, president and general manager of GSIS, said the pension fund is spending P34 billion this year for members’ benefits, just about 10 percent more than what it spent last year.

The fund has assets of P380 billion as of November 2007, Andal said,

At present the bulk or 30 percent of the assets is invested in loans to members, 25 percent to bonds, and less than 10 percent in stocks, Andal said.

The rest is invested in real estate, deposited in banks or lent out to the government.

Including the gains from these investments, the eight percent net that Credit Agricole Asset Management and ING Investment Management are tasked to turn in for the pension fund annually in the next three years should enable GSIS to meet the 11-percent hurdle rate, Andal said.

Andal said investing abroad is the best strategy for the $1-billion or P42-billion fund. If it’s left in the country, it is likely end up in banks and earn just below five percent annually, which is not enough to push the hurdle rate to the desired limit, in effect lowering the actuarial life of the pension fund.

Denys de Campigneulles, deputy chief executive officer for Asia of Credit Agricole, said the French bank intends to invest its allocation, which is yet to be determined, in Asia, Europe and the United States in this order.

Based on his assumptions, Andal said the $1 billion should earn more than eight percent. However, the allowed volatility of seven percent for the fund will be constant.

Andal said the pension fund has about P50 billion in cash that it can pull out for its global investment plan.

"This investment we’re making will make sure that when all our members retire, even if they’re only 20 years old, they’ll get the benefits due them," he said.