When safe assets fail: Pension fund allocation under Ghana’s sovereign default risk

Purpose: This study aims to develop a dynamic, risk-sensitive asset allocation framework for pension funds in Ghana. It is specifically motivated by the 2022–2023 domestic debt exchange program, which exposed critical vulnerabilities in pension portfolios heavily concentrated in government securities. Design/methodology/approach: The research employs a continuous-time stochastic model that incorporates equities, risk-free treasury bills, and defaultable sovereign bonds. Government bond default probabilities are modeled using the Cox–Ingersoll–Ross process, while pension liabilities evolve stochastically. The framework is evaluated using a 10-year Monte Carlo simulation with 10,000 iterations based on empirical Ghanaian data from 2013 to 2023. Findings: Results indicate that sovereign default intensities are mean-reverting but highly cyclical, spiking during fiscal stress. Portfolios concentrated in domestic bonds suffer significant wealth erosion under default conditions, while aggressive portfolios are highly sensitive to credit shocks. In contrast, balanced portfolios consistently deliver superior risk-adjusted outcomes. Research limitations/implications: The study’s findings are based on the specific macroeconomic and institutional context of Ghana. Future research could test the model in other emerging markets with similar fiscal volatility. Practical implications: The findings advocate for a paradigm shift among Ghanaian pension funds toward liability-driven investment (LDI) strategies and greater diversification into equities, inflation-linked, and alternative assets. The study strongly recommends regulatory reform by the National Pensions Regulatory Authority (NPRA) to enable this necessary diversification and enhance long-term portfolio resilience. Social implications: The research highlights the direct link between pension fund solvency and societal well-being. Effective implementation of the proposed framework is critical for protecting the retirement savings of millions of Ghanaians, thereby reducing old-age poverty, maintaining social stability, and upholding public trust in the national pension system. Originality/value: This paper provides a novel, integrated framework that explicitly models stochastic sovereign default risk within pension fund asset allocation — a critical factor often overlooked in emerging market contexts. It offers evidence-based strategic and regulatory prescriptions to preserve solvency and ensure sustainable retirement outcomes in high-volatility, fiscally constrained environments.