Retirement funds will have to develop and conform to strict investment strategies if proposals by a committee set up by the Financial Services Board are adopted.
The proposals for a change to the regulations under the Pension Funds Act oblige trustees of a retirement fund to seek professional advice and to work out an investment strategy specific to their fund's particular needs.
The investment strategy would have to take account of:
* The objectives of stakeholders;
* The nature of the fund's liabilities;
* The funding methods used by the fund; and
* The risks to which the fund's assets and liabilities would be exposed.
The committee says the strategy should set out what percentage of the fund's money is to be invested in different assets such as shares, bonds and property, and how far the investment managers selected by the trustees can deviate from this mandate. The strategy should also include criteria for selecting fund managers. It would have to be approved by the fund's actuary.
The committee's proposal is that this process of developing and reviewing an investment strategy specific to each fund should replace the current prudential guidelines, which merely set out limits for the amount of money all funds can place in different assets.
But the committee does propose some limits: no single investment should account for more than 2,5 percent of the fund's assets, except where the investment is shares in a company with market capitalisation (value of listed shares) of R2 billion or more, or where it is in the shares of the company where the fund members work.
The committee also suggests that the limit on the offshore investments of retirement funds be increased from 15 percent of assets to 30 percent of the fund's South African liabilities plus 100 percent of the value of any foreign liabilities.
Provision is made for annual reviews of the investment strategy.
The committee proposes that a compliance officer appointed by the trustees should report annually to the Registrar of Pension Funds on the split of assets held by the fund, the monitoring of the performance of the investment managers and the review of the investment strategy.
Members would be provided with a summary of the investment strategy in a comprehensible form. The committee proposes that where members are offered a choice over the way their money is invested, trustees should ensure:
* That members either have the skill to manage this choice themselves or have access to skilled advisers;
* That the investment portfolios offered are appropriate for members of different ages and risk profiles;
* That the strategies adopted by the investment managers for each portfolio are explained to members "in language that they can reasonably understand";
* That the performance of each portfolio is monitored;
* That if members who are allowed to choose do not exercise their right, a "default" investment option will kick in; and
* That if an investment manager is not keeping to the instructions issued by the trustees, members are informed and invited to review their portfolio selection.
In choosing investment managers, the committee says, trustees should take into account:
* Financial strength and reputation;
* Track record;
* Experience in managing assets with a particular mandate; and
* Investment style and philosophy.
Trustees would be expected, with help from the investment managers and the actuary, to identify the risks which are critical to the fund, taking into account its liabilities, and to set defined objectives. These should deal with:
* Diversification of investments;
* Volatility of returns;
* Inflation;
* Asset failure (especially if the fund has invested in shares in the company which employs the members);
* Liquidity;
* Capital preservation for members near retirement;
* Currency, market and other risk; and
* Exposure to derivatives.
See also New rules for retirement funds