Sweeping changes to the law, which will affect the way your retirement fund invests your money, have been proposed.
The changes will replace the limits on the amount of money pension funds can invest in different classes of assets, with a process which trustees will be obliged to follow in deciding on investments.
The proposal, designed to provide better protection for members and better guidance for trustees, was drafted by a committee set up by the Financial Services Board with representatives from business, the trade unions, the retirement industry, actuaries and pension lawyers.
It is now being fine-tuned before being submitted to the Minister of Finance. At the moment, Regulation 28 of the Pension Funds Act imposes limits on the investments of retirement funds. For instance, funds may not put more than 75 percent of your money in shares; 25 percent in property; five percent in the shares of your employer's company; and 15 percent offshore.
The committee says that these limits do not, in themselves, guide trustees.
"Trustees are not told how to go about determining what they should do, in their particular circumstances, in order to achieve their objectives. There is no requirement to consult anyone, much less an expert," the committee says.
The limits do not prevent trustees from adopting "a completely inappropriate" investment strategy, the committee says, and often there is no independent check on their decisions.
Yet the investment of the assets of the retirement fund is "one of the most critical of all the management functions carried out by the trustees," the committee says.
"Particularly now that most members belong to defined contribution funds in which the investment risk is carried by members, most members will experience directly any losses suffered."
The committee says the current "one-size-fits-all" regulations do not take into account the differences in the financial position and composition of the different funds. For example, fund managers tend to put between 60 percent and 70 percent of members' money into shares, whatever the nature of the fund, in order to do well in the performance surveys.
Other disadvantages are:
* Derivatives - an increasingly important tool in the hands of fund managers - are not properly covered;
* The regulations allow funds to invest up to 100 percent in fixed interest investments (such as government bonds) which "could be disastrous from the point of view of matching the liabilities"; and
· Insurers are able to offer products which bypass the regulations.
The committee suggests an alternative approach requiring trustees of funds to work out an investment strategy for their particular fund, appoint investment managers to implement the strategy, monitor performance and report to the Registrar of Pension Funds. Trustees would also be obliged to provide members with a summary of the investment strategy.
In drafting the strategy, trustees would be expected to seek expert advice. With the help of an investment adviser and an actuary, they would be expected to identify the risks which are critical to the fund and set clearly defined objectives for each risk.
They should take into account diversification of investments, volatility of returns, inflation, liquidity, capital preservation for members near retirement, currency and market risk and exposure to derivatives.
"The process suggested will provide better protection for members and better guidance for trustees as to how they should invest the money," the committee says.
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