Proposed regulatory changes will place a greater onus on the trustees of retirement funds to take responsibility for the investment strategies of their funds and the investment choices given to you, the fund member.
Regulation 28 of the Pension Funds Act, which lays down basic rules on how retirement funds must invest their money, has been redrafted. The changes have been submitted to Trevor Manuel, the Minister of Finance, for approval.
Jeremy Andrews, the chief actuary of the Financial Services Board (FSB), which drew up the changes, says that, in its current form, Regulation 28 allows many trustees to abdicate their responsibilities on how your retirement savings should be invested to investment managers.
Trustees have little or no training on how to make investment decisions, while they select investment managers by putting them on a "beauty parade" he says. Trustees often fire or hire investment managers on the basis of selective reporting on investment performance, without taking into account the managers' different investment styles or the long-term objectives of the retirement fund.
Andrews says the existing regulation provides no guidance to trustees on investment strategies, and the prudent investment guidelines are often abused by investment managers or advisers who use insurance policies that offer some form of guarantee, to sidestep the regulation.
A recent case in point is the Anbeeco Pension Fund, which, on the advice of retirement fund consultants NMG-Levy, locked 66 percent of the fund into a five-year, structured, capital guaranteed product with performance linked to a foreign index.
Andrews says the changes to Regulation 28 were made on the basis of recommendations by a sub-committee of the FSB's Pension Funds Advisory committee.
The draft changes require trustees who select investment managers to:
- Establish an investment strategy suited to the fund;
- Select appropriate investment managers to carry out the strategy;
- Monitor their performance;
- Regularly review the selection of the investment manager and the investment strategy; and
- Get expert advice.
Trustees will also not be able to evade their responsibilities by offering investment choices to you, the fund member, Andrews says. Trustees will remain accountable for the investment decisions.
Trustees will only be allowed to offer investment choices to fund members who have the necessary expertise, or who have access to properly qualified advisers.
Any investment choices you, the member, are offered will require:
- An investment strategy appropriate to your risk profile;
- That you receive marketing material that must match the strategy; and
- That the investment manager ensures the investment performance is in accordance with that strategy.
Andrews says the draft regulation also lays down stricter prudential investment guidelines for retirement funds. It places further limits on, among other things:
- Shareholdings or loans to a fund-sponsoring employer;
- The maximum amounts that may be placed in a particular investment product; and
- The maximun amounts that may be placed in foreign investments.
Implementation of the regulation has been delayed because of concerns at the National Treasury about whether the foreign investment proposals are sufficiently strict.
Andrews says trustees must now know the investment risks to which their funds and its members are exposed, and how they can manage these risks.
Your fund's trustees will have to decide on asset classes (shares, bonds, equities, property, derivatives); the benchmarks against which the investment managers' performance will be measured; and how proper reporting on performance will take place.
Andrews says that once trustees have developed an investment strategy, they will need approval from an actuary that the strategy is suitable for the risk and investment profile of all the fund's members.