Trustees taking pension fund reins must stay focused on fundamental role

Trustees of pension funds should stay focused on their core responsibilities to fund members even though they have had to become much more involved in investment strategies and decisions in recent months. This is the view of Dinesh Munu, Partner and Le

The much-discussed changes are set out in Regulation 28 of the Pension Funds Act. Regulation 28 regulates how retirement funds can invest their assets to ensure that their long term commitments to members are met. It now provides guidance to trustees to formulate appropriate investment strategies to provide suitable retirement benefits to members, in addition to assets limits.

“There is a tremendous amount of discussion in the industry around investment strategies that are appropriate to different member profiles of different retirement funds. We are beginning to see shifts in investment approaches, asset allocation, further use of hedging strategies and a very slow uptake of the Private Equity limits.

“But we should bear in mind that Regulation 28 has not fundamentally altered the responsibility of Trustees. What it has done, is to formalise the minimum processes trustees need to undertake to ensure that they fulfil these responsibilities.

“In the past, trustees have often inappropriately relied on their service providers to fulfil some of their duties with regards to investment strategies and selections.

“The revised Regulation 28 provides Trustees with a welcome opportunity to reassess their investment strategies and re-engage with service providers to allow them to independently evaluate the appropriateness of their investment processes implemented,” says Munu.

Asset allocation limits seek to limit the risk exposure of a portfolio of assets by increasing the diversity of a portfolio and discouraging investment in more risky asset classes. This strategy requires careful consideration as it may also limits the potential return a fund can earn, he says

He says that one of the most significant matters requiring a change to Regulation 28 was that it did not provide guidance to Trustees on how to formulate investment strategies best suited to meet the obligations to members given the specific nature of the fund.

“The revised Regulation 28 sets out a number of principles which will strengthen the decision making process of Trustees and improve transparency and accountability to a fund’s members and to the Registrar of Pension Funds.”

Munu notes further that a major impact of the changes will be the need to communicate more directly and more frequently with each individual fund member.

“Individual members nowadays have a much greater degree of choice as to the kind of investment approach they prefer to follow. In addition, members are being asked increasingly to signal their appetite for risk.

“This will require careful and diligent implementation as the long-term consequences of errors could be severe for both the member and the fund.

“However, as long as trustees remain true to their fundamental responsibilities, members can expect far greater efficiency and transparency in the way their retirement savings are invested and administered,” says Munu.