Retirement fund investment plans now urgent
RECENT changes in the interest rate environment and concerns about the duration of the JSE bull-run have underlined the urgent need to make investment policy statements (IPS's) obligatory for every retirement fund, warns Lekana Employee Benefit Solutions.
The Johannesburg-based pension fund administrator and advisor on efficient employee-related investments says the mandatory IPS is already being mooted as a key feature of wide-ranging changes to the Pensions Fund Act.
Femi Adebanji, Lekana's Head of Asset Consulting, adds: "The issue has now become urgent in view of changes in the markets. Inflation has moved higher, interest rates have resumed their upward climb and domestic equities have been so strong for so long that a correction seems inevitable at some stage.
"It might be unreasonable to fast-forward the entire pension reform process, but if it is possible to fast-track the IPS provision, this should be urgently considered. Alternatively, the authorities could strongly recommend that all pension funds adopt a formal IPS in anticipation of imminent legislation."
IPS formulation and periodic revision is already established practice at some retirement funds.
Adebanji adds: "A systematic and long-term strategic investment approach is warranted as pension assets can reach enormous proportions.
"Unfortunately, many pension funds still employ intuitive and ad hoc methodologies such as the selection of managers or asset classes that have done well most recently.
"Inconsistent strategies mean a pension funds unique nature and goals are not adequately reflected in the management of fund assets."
Typically, an IPS formalises investment objectives, constraints, potential risks, asset allocation guidelines, fees and stakeholder responsibilities. It articulates a funds long-term strategic plans, outlines specific goals and describes the systematic process to be followed in pursuit of these objectives.
Adebanji explains: "By eliminating the pursuit of ad hoc investment strategies, trustees are better able to focus on issues that directly impact fund success.
"Focus helps them recognise both the long-term nature of the funds liabilities and the investment opportunities presented by capital markets.
"By using an IPS, a fund is best positioned to crystallise its primary objective, which in the case of a defined benefit fund would be to secure the pensions promised to members."
An IPS also enables an assessment of an investment strategy, how it was implemented, the results obtained and how these results contribute to the achievement of the fund's mission.
Adebanji notes: "It is imperative the strategy closely relates the behaviour of assets in the fund to the funds projected liabilities.
Lekana categorises the IPS as a "trustee-friendly tool" that helps retirement fund trustees do their job and prove their diligence in pursuit of their members' interests.
Adebanji says: "Being a trustee is a mission and a half. They have to establish their value-add to members, make asset allocation decisions and select and police asset managers all of which normally fall outside their areas of professional expertise.
"The co-ordination of a complex investment process can be daunting. This alone justifies the adoption of an IPS. Furthermore, should there be a change of trustees, an IPS helps ensure continuity in the implementation of the investment plan."
