Retirement fund trustees need to frequently revisit investment strategy to ensure that the assets of the fund are invested correctly so that members retire with sufficient benefits, without taking on unnecessary risk.
Nerique Nieuwoudt, Head of Strategy Formulation at Novare Actuaries & Consultants, said the most important factors to consider when reviewing strategy are the mission of the fund in terms of what it seeks to achieve for members, the fund’s liability profile, its risk profile and any unique factors that will determine the appropriate asset classes and products to invest in.
The Novare model is based on identifying, implementing and actively managing the most appropriate asset allocation, to ensure that the investment return objective is achieved with minimum risk.
Said Ms Nieuwoudt: “Each fund should have a unique strategy that caters for the liability profile and risk appetite of its membership. Analysing the age profile and underlying liabilities will give a sense of how aggressive or conservative the strategy needs to be, and what kind of time horizon the investments need to have.
“Communication between the asset consultant and other relevant stakeholders and service providers of the fund is critical. This will ensure that all unique circumstances and characteristics are highlighted and taken into account when setting investment strategy.
“Trustees also need to consider what asset classes are acceptable given the level of risk attributed to them, and also whether any specific cash flow requirements or capital protection need to be adhered to in the strategy. The main goal is to select the asset classes in an optimal combination and ensure that all the needs of the fund are met.”
Economic forecasting and modeling should be part of the process in order to gain an understanding of what return can be expected in future from the different asset classes.
Once the scenario analysis is complete and realistic expectations of returns are determined, the appropriate asset classes can be selected, based on their future risk and return profile, and combined in an optimal way to meet the return target for the fund.
“After the strategy has been formulated, it needs to be approved by the Board of Trustees and written into the Investment Policy Statement of the fund. The investment strategy will set out the percentage of the fund’s assets that should be allocated to each asset class, and the relative appropriate benchmarks for each asset class,” said Ms Nieuwoudt.
The next step will involve reviewing the underlying managers and products that will be used to match the required allocations of each asset class.
She added that an investment strategy review should be undertaken on an annual basis, or following any major change to the fund or its membership profile.