Rusconi discussion paper raises key retirement fund industry issues

Speaking at an Old Mutual Actuaries and Consultants function in Johannesburg this week, Rob Rusconi, independent researcher and consultant, presented his recently released retirement fund industry discussion paper entitled; “South African Institutional Investments – Whose money is it anyway?”

Rusconi’s discussion document deals with the institutional investment market and identifies a number of areas in which, the interests of service providers - such as fund administrators, asset managers and brokers - and the owners of capital, being the fund members, are not in complete alignment.

Rusconi’s paper also provides some thoughts on how trustees might address some of the issues raised. “It is not comprehensive, merely a set of questions that trustees could ask themselves and their service providers in an effort to understand a little better the dynamics of the market in which they participate,” says Rusconi. “This in turn will assist trustees in framing a response appropriate to the needs of the retirement fund and its beneficiaries.”

Below are some of the questions contained in Rusconi’s paper.

Active management
• Have the trustees applied their minds to the issue of active management and its appropriateness to the fund?
• Have they understood the logic that, on average, active managers provide an investment return that is in line with the market, before the deduction of fees?

Trustee training
• Are trustees given sufficient opportunity to receive training and the tools to exercise their responsibility in the best interest of the fund and its members?
• Are trustees given a copy of the fund rules and all other relevant documents when they join the board and are they encouraged to read these and clarify any issues not clear to them?
• Is the training that is provided to trustees adequate, delivered with sufficient clarity for all trustees to understand and presented by an individual or organisation with sufficient expertise and independence to carry it out effectively and free of conflicts of interest?

Investment consultants
• Have trustees considered whether the financial interests of their investment consultant are independent of the corresponding interests of any product providers, whether or not the retirement fund uses any of these providers? If the investment consultant is not independent of all product providers, how does it manage any conflict of interest that may arise?

Fee models
• Have trustees considered the models used by all providers of a service to determine their fees?
• Is the level of fees charged by asset managers and other providers appropriate and competitive?

Hedge funds and other alternative asset classes
• Have trustees applied their minds to the need for alternative asset classes or mandates based on absolute rather than relative performance? If they do not have the skill to carry out such an exercise, have they sought independent professional advice in this regard?

Marketing
• Have trustees considered and physically signed a code of conduct to control the extent to which their decision-making might be influenced by the inappropriate behaviour of other parties?

Surveys
• Do the trustees depend on surveys of asset manager performance in their decision-making?

Trading dynamics
• Have trustees sought to understand the issues around portfolio trading, the costs involved and the potential for conflicts of interest?
Socially responsible investment
• Have the trustees recognized and noted their responsibility to consider the investments of the retirement fund in the context of long-term objectives?

Multi-managers
• Have the trustees of funds that have appointed multi-managers, or are considering doing so, noted explicitly that putting in place such an investment manager in no way reduces their fiduciary responsibility to the fund and their duty of care to its members?

“Trustees have an enormous responsibility to the fund and its beneficiaries,” says Rusconi. “This list of questions is intended to assist them but should form only the foundation for a habit of ongoing, rigorous enquiry.”

Craig Aitchison, head of Old Mutual Actuaries and Consultants says: "It is crucial that trustees focus on the way that retirement fund members’ assets are invested”. . “This is where they can make a big impact o¬n the lives of their members. To perform this function optimally, trustees must be prepared to ask questions of their asset managers and investment consultants.”

Trustees should never pass a resolution until they fully understand the decisions they are making and good consultants should always empower trustees to make the best decisions for their members, Aitchison says.

The full discussion document is available on request from [email protected] or at www.robrusconi.com