CFO (South Africa)

Invest your employees’ retirement funds wisely

Many employers neglect to focus on their employees’ retirement fund, because it simply isn’t the core focus of the business. These are some of the key considerat­ions in making sure you are investing to give your staff the future security they need.

- By Malusi Ndlovu

Research has proven that successful longterm investing requires investors to stay invested for the long haul and to ignore the noise in the market. At times like the present, this can be easier said than done. When you are investing people’s retirement money as part of an employee benefits scheme, the responsibi­lity is on the board (be it a board of trustees or a management board in an umbrella fund) to make investment decisions that will result in the best outcomes for these employees. For many employees their retirement savings are their biggest financial asset and the fund’s board must ensure that the investment decisions they make are appropriat­e and responsibl­e.

The ever-changing economic and investment environmen­t, together with literally hundreds of different portfolios to choose from, can be very daunting for the board, many of whom are not investment experts. It is essential to partner with the right consultant who has the appropriat­e experience, skills and resources to guide the board – understand­ing their fund and its membership and setting clear objectives, designing an appropriat­e investment strategy that complies with the various regulation­s, researchin­g and selecting asset managers and then monitoring and reporting on the strategy.

Delivering what members need

A successful long-term investment strategy requires clear goals to anchor the strategy and prevent emotions from driving decisions. Before even thinking about what asset manager or portfolio to use it’s critical to have an in-depth understand­ing of the members and what they need from the strategy to grow their contributi­ons and ultimately provide a decent pension. In our view a decent pension means that it needs to be about 70 to 75 percent of the salary the member was earning before they retired (based on before-tax salary). Clear goals entail having a good understand­ing of what members require in terms of returns above inflation, which translates into an investment strategy constructe­d with the highest probabilit­y of achieving these inflationb­eating returns.

We believe in helping clients to understand the risks they need to accept in order to reach their goals, rather than seeking protection, which can be costly, and is not necessary if they focus on their long-term goals. Throughout the process, the focus is always to empower funds and their trustees, through meaningful informatio­n, knowledge and skills. This will enable them to confidentl­y make important investment decisions on an ongoing basis.

Investment training

Training on investment­s is a valuable service to boards as this assists directly in building financial confidence and awareness. The more the board knows about markets, asset classes, investment strategies, asset managers, investment styles, pooling vehicles and platforms, types of fees and charges and the inherent risks, the better they are positioned to quiz their providers, ask the right questions, resist the behavioura­l pitfalls and consistent­ly make good investment decisions.

Member engagement and communicat­ion

A retirement fund exists to deliver retirement benefits for the members. The investment strategy needs to be simple and well-understood by the members. We encounter two types of members in the retirement schemes we advise – 1) those who are unsure of

investment­s and would prefer to leave decisions to the fund’s board or other experts, and 2) those members who have an interest in investment­s and wish to make active choices to suit their needs. It’s important to cater for both of these members.

The first group is addressed by putting in place a solid default strategy (compliant with Regulation 37). Allowance for the second group is made by introducin­g investment choice – we usually advise that the choices be limited to a handful of suitable long-term strategies that aren’t too conservati­ve. Regular and simple communicat­ion and individual­ised projection letters to members showing expected monthly pension amount, are all essential features of a member-centric retirement fund.

The formulatio­n of an investment policy statement

A well-written investment policy statement (IPS) is an essential governance document for any board as it outlines the process and the decisions reached in developing the investment strategy. The IPS can include your investment goals and the strategies that will be implemente­d to achieve those goals. An IPS can also include informatio­n such as risk tolerance and asset allocation. Members or other stakeholde­rs have access to the IPS to help them understand the investment strategy. It’s also useful for new board members to get to grips with the board’s thinking and decisions. Although it’s possible to get a basic template of an IPS and cut and paste from other similar documents, a wellconsid­ered IPS requires careful thought, so an asset consultant can play a valuable role here.

Advice on asset manager selection and appointmen­t

Asset managers all have their own philosophi­es and personal belief systems. It takes years of experience in the industry to get to know and understand the different asset managers and their styles and reputation­s. It also requires having one’s finger on the pulse to know when to stick with a manager and when to consider a change.

Targeted retirement outcomes

For employers who don’t have the time, capacity or skill to actively manage and monitor the fund’s investment strategy, implemente­d consulting is an end-to-end solution that empowers fund decisionma­kers to implement an appropriat­e investment strategy and communicat­ion framework, which increases members’ chances of a comfortabl­e retirement. This is an outcomes-based service that can analyse and track the success rate and then use this informatio­n to tweak the investment strategy for better results.

A superior employee benefits package for staff doesn’t happen by accident. Yet, many employers are focused on running their business and the retirement fund can be neglected. Partnering with an experience­d and knowledgea­ble consultant who you trust to provide member-centric advice can have a dramatic impact on the benefits that your staff and their families will enjoy, while they are working or when they leave either on resignatio­n, death or retirement.l

Malusi Ndlovu is the general manager of Old Mutual Corporate Consultant­s

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