Legitimate frameworks

Retirement funds and their boards of trustees need to put in place effective investment strategies and the processes whereby they arrived at those strategies should be appropriately documented.

Liberty head of public sector and corporate consulting Mathias Sithole says circular PF130, issued by the Financial Services Board (FSB), in conjunction with regulation 28 of the Pension Funds Act; provide governance guidelines for the retirement fund industry in this regard.

In addition, the principles of King 3 serve to further emphasise aspects of good governance.

“In terms of good governance, investment objectives, strategies, as well as the investment principles and beliefs which will govern the manner in which the fund will manage its investments, need to be formalised in an investment policy statement so that trustees know the framework within which they are operating.

The basis for this approach is to ensure that investment decisions are made as a consequence of a carefully considered and rational process and not simply carried out on a whim or a hunch.

Having the document in place not only gives trustees reference to that process but also means that they are able to demonstrate to members and other stakeholders that decisions are made as a result of rational consideration.

“The policy would usually be prepared by the fund’s asset consultants and signed off by the trustees,” Sithole says.

There are several crucial steps that have to be taken into account when formulating the policy, the first of which is to fully understand the fund and the profile of its members as this will have a direct bearing on the investment strategy that is adopted.

“A defined benefit fund would look at its liability profile. As an example, having older members may mean that the fund will be paying out a larger portion of its assets in the near to medium term to meet its obligations as members retire. This determines the fund’s liquidity requirements.

“If your fund has young members who are not expected to exit soon, the fund will be able to invest in assets such as equities and property so as to build the portfolio on a