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Gerald Gondo, RisCura Africa Business Development Executive

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If followed faithfully by trustees, the revised OECD Core Principles of Private Pension Regulation, introduced late last year, will go some way to restoring public confidence in private pension funds in the aftermath of the Global Financial Crisis (GFC).

“The lingering atmosphere of general distrust the average person has towards the integrity and safety of financial markets remains,” says Gerald Gondo, RisCura Africa Business Development Executive.

The 10 Core Principles have been authored with the intention of providing governments, regulators, and supervisors worldwide with a relevant and common yardstick as well as high-level parameters for the design and operation of private pension systems. A common theme of all 10 principles is putting member interest at the very core of all decision making and undertakings of pension funds.

“The documented losses during the GFC experienced by some pension funds beg the questions whether members’ interests were ever contemplated when taking certain risks,” says Gondo.

The OECD principles guide trustees to restore member interest to the core of all deliberations regarding the governance of pension funds.

“By doing so the OECD hopes that public confidence in private pension funds will be reinstated and individuals will be encouraged to save for retirement,” Gondo says.

The Principles make it clear that trustees need to:

  • ensure that the investment of pension assets is undertaken with care, the skill of an expert, prudence and due diligence; and
  • be able to show demonstrable evidence of fiduciary duty. This means that trustees and other key stakeholders of the pension fund act in the best interests of the members and beneficiaries in matters regarding the investment of pension fund assets and to exercise due diligence in the investment process;

In addition, the Principles advocate introducing a legal provision in a fund’s rules compelling trustees to demonstrate an established rigorous investment process.

“The OECD Core Principles bring into focus the need for trustees to adopt and operationalise a robust Investment Policy Statement (IPS),” Gondo says.

An IPS formulates a plan for pension funds to stay on track when investing. First and foremost, it clearly expresses the investment goals of the pension fund and its investment strategy to achieve them.

Gondo says that most trustees will generally be in agreement on attaining the investment goals, but divergence in opinion often arises when they are tasked with specifying acceptable risks in order to achieve these goals.

An IPS is therefore an important governance tool that clearly sets out the levels of acceptable risk. If compiled comprehensively, any reader of the IPS should also be able to understand how a fund will achieve its strategic asset allocation, as well as the process of selecting asset managers. An effective IPS will also include the responsibilities of the various stakeholders of a pension fund (Benefit Administrator, Actuary, Accountant, Investment Consultant, etc.).

An IPS also provides the method for measuring the pension fund’s performance, a process to evaluate the investment strategy and stipulates investment constraints. For example, the minimum statutory level that pension funds should have invested in prescribed assets, or the proposed exposure pension funds ought to consider towards various asset classes.

“The introduction of an IPS, or the review of an existing one should come with proper guidance and consultation with specialist service providers in this field. In fact, the drafters of the Core Principles compel trustees to seek expert advice where applicable,” Gondo concludes.

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