So often we think that financial plans are for individuals only. Trustees also need a plan. As fiduciary duties become more onerous, regulations increase, member expectations continue growing and the investment world is increasingly more complex, it makes good sense.
WHAT DOES THE LAW SAY?
The UK Pensions Fund Regulator expects trustees to have ‘suitably documented investment governance arrangements that are appropriate for your scheme’s circumstances, including their level of complexity. They should enable effective and timely decision-making, focused on those decisions most likely to make a difference.’
In the US, the Uniform Prudent Investor Act (1992) provides that ‘a fiduciary would not be held liable for individual investment losses so long as the investment was consistent with the overall portfolio or investment objectives’.
At home, Annexure B to Circular PF130 (FSB 2007) provides that boards have a fiduciary duty to deal with the investments with due care, diligence and in good faith and ensure that it complies with the rules of the fund, pensions law, the financial institutions (Protection of Funds Act) and all other applicable laws.
The CFA Institute Research Foundation in 2017 published A Primer for Investment Trustees: Understanding Investment Committee Responsibilities. It provides a comprehensive framework and recognises that whilst trustees are not necessarily experts in investments, they ‘can exercise good judgement in making decisions’. In setting the investment policy they determine ‘the key strategic priorities for the fund’ and ‘the roadmap’.
So, none of this is new or surprising. The challenge is to have a clearly documented framework communicated to the key stakeholders, and as a basis for sound decision- making – an investment strategy document (ISD).
WHY HAVE AN ISD?
Trustees should not be successfully sued for global or domestic events outside of their control. The stresses and volatility in markets from Brexit to COVID-19 and the war in Ukraine are beyond their control. However, an ISD helps avoid potential negligence due to rash, speculative, panicked and uniformed decisions whether in times of extreme volatility or just ‘normal’ markets. It’s good for the beneficiaries and trustees.
WHAT SHOULD AN ISD COVER?
Clearly identifying the objectives of the fund (at group and individual member levels) is the first step.
Other essential elements’ (PF130) include:
- Asset mix and rate of return expectations
- Categories of investments
- Diversification through diverse asset types, industries and geographic regions
- Pledging and borrowing of assets
- Liquidity requirements – long, medium and short term
- Lending against the fund
- Management fees and compensation
- Socially responsible investments
All of these can then be integrated into the selection and appointment of investment managers, their mandates, ongoing monitoring and risk assessments, compliance reviews, and communication to key stakeholders.
PROTECT THE FUND
- Trusteeships for any type of funds is daunting.
- Regulations extend ‘reasonable care and skill’ to greater levels of fiduciary responsibilities.
- Trustees cannot be expected to be experts in the investment realm or realistically manage the day-to-day investment operations.
- Trustees should rather set the strategy, implement and monitor it, together with the required expertise to give effect to the strategy.
- Trustees also need to recognise and manage the same behavioural investment biases as individuals face.
- The principles of an ISD apply to any fund.
- ‘Risk comes from not knowing what you’re doing’ − Warren Buffett.