The new Pension and Provident Fund Act that is currently in draft form is set to re-shape the Zimbabwean retirement industry. Indications are that the Act will be adopted within the next two years, and has already received in-depth response and constructive support from stakeholders in the pensions and savings industry.
In terms of the draft Act, trustees of pension funds will have expanded fiduciary responsibilities, including ensuring that their funds have a robust Investment Policy Statement (IPS).
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.
“Importantly, whilst most Trustees will generally be in agreement on the investment goals they want to attain, divergence in opinion often arises when Trustees are tasked with specifying acceptable risks in order to achieve these goals,” says Gerald Gondo, a Principal at RisCura Zimbabwe, the investment advisor specialising in Africa.
“The IPS is therefore an important governance tool that patently sets out the levels of acceptable risk,” Gondo says.
If compiled comprehensively, any reader of the IPS should also be able to understand how the Fund will achieve its strategic asset allocation, alongside the process of selecting asset managers. An effective IPS will also include the responsibilities of the various stakeholders of a pension fund. These include the Benefit Administrator, Actuary, Accountant, and the Independent Investment Consultant.
An IPS further 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 private equity as an alternate asset class.
Through the Zimbabwe Association of Pension Funds (ZAPF), the pensions industry has a robust and healthy rapport with the Insurance and Pensions Commission (IPEC) on some of these pertinent issues.
“Adopting an IPS is an important milestone in the governance process of a pension fund, however it is but one of many processes that should be adopted by the Trustees to assist them in driving pension fund growth,” he says.
Against the current difficult economic backdrop in Zimbabwe, there is an obvious temptation for Trustees to cut costs by going online and either downloading or purchasing a generic IPS.
“But be careful – the IPS is far from just a document that can be bought online and cut and paste into the governing document of a pension fund; an IPS is a process that serves to enforce good governance.”
The introduction and implementation of an IPS should come with proper guidance and consultation with specialist service providers in this field. In fact, the drafters of the Act see the prudence in this approach, and actually compel the Board of Trustees to seek expert advice where applicable.
Further, the draft Act stipulates as a function of the Board of Trustees, to: “formulate an investment policy to further the objectives and purpose of fund.”
Trustees will be held liable if they fail to meet their responsibilities to a pension fund, one of which will be to have an IPS in place.
A study conducted in the Financial Analysis Journal that surveyed 91 large corporate pension funds found that 93.6% of the pension funds’ final performance was determined by their investment policy, along with asset allocation. “The adoption and commitment to adhering to tenets enshrined in an IPS can make all the difference to the success of a pension fund,” Gondo concludes.
– Gerald Gondo, Principal, RisCura
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