• Malusi Ndlovu

How to invest your employees’ retirement funds wisely

Successful long-term investing requires investors to stay invested for the long haul, while ignoring market noise. But this is often easier said than done, says Malusi Ndlovu, General Manager of Old Mutual Corporate Consultants. 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 70–75% of the salary the member was earning before they retired (based on before-tax salary).

'A successful long-term investment strategy requires clear goals to anchor the strategy and prevent emotions from driving decisions.'

There needs to be 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 inflation-beating 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.

  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 types of members. The first group is addressed by putting in place a solid default strategy that’s 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 incl