Riaan van der Vyver, Head of Asset Consulting at PSG Konsult Corporate, asserted that asset consulting, a historically neglected function in the management of retirement funds, is important for ensuring the optimal and effective implementation of Regulation 28 of the Pension Funds Act which came into effect last year.
He says, “Historically many Retirement Funds delegated the overseeing and implementation of its investments to its appointed Employee Benefit consultant. The reality is that employee benefit and asset consulting are different specialised disciplines. Regulation 28 now requires a far more focussed and expert approach.”
Although Funds must have an Investment Policy and Strategy Statement, it can be argued that in practice most Funds already comply with this. However, van der Vyffer believes that the real issue is that the majority of the existing Investment Policy Statements come up wanting. This is because they are based on industry templates, address aspects generically and are not sufficiently client orientated. “In most cases, these Investment Policy Statements do not address the critical and core investment principles required by the revised Regulation 28 and will need to be reviewed as a result. In our opinion these reviews should only be conducted by an asset consultant with a practical approach to and an acute understanding of the revised Regulation.”
In order to take into account the changing investment landscape, the revised Regulation 28 allows for a much broader asset class universe for potential inclusion in a Fund’s portfolio. Examples include hedge funds, commodities and African exposure. Van der Vyver says, “the broader asset class universe creates opportunities for Funds to obtain improved risk-adjusted returns. However, these asset classes are more specialised and its inclusion will require an adjusted asset class mix and a different approach to how Funds typically constructs member portfolios. Therefore, utilising specialists such as asset consultants becomes critical.”
The revised Regulation 28 requires a Fund to conduct reasonable due diligences before making any investments. Van der Vyffer highlights that these due diligences must be conducted on both domestic and international assets and entails far more than a mere presentation by potential asset managers. “This is where asset consultants can play an important role: Not only can asset consultants define and facilitate the due diligence process, guidelines and parameters but we can bring certainty to a general unknown international due diligence requirement. Since asset managers research forms an integral part of asset consulting, asset consultants can also provide must needed quantitative and qualitative inputs as part of the due diligence process.”
Critically, the revised Regulation specifically recognises the liabilities of a Fund. This means that for Defined Contribution Funds, Trustees must obtain advice to form their own understanding of what they believe these liabilities are. Naturally, these liabilities will be based on an in-depth understanding of member needs. “Apart from the obvious that asset-liability modelling will be required, more importantly, Funds must be geared to monitor and track these liabilities. A new approach to asset manager selection and investment structuring will further need to be adopted,” he says.
Van der Vyver believes that the recognition of a Fund’s liabilities will mean that Trustees must regain a consolidated and overall Fund focus, awareness and understanding instead of a mere individual member focus (brought about by the dawn of Defined Contribution Funds). ”Risk will be internalised in the sense that Trustees will once again realise that investment risks and strategies remains their responsibility (and not solely those of their members within Defined Contribution Funds).”
Fund associated risks are at the core of the adjusted Regulation. Apart from the internalisation of risk, Van der Vyver warns that the revised Regulation 28 requires an adjusted and far more comprehensive approach to risk identification, measurement and management. “Not only does the new Regulation mention an extensive list of risks that should be considered (and monitored) as part of the due diligence process but Funds must be able to understand the changing risk profiles of assets over time and the impact these changing risk profiles will have on the longer term performance of the Fund’s assets and hence overall Fund returns.”
Van der Vyver believes that one of the most significant changes is in terms of reporting. Investment limits now apply at an individual member level and no longer at a Fund level. He stresses that although Funds have time to correct any breaches, these must be reported to the Registrar immediately. “Funds must therefore have the ability to identify potential breaches in real time.” He maintains asset consultants can play a major role in this compliance process. “Assets consultants have access to the correct data from asset managers and member administrators to monitor potential breaches or warn Funds of potential breaches. We, as asset consultants, can then engage with the appointed service providers of a Fund to confirm such a breach and assist the Trustees on the best strategy to correct the breach.”
To comply with the increased risk focus of the Regulation additional and more relevant information must be obtained by Funds. “Standard reporting provided by assets managers will not be sufficient and asset consultants are perfectly positioned to provide appropriate and additional reporting to Funds. Even though the increased focus on governance, caused by the new regulation, will ultimately result in increased costs for Funds, the involvement of asset consultants can limit these costs. Instead of Funds having to appoint staff to assist with due diligences, risk assessments and asset-liability modelling, asset consultants can fulfil that role.”