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"maintain capital

  1. 1. “ maintain capital & secure market return” THE ROLE OF TRUSTEES IN INVESTMENT OF RETIREMENT BENEFITS SCHEME ASSETS Presentation by: Wangu Wachira Hotel Intercontinental 1 st February 2008
  2. 2. Contents <ul><li>Role of trustees in investment </li></ul><ul><li>Concept of investment </li></ul><ul><li>Investment policy </li></ul><ul><li>Role of administrators, fund managers and custodians </li></ul><ul><li>Selection of fund manager(s) and custodian </li></ul><ul><li>Investment options </li></ul>
  3. 3. Role of Trustees in Fund Investments <ul><li>Develop the investment policy that will guide the manager’s actions; </li></ul><ul><li>Appoint registered manager and custodian and sign agreements with them that protect the scheme’s interests; </li></ul><ul><li>Monitor manager’s actions and investments to see if the schemes objectives are being met; </li></ul><ul><li>Evaluate the manager’s performance and compare with other managers’ performance </li></ul>
  4. 4. Concept of Investment <ul><li>Optimizing profitability </li></ul><ul><li>Preserving the value of assets </li></ul><ul><li>Maintaining liquidity </li></ul><ul><li>Reconciling risk and return </li></ul><ul><li>Diversification </li></ul><ul><li>Taking advantage of arbitrage between the cost of capital and the return on capital </li></ul>
  5. 5. Investment Policy <ul><li>Contains: </li></ul><ul><ul><li>Asset allocation policy </li></ul></ul><ul><ul><li>Risk policy </li></ul></ul><ul><ul><li>Asset realisation policy </li></ul></ul><ul><li>Cannot require sponsor’s consent for investment decisions </li></ul><ul><li>To be prepared with advice of investment advisor </li></ul><ul><li>To be prepared every 3 years in accordance with Section 37 of the Occupational Regulations, and submitted to the Authority. </li></ul><ul><ul><li>The purpose of Investment Policy Statement (IPS) is to provide fund manager with written, strategic plans to direct investment decision for the client </li></ul></ul>
  6. 6. Role of the Administrator <ul><li>Administrators can be institutions or ‘natural persons’ appointed by the scheme to render administrative services. These include: </li></ul><ul><li>Liaising with trustees, service providers, RBA and KRA regarding scheme matters </li></ul><ul><li>Advise and train trustees, members, sponsors on their rights and obligations </li></ul><ul><li>Avail data to service providers to enable preparation of returns </li></ul><ul><li>Compute and pay benefits to member and their beneficiaries </li></ul><ul><li>Provide members with annual benefits statements </li></ul><ul><li>Organise trustee and scheme annual general meeting </li></ul>
  7. 7. Role of the Manager <ul><li>Statutory requirement for all schemes to appoint independent registered fund manager. The role of the fund manager is to: </li></ul><ul><li>Advise trustees on asset classes available for investment </li></ul><ul><li>Undertake research at company, industry and country levels before any investment is undertaken </li></ul><ul><li>Make tactical asset allocation decisions based on scheme’s asset allocation policy </li></ul><ul><li>Ensure liquidity is available to meet the scheme’s needs </li></ul><ul><li>Provide accurate and timely periodic reports </li></ul>
  8. 8. <ul><li>The custodian’s roles include: </li></ul><ul><li>Offering safe keeping facilities for scheme assets/documents in proper system </li></ul><ul><li>Carrying out financial transactions as instructed by fund manager on behalf of scheme </li></ul><ul><li>Collecting income, recovering tax, and settling transactions </li></ul><ul><li>Keeping proper records and books of Accounts of investment activities </li></ul><ul><li>Providing independent checks on breaches of investment policy </li></ul>Role of the Custodian
  9. 9. <ul><li>It is upon the trustees to shop for and appoint service providers based on among other things: </li></ul><ul><li>Past performance </li></ul><ul><li>Fee structure - service fees, hidden costs </li></ul><ul><li>Quality and promptness of reports </li></ul><ul><li>Customer service (personalised services) and value additions (Education programmes) </li></ul><ul><li>Access to information regarding the scheme </li></ul><ul><li>Not related companies to each other </li></ul>Selection of Manager and Custodian
  10. 10. Available Investment Options - I Asset Class Positive Attributes Negative Attributes Cash Maximum – 5% Deposits Maximum – 30% <ul><li>Most liquid </li></ul><ul><li>Stable </li></ul><ul><li>Yields the lowest returns of all other assets </li></ul><ul><li>Does not protect against erosion by inflation </li></ul><ul><li>Deposits can also have risk in case of bank failure </li></ul>Commercial Paper and Corporate Bonds Maximum – 30% <ul><li>Easy to subdivide for trading purposes </li></ul><ul><li>Guaranteed interest income </li></ul><ul><li>Offer premium above government papers </li></ul><ul><li>Fixed income from coupons - cannot expect the income to increase with good economic performance </li></ul><ul><li>No capital appreciation </li></ul><ul><li>Short term in nature </li></ul>Equities Maximum – 70% <ul><li>Yield the highest cumulative returns over time </li></ul><ul><li>Easy to subdivide for trading </li></ul><ul><li>Dividend income </li></ul><ul><li>Capital appreciation </li></ul><ul><li>Short-term volatility leads to high risk </li></ul>Guaranteed Funds Maximum – 100% <ul><li>Allows small schemes to access hitherto inaccessible assets </li></ul><ul><li>Offer guarantee on both capital and interest </li></ul><ul><li>Reserving policy used to smoothen returns </li></ul><ul><li>Severe withdrawal penalties </li></ul>
  11. 11. Available Investment Options - II Asset Class Positive Attributes Negative Attributes Foreign Investments Maximum – 15% <ul><li>Increase diversification by providing broader selection of assets </li></ul><ul><li>Provides an opportunity to invest in assets unavailable in the country </li></ul><ul><li>Allows protection against system country risk </li></ul><ul><li>Fairly liquid </li></ul><ul><li>Faces foreign exchange risks </li></ul><ul><li>Political economy questions </li></ul>Property Maximum – 30% <ul><li>Increase diversification </li></ul><ul><li>Inflation indexed </li></ul><ul><li>Income and possible capital appreciation </li></ul><ul><li>Not easy to subdivide for trading </li></ul><ul><li>Not easy to liquidate can seriously constrain a scheme if sudden large pay-outs are required </li></ul><ul><li>Lack of liquid competitive marketplace can result in incongruent pricing </li></ul>Government Securities Maximum – 70% <ul><li>Extreme high security and low risk </li></ul><ul><li>Secure income returns </li></ul><ul><li>Give only a small premium over inflation </li></ul><ul><li>Low default </li></ul><ul><li>Longer term bond available </li></ul><ul><li>Returns may not be high </li></ul><ul><li>Default is not impossible </li></ul>Self Investments Maximum 3% Quoted Equity – 10% <ul><li>Diversification in private equity </li></ul><ul><li>Benefit if share is doing superbly in the market </li></ul><ul><li>Jeopardy of losing both employment and pension funds </li></ul><ul><li>Sponsor’s influence </li></ul><ul><li>Private equity is unknown </li></ul>
  12. 12. Evolution of Asset Distribution
  13. 13. Compliance with Guidelines Data as at 30 th September 2007
  14. 14. Market Indices - I Source: www.mystocks.co.ke
  15. 15. Market Indices - II
  16. 16. * Kenya includes NSSF International Comparison
  17. 17. Conclusion <ul><li>Today we have tried to understand the following: </li></ul><ul><li>Role of trustees in investment </li></ul><ul><li>Concept of investment </li></ul><ul><li>Investment policy </li></ul><ul><li>Role of fund managers and custodian </li></ul><ul><li>Selection of fund managers and custodian </li></ul><ul><li>Investment options </li></ul>
  18. 18. Thank You Asante www.rba.go.ke