Oran Hall | Investment manager’s effect on your pension

Retirement schemes are defined contribution schemes, meaning that the size of a member’s pension rests heavily on the funds in the member’s account.

Critical to this is the ability of the investment or fund manager to invest the pension contributions made by and for the scheme member to give worthwhile returns.

The investment manager, typically a corporate entity, upon receiving the pension contributions of the member and employer, invests them in a pooled fund according to legislation and the rules of the trustees to provide replacement income by buying units in the respective investment funds.

Although the investment manager is responsible for the day-to-day management of the funds, the board of trustees also has a very important role in terms of the policies it sets for their effective management as well as overseeing the performance of the investment manager.

The investment manager invests the assets of the fund in diversified investment portfolios – called investment funds. Some funds are conservative, or low risk; some are aggressive, or high risk; and others are balanced, or medium risk. Conservative funds aim to preserve capital and earn income and aggressive funds focus largely on capital appreciation. Balanced funds tend to strike a balance between those investment objectives.

The investment objective of each type of fund is evident in its asset mix, which is expressed in ranges. For example, the equity portion of an aggressive fund could be 70 per cent to 90 per cent and for a conservative fund 15 per cent to 25 per cent. These ranges give the manager latitude to invest in line with market conditions and changes in the prices and yields of securities.

Although there could be just a few investment funds, it is possible they could be quite diversified because there are many instruments which fall within a particular asset class. A conservative fund comprising mainly fixed income securities, for example, could include government bonds, corporate bonds, short-term bonds, long-term bonds, Jamaican dollar-denominated bonds and foreign currency-denominated bonds.

The investment funds are set up by the trustees, who also appoint an investment committee, which plays a key role in investment decision-making. The investment committee tends to include representatives of the following: the trustees, the fund sponsor or operator of the scheme, the investment manager, and individuals having investment or other expertise that can be of value to the committee.

The investment committee reviews the performance of the investment funds, makes investment decisions and recommendations, and receives reports, for example, those relating to compliance with statutory requirements. There are some matters that it may refer to the trustees for a decision to be made.

The funds of the retirement scheme are segregated from those of the sponsors and the investment manager. The policy of not commingling funds serves to protect the interest of the members of the retirement scheme.

Investment activities are subject to statutory regulations, which place limits on eligible investments, general concentration limits, related party investments, and measures related to investment quality. Additionally, the trustees set established investment policies and procedures for the funds and may revise them when deemed necessary.

There are other constraints on the investment manager. A significant one is uncertainty, which may arise due to political developments in a country; changes in government policies and taxation policies; restrictions on foreign currency-denominated transactions; currency fluctuations; changes in laws and regulations, which may affect the fund; and the suspension of trading on the stock exchange, which could limit the ability of the manager to liquidate securities.

The unit value of the fund is important as it determines how many units are allocated to the account of the scheme member who puts new money into the fund. It also determines the total value of the units of the member who is to derive a benefit.

The value of a fund is the fair value of the net assets plus investment income due and accrued and takes into consideration the gains or losses on the sale of assets, as well as foreign-exchange gains and losses.

Certain charges are deducted to arrive at the final value of the fund. These include the management fee paid to the investment manager, which is a percentage of the value of the fund; valuation costs; audit fees; and regulatory fees. The fund also bears the expenses incurred in the purchase, maintenance, and sale of its assets.

The unit price of a fund is derived by dividing its net value by the number of units outstanding.

There are many factors that affect the investment performance of a retirement scheme. Some are beyond the control of the investment manager, but ultimately, the investment manager’s skill is critical to the delivery of good investment returns and good benefits to the scheme member.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

finviser.jm@gmail.com.