“maintain capital & secure market return”

THE ROLE OF TRUSTEES IN INVESTMENT OF RETIREMENT

BENEFITS SCHEME ASSETS

Presentation by: Wangu WachiraHotel Intercontinental1st February 2008

Contents Role of trustees in investment

Concept of investment

Investment policy

Role of administrators, fund managers and custodians

Selection of fund manager(s) and custodian

Investment options

Role of Trustees in Fund Investments Develop the investment policy that will guide

the manager’s actions;

Appoint registered manager and custodian and sign agreements with them that protect the scheme’s interests;

Monitor manager’s actions and investments to see if the schemes objectives are being met;

Evaluate the manager’s performance and compare with other managers’ performance

Concept of Investment Optimizing profitability

Preserving the value of assets

Maintaining liquidity

Reconciling risk and return

Diversification

Taking advantage of arbitrage between the cost of capital and the return on capital

Investment Policy Contains:

Asset allocation policy Risk policy Asset realisation policy

Cannot require sponsor’s consent for investment decisions

To be prepared with advice of investment advisor

To be prepared every 3 years in accordance with Section 37 of the Occupational Regulations, and submitted to the Authority.

The purpose of Investment Policy Statement (IPS) is to provide fund manager with written, strategic

plans to direct investment decision for the client

Role of the AdministratorAdministrators can be institutions or ‘natural persons’ appointed

by the scheme to render administrative services. These include:

1. Liaising with trustees, service providers, RBA and KRA regarding scheme matters

2. Advise and train trustees, members, sponsors on their rights and obligations

3. Avail data to service providers to enable preparation of returns

4. Compute and pay benefits to member and their beneficiaries

5. Provide members with annual benefits statements

6. Organise trustee and scheme annual general meeting

Role of the ManagerStatutory requirement for all schemes to appoint independent registered fund manager. The role of the fund manager is to:1.Advise trustees on asset classes available for investment

2.Undertake research at company, industry and country levels before any investment is undertaken

3.Make tactical asset allocation decisions based on scheme’s asset allocation policy

4.Ensure liquidity is available to meet the scheme’s needs

5.Provide accurate and timely periodic reports

The custodian’s roles include:1.Offering safe keeping facilities for scheme assets/documents in proper system

2.Carrying out financial transactions as instructed by fund manager on behalf of scheme

3.Collecting income, recovering tax, and settling transactions

4.Keeping proper records and books of Accounts of investment activities

5.Providing independent checks on breaches of investment policy

Role of the Custodian

It is upon the trustees to shop for and appoint service providers based on among other things: 1.Past performance

2.Fee structure - service fees, hidden costs

3.Quality and promptness of reports

4.Customer service (personalised services) and value additions (Education programmes)

5.Access to information regarding the scheme

6.Not related companies to each other

Selection of Manager and Custodian

Available Investment Options - IAsset Class Positive Attributes Negative Attributes

Cash Maximum – 5%

Deposits Maximum – 30%

Most liquidStable

•Yields the lowest returns of all other assets•Does not protect against erosion by inflation•Deposits can also have risk in case of bank failure

Commercial Paper and Corporate BondsMaximum – 30%

Easy to subdivide for trading purposesGuaranteed interest incomeOffer premium above government papers

•Fixed income from coupons - cannot expect the income to increase with good economic performance•No capital appreciation•Short term in nature

Equities Maximum – 70%

Yield the highest cumulative returns over time Easy to subdivide for trading Dividend incomeCapital appreciation

•Short-term volatility leads to high risk

Guaranteed Funds Maximum – 100%

Allows small schemes to access hitherto inaccessible assets Offer guarantee on both capital and interest Reserving policy used to smoothen returns

•Severe withdrawal penalties

Available Investment Options - IIAsset Class Positive Attributes Negative Attributes

Foreign InvestmentsMaximum – 15%

Increase diversification by providing broader selection of assets Provides an opportunity to invest in assets unavailable in the countryAllows protection against system country risk Fairly liquid

•Faces foreign exchange risks •Political economy questions

Property Maximum – 30%

Increase diversification Inflation indexed Income and possible capital appreciation

•Not easy to subdivide for trading •Not easy to liquidate can seriously constrain a scheme if sudden large pay-outs are required•Lack of liquid competitive marketplace can result in incongruent pricing

Government SecuritiesMaximum – 70%

Extreme high security and low riskSecure income returns Give only a small premium over inflationLow default Longer term bond available

•Returns may not be high•Default is not impossible

Self Investments Maximum 3% Quoted Equity – 10%

Diversification in private equity Benefit if share is doing superbly in the market

•Jeopardy of losing both employment and pension funds •Sponsor’s influence •Private equity is unknown

Evolution of Asset Distribution

Compliance with Guidelines

Data as at 30th September 2007

Market Indices - I

Source: www.mystocks.co.ke

Market Indices - II

* Kenya includes NSSF

International Comparison

Conclusion

Today we have tried to understand the following:

Role of trustees in investment

Concept of investment

Investment policy

Role of fund managers and custodian

Selection of fund managers and custodian

Investment options

Thank You

Asante

www.rba.go.ke