Good morning- Bom Dia

Obrigado por participar deste curso

Thank you for attending this course

1
CPS CERTIFIED PENSION FUND
AND INVESTMENT SPECIALIST ™
REFERENCES:

YESTERDAY’S PEOPLE: GAIL GIBSON: 2019

CLASS OF BUSINESS COURSE: PENSION FUNDS 2019

DISPOSITION OF DEATH BENEFITS: TAMARA JACOBSEN 2017

AN INTRODUCTION TO EMPLOYEE BENEFITS – OLD MUTUAL: TAMARA JACOBSEN 2015

PROFESSIONAL PRINCIPAL EXECUTIVE OFFICE (SAQA ID 93602) BATSETA 2017

HTTP://WWW.SARS.GOV.ZA

FSCA : TRUSTEE TOOLKIT TRAINING PROGRAMME

WE’LL LIVE TO 100 – HOW CAN WE AFFORD IT? WORLD ECONOMIC FORUM® 2017

2
 SPECIALIST Analyst EXPERT
SAME THING?
WHAT?
Who?

a person who concentrates on a particular subject or activity; a

person highly skilled in a specific field.
3
WHAT DO PENSIONERS REALLY FEEL LIKE?

OR

4
 SPECIALIST Analyst EXPERT
SAME THING?
WHAT?
Who?

a person who concentrates on a particular subject or activity; a

person highly skilled in a specific field.
5
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7
MODULE 1: THE CONTROVERSY SURROUNDING PENSION FUNDS

Defined benefit fund vs defined contribution fund

DB plans - Employers fund and guarantee a specific

retirement benefit amount for each participant of a
defined-benefit pension plan.

DC plans are funded primarily by the employee

A shift to defined-contribution plans has placed the

burden of saving and investing for retirement on
employees.
8
PENSION INCOME OPTIONS.

ANALYZING ANNUITIES

Subject to copyright 10
Will your scheme give you that confidence?
11
INFO - SOUTH AFRICA

50% retire on
less than 20%
of income

12
Mozambique: At age 55 for women
and 60 men will have the right to an
old-age pension provided that he or
she has completed 240 months or
twenty years of paying social security
contributions

WHY HAVE A PENSION FUND? 13

 WHY IS PENSION LAW SO COMPLICATED?

• APPROPRIATE REGULATION OF FINANCIAL MARKETS

• A PRODUCTIVE, DIVERSIFIED INVESTMENT OF RETIREMENT SAVINGS WHICH SPREADS RISK
REQUIRES WELL-FUNCTIONING CAPITAL MARKETS AND FINANCIAL INSTITUTIONS

14
 UNDERSTANDING THE GLOBAL PENSIONS CRISIS
• WE ARE LIVING MUCH LONGER THAN WHAT PENSION SYSTEMS WERE
DESIGNED FOR

2015
Life expectancy
has increased by
6.5 years on
average since
1960
ITS ONLY GOT
WORSE

15
16
 UNDERSTANDING THE GLOBAL PENSIONS CRISIS

• WE ARE LIVING MUCH LONGER THAN WHAT PENSION SYSTEMS WERE

DESIGNED FOR
2015
Life expectancy
has increased by
6.5 years on
average since
1960
ITS ONLY GOT
WORSE

Subject to copyright 17
18
What really scares you about retirement and why?

19
 RISING COSTS

Governments typically target an inflation rate of 2% 20

 FUNDAMENTAL PENSION EQUATION

WHAT IS YOUR PENSION WILL YOU BE ABLE TO HOW IS YOUR PENSION

WORTH TODAY RETIRE COMFORTABLY CALCULATED

21
PENSION INCOME OPTIONS.

ANALYZING ANNUITIES

Subject to copyright 22
 WILL GOVERNMENT PENSIONS BE VIABLE?
• NO
• INCREASED LONGEVITY IS A POSITIVE STEP FOR
INDIVIDUAL AND SOCIETAL HEALTH AND
PRODUCTIVITY, BUT IMPACTS ON THE TRADITIONAL
MAKE-UP OF SOCIETIES AND THE SOCIAL PROTECTION
SYSTEMS DESIGNED TO SUPPORT THE ELDERLY
• THE KEY DRIVER OF THE CHALLENGES FACING
RETIREMENT SYSTEMS IS INCREASING LIFE
EXPECTANCY AND A FALLING BIRTH RATE:
• THIS LEADS TO A SMALLER WORKFORCE
SUPPORTING AN EVER GROWING POPULATION OF
RETIREES
23
 CALCULATING DEPENDENCY RATIO

POPULATION EMPLOYMENT RATIO DEPENDENCY RATIO

13.1 Million employed 31 000 000

4% OF POPULATION _______________________ =
(1,1 Million formerly UNEMPLOYED 13 100 000
employed)
2366,41 X 100 =
12 Million informal = 520 000 UNEMPLOYED
236 641DEPENDANTS
sector
(DOES NOT INCLUDE
UNEMPLOYED) 24
Sovereign Wealth funds
Many countries invest excess capital into markets or
other investments, to accrue profit for the benefit of the
nation's economy and its citizens

The primary functions are to stabilize the country's

economy and to generate wealth for future generations.

State-owned pool of money that is invested in

various financial assets.

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 SOVEREIGN DEBT AND RISK

MEANING DEBT RISK

26
ROLE AND PURPOSE
OF PENSION PLANS

27
 Liability and matching

Future asset sales and income streams matched

against the timing of expected future expenses.

PF’s increasingly use liability matching to ensure

they will not run out of guaranteed funds
for beneficiaries.

This strategy differs from return maximization

strategies that only look at the assets side of the
balance sheet
and not the liabilities.
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29
30
THE LINK BETWEEN ASSET ALLOCATION, CAPITAL STRUCTURE
AND FINANCIAL RISK

31
THE PENSION FUND AS A FINANCIAL BUSINESS

32
PENSION FUND PROFESSIONAL STAKEHOLDERS

33
CREATING VALUE IN PENSION FUNDS

The most common type of traditional pension is

a defined benefit plan

Other types of funds are:

Defined contribution funds
Umbrella funds
National Pension Scheme (India)
Public Provident Funds
Annuity plans

Outside of this pensioners are limited to

social schemes and grants.

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 Status

High/low

Flexibility Charismatic

Intuitive Enthusiastic

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MODULE 2: PENSION FUND ASSET-LIABILITY MANAGEMENT

37
 LIABILITIES VS INVESTMENT STRATEGY

LIABILITIES INVESTMENT STRATEGY

38
 RISK MANAGEMENT AND LIABILITY

RISK MANAGEMENT LIABILITY

The employer carries the risk that assets invested
in the pension plan may not be sufficient to pay all benefits.

Defined-benefit pension plans use liability management

to ensure it does not experience a cash shortfall for paying
its current and future obligations.

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 PENSION FUND LIABILITIES

MEASURING AND LIABILITY RETURN AS A

ACTUARIAL VALUE HURDLE RATE
MODELLING

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LIABILITY DRIVEN INVESTING

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 SURPLUS ASSET
A surplus describes a level of an asset that
exceeds the portion used.

Budgetary surpluses occur when income earned exceeds

expenses paid.

A surplus isn't necessarily desirable.

A surplus occurs when there is some sort of disconnect

between supply and demand

42
SURPLUS RISK

Typically, a surplus causes a market disequilibrium

in the supply and demand of a product or service.

Surpluses often occur when the cost of a product or service

is initially set too high, and nobody is willing to pay that price.

Important- Budget surpluses are expected during periods of

economic growth. During recessions, when consumer demand
declines, budget deficits typically follow.

43
DISCOUNT RATE
Prime Rate vs. Discount Rate: What's the Difference?

The reserve bank sets the reserve rate

The discount rate can be set by, a bank, a borrower, a bond supplier

The rate of return that the investor could earn in the marketplace
on an investment of comparable size and risk.

The discount rate expresses the time value of money

44
 PENSION FUND POLICY
Pension fund management

Investment Policy

Funding Policy

Benefits Policy

Governance Policy

IPS - Investment Policy Statement - Declaração de Política de Investimento

Security of benefits Contribution stability Integrational equity 45

FUNDING TARGET

Example – In 10 Yrs. where will the fund be?

Total assets which the Fund needs to hold at valuation date
Sets a clear timeframe and destination
All stakeholders have greater clarity on the task in hand.

46
 FUNDING PROBABILITIES

RETURN ON
SPONSOR / EMPLOYER MEMBER / EMPLOYEE INVESTMENTS

47
48
ASSET ALLOCATION – STATIC VS DYNAMIC

49
 PORTFOLIO ANALYSIS

ADVANTAGES VS
DEFINITION DYNAMIC VS STATIC DISADVANTAGES

50
 DYNAMIC PORTFOLIO ANALYSIS

Sync the investor expectation and the market

in which such Assets will be invested.

Quantitative presents reality in terms of a numerical value.

Qualitative analysis uses subjective judgment based

on "soft" or non-quantifiable data.

51
HOW TO COMMUNICATE
USE YOUR EYES, EARS AND SENSES

52
53
 Module 3: Pension Fund Investment Strategies

THIS
Is not
PRUDENCE

54
INVESTMENT APPROACHES

55
ASSET ALLOCATION

Asset allocation is an investment strategy that aims to

balance risk and reward by apportioning a portfolio's
assets according to a funds, risk tolerance
and investment horizon.

The three main asset classes, Equities, fixed-income, and

cash and equivalents—have different levels of risk and
return, so each will behave differently over time.

56
 ASSET ALLOCATIONS
• Considerations:
– What percentage of the fund’s
investments should be invested in
each asset class identified as suitable
for the fund’s profile? (for example,
cash instruments, shares)

• Allocation to asset classes most

important factor in delivering the
expected returns

– Under each asset class, what specific

securities or instruments are suited
for the fund’s profile?

– When should investments be made 57

(market timing?)
An aggressive portfolio takes on great risks in search of
great returns.
A defensive portfolio focuses on consumer staples that
are almost never suffer downturns.
58
The speculative portfolio is not for the faint-hearted.
PORTFOLIO OPTIMIZATION

Benefits

Stable return on investment

Diversification of portfolio

Tracking

Security of principal investment

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PORTFOLIO STRUCTURE

60
DRAWDOWN

Income drawdown, or pension drawdown, is a way of

taking money out of pension to live on in retirement.

There is the risk that the fund may fall in value.

The upside is that investment growth can provide higher

returns and see the pot continue to increase in value.
61
 ADVANTAGES VS DISADVANTAGES
•Control over your savings and •Pension drawdown income is not guaranteed and there is
how they are invested a risk that you may run out of money in retirement
•Manage your money with the aim of: •If your investments perform poorly you may need to
generating further growth or reduce the income you take
to beat the effects of inflation
•You will need to regularly review your investments to
•Make changes to the income you receive ensure you are still on track
•Pass any remaining funds in your pension pot •If you plan to buy an annuity later in life, annuity rates
on to your next of kin may be lower than they are currently

62
 INFLATION

RETURNS

MARKET EFFECT

DEFINITION Inflation can have a devastating effect on pension benefits

Purchasing power is greatly reduced over time

It is critical for retirees and pension plan managers to 63
adjust for inflation
CORRELATION

DEFINITION PRACTICAL WHAT IT IS NOT

64
TARGETTING

65
RETURN ORIENTATION
UNCONSTRAINED

66
 RETURN ORIENTATION
CORE / SATELLITE EXPLORE

67
 (DB) pension plans continue to cause financial volatility

DB obligations are a complex form of debt and create

unexpected cash calls, large expenses

These obligations have to be recognized in

balance sheets and financial statements

The risks are biggest in unfunded and underfunded arrangements

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 INFLATION – HEDGING ASSETS

EFFECTS MANAGING 2 AND 20

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THE FUND MANAGER

Most fund managers are highly educated,

have professional credentials, and
possess management experience.

Responsible for implementing a

fund's investment strategy and managing its
trading activities.

Fund managers fall into two categories:

active managers and passive managers.

70
 HEDGE FUNDS

DEFINITION WORKINGS WHAT IT IS NOT

71
Hedge funds use riskier strategies, leverage assets, and
invest in derivatives such as options and futures

A hedge fund can invest in land, real estate,

stocks, derivatives, and currencies while mutual funds
use stocks or bonds as their instruments for long-term
investment strategies.

Hedge fund investment is considered a risky

alternative investment choice and requires a high 72
minimum investment
MODULE 4: ACTUARIAL CONSIDERATIONS, SCHEME
DESIGN AND THE ANNUITY MARKET

73
 ACTUARY

EVALUATE COMPLEX RISK

ASSESS THE POTENTIAL FINANCIAL
CONSEQUENCES OF THOSE RISKS

ANALYSING STATISTICAL DATA

74
ACCOUNTING METHADOLOGIES

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77
78
79
 ACTUARIES IN OUR NEW WORLD
COVID GLOBAL WARMING GLOBAL FINANCIAL
CRISIS

80
 METHADOLOGIES

ACTUARIAL ACCOUNTING

81
 DISCOUNT RATE

You can calculate the discount rate in DCF as long

as you know the future and present values and the
total number of years

Investors use this facility sparingly, mostly when they

cannot find willing lenders in the marketplace.

Calculation of discount rates and their use in financial

modelling may seem scientific, however, there are many
assumptions that are only a “best guess” about what will 82
happen in the future.
CONFUSION AND CONTROVERSY

Financial markets have been described by formal

economic models that draw from several theoretical
frameworks
The most ubiquitous model, the efficient markets
hypothesis, remains subject to debate since reality
doesn't always conform to the theoretical assumptions.

Other theories do not rely on rational actors or market

efficiency, but instead on human psychology and
emotion.

The greater fool theory proposes that you can profit from
investing as long as there is a greater fool than yourself to buy
the investment at a higher price. 83
 MODERN PORTFOLIO THEORY
Any given investment's risk and return characteristics
should not be viewed alone but should be evaluated by
how it affects the overall portfolio's risk and return.

The investor can construct a portfolio with the lowest

possible risk that is capable of producing that return.

Ultimately, the goal of the modern portfolio theory is to

create the most efficient portfolio possible.

84
INVESTMENT ASSUMPTIONS

Investment Assumptions should at least be realistic

the assumed information should have some sort of

factual basis or justification, not just something that
was pulled from thin air.

It is important to remember that they serve the purpose

of placeholders for the information you currently don’t
have.

Investment assumptions should be replaced with

facts as quickly as possible,

85
86
 SUSTAINABLE ECONOMY

Channeling your capital based on Environmental,

Social and Corporate governance (ESG) factors,
has an impact.
It creates pressure on companies to disclose more
about what they’re doing and to potentially also
change their practices

In October 2022, a report released by the White

House warned that “Climate change is an emerging
threat to the financial stability of the United States
Companies are given ESG scores based on
these factors:

Environmental Social Governance

87
ESG - Governança Ambiental, Social e Corporativa
 AFRICA
in late 2020, less than 0.1% was raised
by Sub-Saharan Africa.

Some the most severe temperatures are

predicted to occur in Sub-Saharan Africa

Dependence of many economies, and jobs, on

minerals, energy and mining.

Funds do not appear to disclose any

information on their approach to
climate change 88
Percentage of ESG Information Found in Main Markets and in Regions Sub-Saharan Africa

89
INVESTOR AND ACCOUNTING
Knowledge of accounting helps investors determine:

An assets' value

Understand a company's financing sources

Calculate profitability

Estimate risks embedded in a company's balance sheet

Estimating uncertainty or risk of assets is one of the

most important steps in investment valuation.

Financial statements provide many useful disclosures in

the notes, which help identify risk.

Investors may need to possess extensive knowledge of

different accounting standards from different countries
90
91
MODULE 5: PENSION RISK MANAGEMENT AND
GOVERNANCE

92
 Particularly advanced in highly developed countries
As people age and retire, they tend to draw down their
savings and rely more heavily on their pensions.

Medical costs are rising - state coffers are decreasing

As the population ages and fewer children are

born,
there will be fewer people entering the
workforce and contributing to pension funds

People are living much longer than the schemes were

designed for
As pessoas estão vivendo muito mais do que antes

93
 Longevity risk is the risk that pension funds or insurance
companies face when assumptions about life
expectancies and mortality rates are inaccurate.
The impact of medicine on life expectancies is difficult to
measure, but even minimal changes can increase
longevity risk.
The trends can result in payout levels that are higher
than what a company or fund had originally accounted
for.

Pension funds and other defined-benefit programs that

promise lifetime retirement benefits have the highest
risk.
Current mortality rates and longevity trend risk are the
two factors considered when attempting to transfer
longevity risk.

94
FUND RISKS ONLY GETTING HIGHER

95
Broadly categorized as the chance an
outcome or investment's actual gain will
differ from the expected outcome or return.

Risk includes the possibility of losing some or

all of an investment

There are several types of risk and several

ways to quantify risk for analytical
assessments.
Risk can be reduced using diversification and
hedging strategies.

96
Only defined-benefit pension plans can be at risk of
underfunding

An employee, not the employer, bears the investment risk in

defined-contribution plans

Underfunding means that pension payout liabilities exceed

the assets a company has to cover those payouts

It can be difficult to determine whether underfunding is

happening

97
Every saving and investment action involves different
risks
and returns.

Investors are exposed to both systematic and

unsystematic risks
When investing in foreign countries, it’s important to
consider the fact that currency exchange rates can
change the price of the asset as well.

It’s important to keep in mind that higher risk doesn

automatically equate to higher returns.

98
No pension fund can say we don’t have this
climate change issue in my portfolio.

Investors are also starting to dig deeper

into
what the impact of companies on the
environment is
Forward-thinking investors are focusing on
water and biodiversity as well as the
climate
You cannot diversify away climate change

There is a lack of common standards and

common language

99
 Economic Cycle
An Economic Cycle is the natural fluctuation of the economy
between periods of expansion (growth) and contraction (recession).

100
DE-RISKING A PENSION FUND

101
 Diversification
• Balance between risk
mitigation and the related
costs must be maintained

IPS

Liquidity
• Fund’s cash flow requirements should be
taken into account when investment
decisions are made to avoid holding large
amounts of cash or being forced to
liquidate long-term investments to cover 102

short-term requirements
 An asset refers to something a fund owns that provides an
economic benefit or may provide one in the future.

Assets are generally physical objects that provide value, though

they can also be non-physical.
The liquidity of an asset refers to how quickly a fund can
convert it into cash.

liability is the opposite of an asset and represents something

that lowers the value or equity of a fund.
Liabilities are typically intangible and include things such as
bank debt, taxes, mortgage debt and of course pensions
payable
The primary difference between an asset and a liability is
whether it adds value to a business or detracts from it. 103
Diversification strives to smooth out
unsystematic risk events in a portfolio

In theory, what may negatively impact one

asset class may be beneficial to another.

Important- How many stocks do you need to

own to be properly diversified?

104
Stocks—shares or equity in a
publicly traded company

Bonds -government and corporate fixed-

income debt instruments

Real estate—land, buildings, natural

resources, agriculture, livestock, and water
and mineral deposits
Exchange-traded funds (ETFs) -follow
an index, commodity, or sector

Cash and short-term cash-equivalents (CCE)—Treasury

bills, certificate of deposit (CD), money market vehicles,
and other short-term, low-risk investments 105
 RELATIONSHIPS: BONDS AND INTEREST RATES

Most bonds pay a fixed interest rate that becomes more

attractive if interest rates fall, driving up demand and the
price of the bond.

if interest rates rise, investors will no longer prefer the

lower fixed interest rate paid by a bond, resulting in a
decline in its price.

Not all bonds have coupon payments ( Interest or annual

payments).
Those that do not are referred to as zero-coupon bonds.

Quando as taxas de juros caem, os preços dos títulos sobem 106

 LONGEVITY SWOPS VS BONDS
SWOP BOND

107
Appropriate governance structures
Identification of responsibilities

well-defined accountabilities

Well set out policies, and procedures

Efficient governing body

108
 STRUCTURE OF FUND RULES

The rules form the framework of the

legal structure of a fund and outline
all important provisions relating to a
specific fund

Rules must be registered

with the authorities and
The rules must conform to comply with the
the requirements of law requirements of these laws
and any linked subordinate 109

legislation
 Extended Pension fund professional stakeholders

• Life insurance • Stock market

• Investment companies • Insurance brokerages;
• Finance Companies • Insurance underwriting
• Mortgage Companies • A stock broker
• Trust Company • A financial adviser
• Financial Sector Conduct • Underwriting
authority • Reinsurance
 Facultative
Reinsurance
 Treaty Reinsurance

110
 GOVERNANCE

Governance is the structure of rules, practices, and

processes used to direct and manage a fund.

A company or fund’s board of directors is the primary

force influencing corporate governance.

Corporate governance covers the areas of environmental

awareness, ethical behavior, corporate strategy,
compensation, and risk management.

The basic principles of governance are accountability,

transparency, fairness, responsibility, and risk
management.
111
 COMPLIANCE WITH FUND RULES

The board is responsible for

the compliance with the
applicable laws, rules of the
fund and also with those
Rules should be understood
non-binding policies and
not only in terms of the
codes and standards with
obligations that they create,
which the fund may have
but also for the rights and
Fund rules, once registered elected to comply
protection that they afford
by the Regulator become
legally binding upon the
board - this gives them legal
force

112
ESTABLISHING A CULTURE OF COMPLIANCE

Risk

Compliance
113
 COMPLIANCE APPROACH

The purpose of compliance is to adhere to both internal

policies and procedures, along with governmental laws. Policies
and
Protects your fund’s reputational risk and improves your Standar
fund’s vision ds

Prevents and detects violations of any rules

Board and
/ or audit Internal
Non-compliance of the set standards set by law,
committee
Compliance controls
would lead to fines and penalties and in review
extreme cases prison.

Report
&
remedia 114
l action
COMPLIANCE IN A PENSION FUND
Pension funds have many moving parts

Seeing a fund through a systemic point of view is the

best way to ensure that the interests of the fund and its
members are protected.

Administration

Governance

Investment

Risk
115
 NO “ONE SIZE FITS ALL” COMPLIANCE

Different Defined
fund sizes benefit Umbrella
and versus funds versus
membership defined standalone
profiles contribution funds

Different Audit-exempt
investment versus non-
mandates exempt

116
THE BOARD OF
TRUSTEES

A pension fund’s board of Trustees have significant

responsibilities towards the fund and members

117
THE BOARD OF TRUSTEES
Getting the right balance between security and growth is
one of the main challenges for Trustees

Trustees themselves must have a mix of all the

skills needed to do the job.

Gender representative

Representative of members cultures

Financial and investment expertise

Some legal knowledge

Some actuarial training 118

 THE TRUSTEE
Serve with honesty and integrity

Detail-oriented, with organizational

and record keeping skills

Passion for the mission of the board

Leave ego outside- This is about the members

And not them

A trustee will be liable if his / her conduct amounts to willful misconduct

or a willful breach of trust – This is why the board MUST have insurance,
To cover both the board and the trustees 119
120
121