JOHANNESBURG - Trustees of South African pension plans are generally dissatisfied with management of their offshore assets, according to a recent survey by SEI Investments (South Africa) Ltd. and Wits Business School, both of Johannesburg.
South African pension plans are restricted to investing no more than 15% of total assets abroad, and that's the allocation most pension plans have.
The survey polled officials at 27 pension plans ranging from 140 million South African rand (US$12.2 million) to 9 billion rand.
The survey found trustees consider their international investments as an important way to diversify and protect against weakness in the local currency. But only a small proportion of plan officials were confident their domestic and international investment strategies were coordinated.
"What alarmed us most was the process that led to this hodge-podge of investments offshore," said Frank Durand, senior lecturer at Wits Business School who co-authored the survey.
Most pension plans left it to their local balanced money managers to appoint investment managers for their international portfolios. This approach meant international investment strategies were not coordinated. Where more than one balanced money manager was used, the strategy for international investments could double up or cancel out depending on the style of the offshore managers.
Only 39% of plan trustees were confident their domestic and international money managers complemented each other's style and asset allocation decisions.
Only 52% of plans surveyed knew the details of their international asset allocation; 44% relied on their local fund managers to decide allocation; and 4% said they did not know how their international portfolios were invested.
A number of trustees responding to the survey said they felt domestic money managers lacked ability in managing international assets and that the relative outperformance of their plan's international portfolios was due more to depreciation of local currency than asset management skill by their money managers.
Trustees generally were not well-equipped to make effective investment decisions.
"We are not impressed pension trustees understand what a good strategy entails," said Mr. Durand. And actuaries and money managers are not helping. Actuaries are more skilled in measuring assets and liabilities than giving advice on asset allocation, Mr. Durand added.
The South African actuarial market is "not well skilled in modern portfolio theory," he said.
Money managers also confused the situation by not providing clear information on risks and portfolio performance, he added.
South African pension trustees are under increasing pressure to improve their asset allocation because of changes proposed to regulations governing local pension plans.
Under the new proposals, likely to take effect later this year, trustees will be expected to set investment strategies appropriate to the pension plan's liabilities, monitor investment managers and review investment strategy on a regular basis.
Alan Lauder, SEI's managing director in South Africa, said he believes consultants have a great opportunity to educate trustees on decision-making. Trustees have to date treated their international portfolios as part of the their overall balanced mandates and have little experience treating them as a separate asset class.
To date, most pension plans have seen the ability to invest internationally as an end in itself without considering how the international asset allocation could complement their overall investment strategy.
"From a fiduciary standpoint, shouldn't pension plan trustees know how their pension fund is structured?" he added.
The survey also found the majority of plan trustees would like to increase their international portfolios to 30% of total assets. Just under half of the plan officials said they were "concerned" about the current limits on international investments that restrict offshore fund flows to 10% of previous year's net inflows.