September 16, 2021

Investment Governance Model

By Alan Wood, Head of Investment Consulting

Retirement fund trustees have a very onerous duty to treat the fund assets managed on behalf of members with greater care than they would manage their own money. Acting in good faith is simply not good enough. The law requires trustees to act with due care and diligence, and with a level of expertise above the standard of a reasonable person. At the same time, most trustees perform their duties on a part-time basis and are not investment experts.

The complexity of the external economic and investment environment is making significant demands on trustees, given their time and expertise constraints. There is an increased focus on sustainability and governance in general, together with heightened regulatory oversight. Investments are much more complex than in the past, with complexity set to increase.

Today, trustees have to work much harder to achieve incremental improvements in investment returns.

While some argue for simplicity, believing complexity is unnecessary, others embrace investment complexity and allocate significant resources to find incremental improvements in investment outcomes for members. There is no right approach to the level of investment complexity to embrace. However, trustees must have clarity on their Investment Governance Model, and where they sit on the simplicity versus complexity continuum. A clearly defined Investment Governance Model will facilitate effective decision-making, oversight and governance. This ensures that limited trustee expertise and time are applied efficiently to embrace an appropriate amount of investment complexity where the expected improvement in investment outcome justifies the effort.

The responsibility of the board to treat fund assets with greater care than their own does not require trustees to be investment experts. They are required to seek advice from experts in the areas where they lack expertise. The board is also permitted to delegate certain activities relating to managing investments, provided that proper oversight of delegated activities is maintained.

It is an established practice for trustees to outsource investment management activities to professional asset managers. The majority of retirement funds around the world don’t have the deep skills and resources required to manage retirement fund assets. Even very large retirement funds with critical mass in their internal staff complement outsource some asset management functions to professional asset managers where they do not have particular skills or sufficient scale to manage the assets themselves.

However, looking after the assets of a retirement fund involves a lot more than stock selection and tactical asset allocation. Strategic asset allocation, asset manager selection and portfolio construction are examples of complex investment activities that also require a high level of experience and time, especially in niche areas. These activities are very often retained by trustees.

Globally, there has been a significant increase in the popularity of “fiduciary management” or “delegated/implemented solutions”, as a growing number of trustees conclude that their limited bandwidth is spent more wisely on setting policy and monitoring implementation than dealing with complex, detailed investment decisions.

The board should prioritise activities it wishes to retain, based on the fund’s capacity to spend the right amount of time to achieve the desired results. Capacity constraints will vary depending on a number of factors. Generally, larger funds – both in terms of number of members and asset values – will have greater resources and are therefore able to cope with a more complex investment strategy required to achieve incremental additional returns. It is important to realise that although the extra effort results in a much higher level of control as to how the investment strategy is implemented, this does not necessarily translate into superior investment outcomes for members.

In the matrix below we have provided a simple model to demonstrate how an appropriate governance model can be arrived at. The X-axis considers the extent to which the board believes its additional effort translates into better outcomes. The capacity of the board, measured by expertise and available resources, is shown on the Y-axis.

To some extent, the additional effort that is required to look after a retirement fund’s assets is unavoidable because of the external environment as discussed above. However, in terms of investment matters, the fund should consider to what extent “discretionary” additional effort translates into better investment outcomes for members and decide on an appropriate Investment Governance Model.


Resources and expertise

Medium governance budget, luxury to outsource or retain activities, based on organisational goals and/or the investment beliefs of the fund. High governance budget, high level of control of activities, low appetite to outsource. Strong belief that additional effort translates into better outcomes. There is room to allocate trustee capacity in appropriate areas.
Low governance budget, appetite/desire to outsource most activities Medium governance budget, desire to retain many activities, but limited capacity to do so. Choose activities to retain carefully.
Low X-axis

Extent to which additional effort translates into better outcomes for members


The matrix above can also be applied to guide a decision on whether retirement benefits should be provided by a standalone employer-sponsored fund or via an umbrella fund. Weighing up the belief that the additional effort of running a standalone fund translates into better retirement outcomes for members against the resources and expertise available to run the fund, could help in this decision-making process.

The trend towards umbrella funds suggests that several retirement funds and employers in South Africa believe that their members can be better served under an umbrella fund structure.

Each retirement fund will have a different set of beliefs and varying resources at its disposal.

Based on our experience to date in working with retirement funds, very few funds have sufficient resources to allow for a high Investment Governance Model in all investment areas. Therefore, retirement funds need to decide which investment activities are to be performed on a high governance budget basis, and where investment activities are to be outsourced. Experienced investment consultants will be able to help the board decide which areas to focus on and can fill the gap in finding suitable low governance budget solutions where this is appropriate.

One area that requires a very high governance budget to achieve a superior investment outcome for members is the management of global equities. The odds of success in this space are significantly stacked against part-time trustees who simply focus on picking winning asset managers. It seems logical for South African retirement fund trustees to rather adopt an implemented solution in this space or simply invest in an enhanced passive portfolio, than to allocate significant resources in this area. This frees up time to focus on other important matters such as holding managers accountable to invest the assets of the fund in a sustainable and responsible manner.

A board that tries to deal with investment complexity without being clear on its Investment Governance Model, is at risk of reacting to complexity instead of embracing the opportunity it brings to improve investment outcomes for members.