Issue: September/October 2007

Unpack IPS and you realise it can be so trustee-friendly

Requirements of the Investment Policy Statement (IPS) are detailed; even daunting. SCOTT HARVEY of STANLIB’s Client Solutions Department de-fangs the FSB document relating to IPS in a series of articles on how to comply and get the most out of the process. Harvey begins with a general look at the concept ...

The Financial Services Board (FSB) is to be congratulated on its efforts to provide trustees with clear and comprehensive guidelines on the actions they should be taking to further protect the interests of retirement fund members.

Some extremely valuable rules and procedures are detailed in the FSB circular PF 130 on the Good Governance of Retirement Funds. Circular PF 130 sets out 13 principles of good governance, with principle 8 being “The Investment Performance of the Fund Assets”. The primary thrust of principle 8 is the establishment of an Investment Policy Statement (IPS). This is a vital element of the good governance process and guidelines on the structure, content and purpose of an IPS are set out in Annexure B to the circular.

Many technical issues are dealt with in Annexure B; so much so, it is possible to lose sight of the fact that an IPS is a trustee-friendly tool. For the purposes of this introductory article, the main message to communicate is that an IPS is useful and helpful. It assists trustees in the discharge of their duties and provides a handy framework when communicating with members on key issues such as investment returns.

In fact, an IPS can be a great scorecard to highlight what a good job you are doing for your members and a sturdy ally when you are under fire for alleged under-performance.


A properly drawn-up IPS ensures that the fund has a planned and well thought out road map to guide its quest to deliver adequate retirement benefits. It helps trustees measure the performance of their professional advisers and service providers (i.e. asset consultants and investment managers) while providing reassurance to the membership.

Admittedly, the process of drawing up an IPS can be complicated and it takes discipline to abide by its dictates, but once the initial work has been done, the benefits can be substantial. Learn to live with your IPS and you learn to love your IPS.

Some funds already have them. Some will now start to frame and adopt them. But what exactly – for the sake of newcomers to this concept – is an IPS?

An IPS is a formal, written statement that sets down the investment strategy of a fund along with what you expect your investments and your investment managers to do for you. It is also a framework for investment decisions and a useful reference for existing and future trustees. It provides the investment manager with a clear understanding of the trustees’ investment philosophy and requirements.


The IPS is not an inflexible tool but a living document. From time to time, it can and should be amended to meet changing needs and circumstances of the fund. Changes are made after debate and agreement by the trustees and the living document is then amended to reflect the agreed-upon changes.

Circular PF 130 does not set down rigid requirements on the specifics of each and every IPS. It advises that “the guidelines should be adapted by each board to suit their particular obligations, objectives and all other factors that may affect solvency, funding and the ability to meet its financial obligations”.

Nor should an IPS be viewed as a mysterious, technical document filled with mathematical calculations. Some reference to percentages and performance criteria is critical, but an IPS has to be readily understood by the average trustee and fund members.

The FSB says: “The IPS should be based on the standards that a reasonable person would apply to the investment portfolio – the ‘prudent person portfolio approach’.”


An IPS is not meant to bamboozle anyone. It is there to illuminate and guide investment decisions and provide a method of judging how well the investments are doing in relation to a set of reasonable standards and performance requirements. An IPS is not, however, a public document. It is confidential to the trustees, their advisers and services providers. Trustees may elect to make a summarised version available to members.

Nor is it expected that the trustees themselves should draw up the document. They obviously set down the overall strategic objectives, but they are well advised to call on professional help when setting down the detail.


In the words of Annexure B, “the board should, where appropriate, obtain the advice and guidance of independent consultants and/or actuaries”. In several instances, the document notes the advisability of obtaining expert opinion and advice.

Trustees will often find that an IPS merely formalises long-standing objectives and practices. There is no need to throw away yardsticks that stood you in good stead in the past. You simply incorporate them into your IPS.

The IPS will obviously consider the nature of the fund and its liabilities, along with the existing investments, and describe the assets that make up the portfolio. It will describe an appropriate mix of investments (the different asset types held in the portfolio) and suggest certain weightings (the percentage of the portfolio ascribed to various categories) within certain parameters or limits. Regulation 28 of the Pension Funds Act is the cornerstone of these parameters.

Overall investment objectives will be set out, covering key aspects like liability matching, wealth preservation and growth.

Specific targets or benchmarks will be established and put into the context of acceptable risk for a certain return. For clarity on risk parameters it will also be necessary to define a membership profile.


By setting targets you are not making a rod for your own back as it is quite reasonable to create some leeway, give reasonable timeframes for the accomplishment of your goals and list the factors that may limit your capacity to meet certain objectives in a certain time.

Among key issues are risk tolerances relative to membership profiles, the asset mix, portfolio diversification and expected rates of return. These core IPS elements will be covered in more detail in our next article.

Client Solutions is a division of STANLIB, a leading institutional asset manager and South Africa’s largest unit trust company.