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FSC Jamaica Kingston 2005-01-28 Pensions Act 2004 Investment Regulations. Mark S Fowler F.S.A.,F.C.I.A. Principal Lawrie Savage & Associates. Purpose of Investment Regulations. To create a legal framework for pension investing in Jamaica
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FSC JamaicaKingston 2005-01-28Pensions Act 2004Investment Regulations Mark S Fowler F.S.A.,F.C.I.A. Principal Lawrie Savage & Associates
Purpose of Investment Regulations • To create a legal framework for pension investing in Jamaica • To set out standards for sound pension fund investment practice • To enhance the protection of pension plan members • To assist trustees in ensuring sound pension plan governance regarding investment process
Investment Basics • Investment basics underpin sound investment practice • Form the foundation of the Regulations • Modern Portfolio Theory (efficient portfolios) • Lessons learned from experience – the problems needing attention • Risk management principles are at the focus of the Regulations
Overview of the Regulations • Key definitions – section 2 • General requirement of prudence – section 3 • Legal requirements re. nominee names, authorization by trustees or investment manager – sections 4, 5 • Arm’s length investing required and at market terms – section 6 • Control over borrowing by fund – section 7
Overview of the Regulations • Statement of Investment Principles and Practices (“SIPP”– cornerstone of the Regulations – section 8 • Documents the investment management of the fund against a generic framework • Actuary and auditor to be kept informed re. SIPP – section 9 • Mandatory features of the SIPP – sections 10, 11
Overview of the Regulations • Statement of Eligible Investments – sections 12,13,14 • Determination of the percentage of a fund that an investment represents – section 15 • General Concentration Limits • Single Issuer Limit of 5% - section 16 • Application and interpretation – section 17 • Fair value and appraisals required – section 18
Overview of the Regulations • Insurance of property required – section 19 • Investments in deposits authorized – section 20 • Investments in government securities authorized – section 21 • Use of repurchase agreements authorized – section 22 • Corporate obligations authorized – section 23 • Qualified institutions for purpose of section 23 – section 24 (tests of coverage of fixed charges)
Overview of the Regulations • Investment in stocks and shares authorized – section 25 • Investment in IPOs authorized – section 26 • Control over ownership of corporations by fund or scheme – 30% rule – section 27 • Investment in preferred or guaranteed shares authorized subject to earnings test – section 28 • Loans including mortgages authorized –section 29
Overview of the Regulations • Investment in real property authorized – section 30 • Investment in Deposit Administration contracts and Pooled Funds authorized –section 31 • Investment in Foreign Securities authorized – section 32 (20% portfolio limit – all items) • Investment in Multilateral Financing Bodies authorized – section 33
Overview of the Regulations • Investment in leases and other investments authorized – section 34 • Hedging transactions authorized – section 35 • Related Party investments authorized – section 36 subject to conditions described below • Certain investments Prohibited – section 37 – described below • Disposal of ineligible and Prohibited investments – section 38
Overview of the Regulations • Control Over Related Party Investing • Related party defined in detail • Portfolio limit: total of such investments and loans limited to 10% of the fund • Interior limit: total of NRP excluding those traded on recognized exchange and mortgage loans to members of a fund limited to 5% of the fund
Overview of the Regulations • Related Party • - administrator, investment manager, trustee or sponsor • - director, officer or employee of above • - association or trade union (including officers and employees) • - member • - person holding 10% or more of voting shares of sponsor
Overview of the Regulations • Related Party • - person associated or affiliated to the above • - immediate relatives of above persons • - company controlled by any of the above • - body or organization in which sponsor, administrator, investment manager, trustee, director, officer or employee holds a substantial investment • - body or organization holding a substantial investment in an administrator, investment manager, sponsor or trustee
Overview of the Regulations • Prohibited Investments • Short selling, ineligible investments or loans • Issues of or loans to insolvent institutions • Unsecured loans or leases • Speculative investments (e.g. commodities, art) • Loans or investments in auditors or actuaries • Mortgages on properties out of Jamaica • Any that the FSC believes are designed to evade • Participation in underwriting/marketing
Overview of the Regulations • Transition Provision – section 39 • Requires trustees to review existing investment portfolios • Determine if any non-compliance exists • Develop a plan to bring compliance about within 3 years • File statement and plan with FSC for review for reasonableness and approval – section 40
Overview of the Regulations • General Concentration Limit • Aggregate exposure to investments in securities of and loans to a single issuer is restricted to 5% of the fund • Exceptions – GOJ securities, Deposit Administration Contracts and Pooled Funds • Control measure against inadequate diversification
Overview of the Regulations • Currency Limit • Total exposure to non-Jamaican currency limited to 20% of the fund • No exceptions for GOJ securities • Includes all issuers, domestic and foreign • Includes real property not in Jamaica • Deposits held outside of Jamaica • Loans in non-Jamaican currency
Overview of the Regulations • Investment Categories Not Subject to Specific Portfolio Limits (to unrelated parties) • GOJ Securities • Term Deposits, Deposit Administration Contracts, Pooled Funds • Mortgage Loans • Eligible Corporate Securities • Shares traded on recognized exchanges (but voting shares restricted to 30% control limit)
Overview of the Regulations • Specific Portfolio Limits • Real property other than for the production of income limited to 5% of the fund • Leases and other investments limited to 5% of the fund • Loans – must be secured by adequate collateral, must not exceed 80% of value at date of loan, and must incorporate a fixed schedule for repayment
The SIPP • Responsibility of the trustees • May take advice from experts • Must file with FSC within 60 days of fund or scheme’s approval • Must be consistent with fund/scheme rules, Act and Regulations • FSC will review and approve or require change
The SIPP (Regulation 10) • FSC will review the SIPP for • - consistency with prudential standards • - comprehensiveness (reference to sections 10, 11 of the Regulations) • - consistency with the Act and Regulations • Where changes are required, FSC will review and approve amended SIPP • Trustees apprise actuary and auditor
The SIPP (Regulation 10) • SIPP to document: • - ROI objectives (g&n) • - should be consistent with fund’s circumstances and economic environment • - risk exposures and tolerances • - outlook for the fund/scheme’s continuity • - liquidity needs, current and anticipated changes
The SIPP (Regulation 10) • SIPP to document: • - any legal, regulatory or special issues related to the investment structure of the fund/scheme • - the fund/scheme target asset mix and re-balancing process • - relate asset mix target to objectives and risk tolerance
The SIPP • Note: • The Regulations require annual review of SIPP • Review must be documented for FSC review • Material change events automatically trigger SIPP review by trustees within 90 days • Sale of business, sponsor bankruptcy, sponsor reconstruction, merger, other events as declared by FSC
The SIPP (Regulation 11) • Factors to consider in constructing the SIPP • - nature of fund/scheme • - risk management, exposures and controls • - demographic circumstances current, expected • - funding/solvency requirements • - economic conditions • - diversification by and within asset classes