Why Was The Fairhead’s Independent Beneficiary Fund Established?
The Fairheads Independent Beneficiary Fund was established to administer benefits awarded to beneficiaries upon the death of members of Old Mutual sponsored retirement funds, particularly the Old Mutual SuperFund Pension and Provident Funds.
These benefits are administered so as to provide financial support to the Members in the form of regular monthly distributions and to utilise the funds to facilitate ad hoc payments in respect of the Members’ maintenance, education and general well-being, including medical costs.
Beneficiaries are mostly minors whose parents have died and the Fund Trustees have decided that their benefits should be administered by professionals until they reach majority. Beneficiaries may also be older than 18 years if they have requested the Fund to administer their benefits or who are classified as legally disabled.
Moneys will flow into the Fund irregularly and the amounts are likely to be modest. These beneficiaries require regular monthly distributions and ad hoc payments in respect of their maintenance, education and general well-being, including medical costs. As such a low risk tolerance is appropriate for the manner in which the Fund invests on behalf of the beneficiaries. On the beneficiary reaching the age of 18 (if they are minors) or upon their request (if they are older than 18 years and are not labouring under legal disabilities), any remaining capital is paid out to them.
Where the beneficiary’s income need is low relative to the capital sum and the member is young, investment may be for a period of 15 years or more.
Broadly, for most beneficiaries, their needs will be met by investing their capital in a money market portfolio to cater for short-term cash requirements with the balance in low risk portfolios that provide firstly for varying capital protection, then income generation and finally growth.
Investment Portfolios Matching The Membership Profile & Needs.
The Fund has used an asset-liability-modelling exercise to derive the following strategy:
- An allocation to cash (money market) at inception consisting of at least twelve (12) months regular income plus fees to cater for short-term benefit payments;
- An allocation to a portfolio with a high growth potential that provides a high level of capital protection to cater for the medium-term expected benefit payments; and
- Allocation of the balance of a beneficiary’s capital to a portfolio with a high growth potential but lower capital protection to cater for longer-term needs.
The split between the latter portfolios will be determined by a formula derived in the modelling exercise. The Fund Trustees will rebalance the allocation twice a year.
The Trustees have decided to use a smoothed bonus approach to protect beneficiaries against investment volatility because a beneficiary may require some of his or her benefit to be paid out at any point of time. The Fund Trustees have thus imposed conditions on the investment product used: The smoothed bonus portfolio must be managed according to principles that are transparent; the insurer underwriting the portfolio must be adequately capitalised; they must report at least annually on the level or range or the bonus stabilisation reserve; switching and termination conditions must be explicit and fair, and the portfolio must be big enough that there are no problems anticipated in paying benefits.
The Trustees selected the Old Mutual Absolute Stable Growth Portfolio for the investment of moneys corresponding to the medium-term expected benefit payments, and the Old Mutual Absolute Smooth Growth Portfolio for the investment of longer-term moneys. The Fund uses Futuregrowth Money Market Portfolio for the “cash” returns for short-term moneys.
These portfolios satisfy the above conditions. Over periods of 10 years or more, the Stable Growth Portfolio targets returns of inflation plus 5,5% and the Smooth Growth Portfolio targets returns of inflation plus 6%, in both cases before investment management fees of 0,55%.
Old Mutual has a B-BBEE score of 1. Furthermore, Old Mutual is a signatory to the UN Principles of Responsible Investment and the Code on Responsible Investment in South Africa, and has a process that integrates environmental, social and governance aspects into their decision making. The portfolios have part of their assets directed towards impact investing through the IDEAS Fund and part directed towards infrastructure investments.
In addition, the Old Mutual Absolute Growth portfolios have integrated environmental, social and governance aspects into their decision making process, direct part of the assets under management towards impact investments, and have satisfied transformation objectives in terms of the Financial Services Sector scorecard.
The Board monitors performance quarterly and reviews the investment strategy once a year.