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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


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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


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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


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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


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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


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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


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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)


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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)


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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


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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


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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


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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


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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


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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


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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


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