The investment mission and supporting goals are clearly defined and have commitment from the relevant stakeholders.
For social security institutions that have an investment mandate, legislation, policy or decree may establish the general direction of the investment policy and prescribe the types of allowed investment instruments. Furthermore, in order to maximize the long-term rate of return on reserves while at the same time mitigating investment risks and taking into account the nature of liabilities, the range of instruments allowed for investment should be sufficiently diversified. There are a number of factors influencing the investment strategy of an institution including the security of investments, expected rates of return, cash flow issues and the nature of the liabilities of the organization. For institutions using external managers, it is also important that the missions and goals are clearly defined and communicated appropriately.
- The investment mission should be complemented by explicit goals that specify financial “success” over defined time periods.
- The investing institution’s resources should be aligned with the importance of each component of the mission, with frequent references to the priorities set out in the mission.
- The investment process should be framed by reference to a risk budget aligned to the investing institution’s goals incorporating an appropriate and integrated view of alpha and beta.
- When an institution uses an external body for investment, a document clearly setting out the mission and goals of the institution should be drawn up and communicated to the external manager(s). When these goals change, this should be reflected in an updated document.
- A clear belief system should be established with regard to why a long-term approach to investment is important and creates value, coupled with recognition that there will be short-term opportunities that present themselves and require a swift and decisive response from the management or investment committee.
- The board should adopt a clearly defined and well-specified investment mission agreed by all stakeholders with prioritization of each component.
- The investment mission shall respect relevant legislation, policy or decrees.
- Abstract objectives such as maximizing beneficiary welfare should be supplemented by second-order mission statements such that the board, management, investment committee and stakeholders inside and outside the institution are able to match the objectives with an accepted operational goal, such as a target annual real rate of return, while allowing for liabilities and subject to agreed risk parameters.
- A set of supporting goals should be developed to support success of the investment mission.
- The board should establish the investment time horizon in the investment mission. This should balance the advantages of a long time horizon, understanding of the need to be able to act swiftly and decisively when opportunities arise, and the need for measured responses to short-term changes in conditions and performance.