Guideline 8. Restrictions on investments

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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. Any legal or regulatory restriction is documented and incorporated into the social security institution’s investment mission and strategy or appropriately communicated to external investment managers.

Guideline code

INVEST_01100

Mechanism

An independent, external authority should review the investment mission and restrictions of the investing institution and disclose publicly whether these are consistent with the long-term objective of the social security institution.
Where a choice of investment is influenced by externally set investment constraints, the institution should document the implications of such a choice for the financial situation of the institution including the setting out of the risk implications.
Investments in a given individual asset or security, or in the assets or securities of a particular industry or entity other than the government itself, should be limited as a proportion of a social security institution’s total portfolio.
While the proportion of investments in government bonds or other instruments may not be limited, the institution should assess the risks related to this type of investment, including sovereign risk.
A social security institution should not hold more than a specific proportion of the total market value of a given type of asset or of the assets of a particular industry or entity.

Parent

C. Common Processes

Structure

Restrictions on levels and types of investments should be imposed only when necessary as they limit the freedom of the board, management, investment committee and investment unit to maximize the long-term rate of return on reserves while mitigating investment risks with appropriate diversification.
In certain situations, externally imposed types or levels of investment may be prescribed. Where such limits are imposed, the social security institution should properly disclose the nature of such limits and set out the impact on the risk-and-return profile of the portfolio where such an impact exists. This should also be carried out even when such limits on investment are imposed on an exceptional and temporary basis and/or for compelling prudential reasons.
Internally imposed minimum and maximum levels of investment should be established as appropriate, recognizing the available governance capacity. These limits should satisfy prudential rules and be consistent with the investment mission and goals.
Some administrations will set funding level objectives as a multiple of cash flow requirements and this will be reflected in the investment policy of the investing institution. Therefore, the importance of liquidity management is particularly relevant for social security reserve funds. Investing institutions should, therefore, set aside a minimum level of cash and/or short-term money market securities to pay immediate benefits and meet other ongoing obligations. This consideration will form part of a wider requirement to take into account the nature of liabilities in investment strategy and the selection of assets.

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