Guideline 10. Investment assumptions

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The investment assumptions used in determining the investment strategy of the social security institution are fit for purpose. These assumptions will include assumptions for return, risk and correlation, and other factors as appropriate. Assumptions are considered over a suitable time frame (typically long term) to ensure the output of any modelling is consistent with the time horizon of the mission and goals of the social security institution.

Guideline code

INVEST_01300

Mechanism

Appropriate staff resources with sufficient knowledge and expertise should be allocated to the setting of assumptions. This may include actuarial input.
The management or investment committee should provide the board with proposed investment assumptions for review and approval.
A broad range of information should be considered in the setting of assumptions for each asset class, including, but not limited to: current market information; historical market data (particularly in determining volatility and correlation assumptions); and the views of other market participants (e.g. information from central banks and governments, academic papers, market commentators and investment managers). Historical market data should be considered from a wide range of markets and economies, and due consideration should be given to whether historical drivers and rates of return are likely to be repeated in the future. Other economic and demographic factors should also be taken into account in the determination of long-term rates of return on different asset classes.
The overall assumption for return on total assets held by the reserve fund will take into account the assumptions for the individual asset classes and blend these into an overall assumption after determining the appropriate weighting to apply to each individual assumption. This weighting will depend on current and future asset profiles and the proportion of total assets made up by each individual asset class.
Assumptions should be adequately reviewed prior to use in any modelling to ensure they reflect current and future global economic and market information. While the frequency of the review of assumptions should be consistent with the needs, characteristics and processes of the investing institution, an annual review of assumptions can be considered good practice.
The board, management and investment committee should understand which time frame has been considered when assumptions to be used in modelling were determined. This requirement refers to both the period in the past over which data was taken into account in determining the assumptions and the future period over which assumptions are applied.
Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to determine investment assumptions, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions. However, the setting of assumptions should be a decision that is independent of those involved in the investment management process itself, although the input of those involved in the investment management process may be requested.
Where investment functions are carried out by an external investment manager, any relevant information regarding investment and the external manager’s point of view on future returns should be sought in the setting of assumptions.

Parent

C. Common Processes

Structure

A broad range of information should be considered in the setting of assumptions.
Assumptions used in any modelling to determine the investment strategy should be up to date.
Assumptions used in modelling should be considered over an appropriate time frame.
Assumptions should, where required, reflect decrees or decisions issued by relevant national authorities or establishing legislation.

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