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MARINOS G. GIALELI
The management committees of the Provident and Pension Funds should have as their main concern to draw up and implement an investment strategy with specific targets which will yield the desirable results on a long term basis.
This investment strategy should rise from the fundamental personal information of the members of each fund, because if a fund is made up of members who are relatively young, then its investment strategy will naturally be different from any other fund whose members are older.
Considering the recent facts as a result of the global economic crisis with the capital markets falling significantly, we have listened to and many views have been analysed as regards the investments by pension funds, one of which was that we should not invest in shares. Any thoughts or suggestions are always welcome and they lead to further reflection.
Concerning the members who are close to retirement, it is true that they should not be exposed much to the risk of shares. However, for the younger members, this would be unfair and not productive. That is why the management committees should implement advanced methods so as to be able to satisfy all their members.
Not investing the funds in any shares will cause the same serious problem in respect to inflation, as the inflation on a long term basis (after being a member of the fund for 30-40 years) is greater than the deposits. Therefore, there is serious risk that the return of the fund for all those years could even be negative, a fact that most of the members do not know and while the management committees would believe (and take pride in it) that they have done their job well, they would actually have failed.
Furthermore, the management committee must provide members with results that are equal to 2/3 of their last salary so as the members will be able to continue to enjoy the same standard of living as prior to retirement, otherwise they would have not achieved their target in full. For having better results than inflation and to be equal to 2/3 of the last salary, the management committees must undertake also the management of a small percentage of risk (a percentage according to the investment strategy); for achieving a greater return than deposits then a risk must be taken as we cannot have good results without taking any risks. These two go together – it is inevitable!
The dispersion of the portfolio should be achieved through the long term investment strategy to contain specific targets and by this way the correct management of the risk shall be carried out. The funds are long term investment organisations which do not need anyone to guarantee their capital as they can guarantee such capitals on their own.
Therefore, the key to success is the correct management of the risk based on a long-term investment strategy.
(Marinos G. Gialeli is General Manager of the Cyprus Hotel Employees Provident Fund)
