The Value of an Investment Policy Statement

stack of papers

Pension funds, both public and private, each have an Investment Policy Statement (IPS). An IPS provides a formal framework for investing the pension fund’s assets, including asset allocation targets and investment objectives.

But what are the values of having such a statement? A recent paper by Anthony L. Scialabba and Carol Lawton, published in the Journal of Pension Benefits, dives deep into that question.

Regarding the value of the statement, it can be used to show that trustees are indeed acting as “prudent investors”. From the paper:

With regard to the duty of prudence, conduct is what counts, not the results of the performance of the investments. An IPS can show that a prudent investment procedure was in place. In addition, an IPS can protect plan fiduciaries from inadvertently making arbitrary and ill-advised decisions. The directions outlined in the IPS can provide the fiduciaries with confidence in bad economic times that they made sound investment decisions in accordance with the plan sponsor’s or administrator’s intentions.

An IPS can also be a good communication tool, both for plan participants and for trustees:

An IPS can enhance employee morale in providing clear communication of the plan’s investment policy to participants. A plan sponsor can post a plan’s IPS on the Internet to provide participants with helpful insight into how the plan’s investments are chosen and maintained. This can reassure employees and encourage participation because they know that the investment fiduciaries have a sound investment structure in place. In addition, an IPS can enhance the morale of management if its members serve on the investment committee of a plan, as they are given guidance by which to judge their decisions and performance.

The authors also note that having a strong IPS – and sticking to it – can translate into strong investment performance.

There are some drawbacks to IPSs as well. To read about them, and read the rest of the paper (titled “Investment Policy Statements: Their Values and Their Drawbacks”), click here [subscription required].