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Chapter 1: The Regulatory Environment > Objectives of Funds > Flashcards

Objectives of Funds Flashcards

1
Q

What are the largest institutional investors?

A

Pension funds (great emphasis on this in the exam), followed by insurance companies, collective investment schemes (unit trust) and private trust companies

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2
Q

What factors effect fund risks?

A
  • Similar to factor effecting individual risks
  • time horizon, liquidity needs, tax obligation, legal structures
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3
Q

What document is fund objectives written in?

A

Constitutional documents e.g. trust deeds for unit trusts, statement of investment principle for occupation pension scheme

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4
Q

What are the objectives of funds?

A

Maximising returns
- Defined contribution pension scheme
- Collective investment scheme
- Investment trust

Minimising liability
- Defined benefit pension scheme
- Life assurance company
- General insurance company

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5
Q

What is a liability driven investment?

A

Ensures that the return generated
meets liabilities before its due date.

Many liability driven investments include fixed income and government bonds, matching cash flows with maturing

Real liabilities vs nominal liabilities e.g. real liabilities are adjusted to inflation so a pension scheme is linked to an employees final salary which is impacted by inflation

Often investors facing real liabilities will use assets such as equities and index linked gilts to reduce the impact

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6
Q

What affects a funds asset allocation?

A

Time horizon - length of time fund can commit to investments - longer the time horizon, the ore short term risk a fund can take (as there’s time to make it back)

E.g. life assurance policy for person in their 30s - longer time horizon, short term risk, less liquidity needed e.g. equity vs general insurance which pays out immediately, requires liquidity, immediate and uncertain liabilities takes short term Tim horizon and view on investments - cash deposits or money market instruments

Tax - is the fund liable for tax? Insurance companies, unit trust and and investment trusts are liable for tax (largely on income from equity, bonds, deposits or property income). Pension funds and charities pay no income or gains tax, but there may still be some tax implications involved.

Legal and regulatory restrictions - collective investment schemes have to comply with FCA source and therefore are restricts asset classes and allocation within funds. General insurers are required to keep solvency margins, expressed as an interest of net assts to net premiums

***ESG funds screen companies and sectors, effecting asset allocation

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7
Q

What is UCITS?

A

Undertakings for Collective Investment in Transferable Securities

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8
Q

What security does the UCITS Directive regulate?

A

Collective investment schemes

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9
Q

What incarnation of the UCITS directive are we now on?

A

4th

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10
Q

What 2 parts is the UCITS III Directive split into?

A
  • Management Directive - increases the scope of management companies activities that can be passported to include discretionary management, administration and safekeeping. Also seeks to protect investors by ensuring management companies are suitably capiatalised
  • Product Directive - expands the range of instruments/products that are available within UCITS funds e.g. derivatives to reduce risk
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11
Q

Outline UCITS IV

A
  • Came into effect in 2011
  • To promote greater efficiency in Pan-European management funds by:
    1. Management company passport: a management firm located in one country can set up a fund in another
    2. Notification procedure: quicker, more simplified regulator-to-regulator communication
    3. Supervision - management company will be subject to the regulation and supervision of the country its based in
    4. Key investor information - Product brochures to be simpler
    5. Mergers - a standardised framework governing both border and cross border mergers between funds
    6. Master feeder structure - allows funds to build economies of scale across borders
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12
Q

What is the UCITS criteria?

A
  • Scheme must apply for permission (UCITS passport) from its home state regulator to operate in EEA member state
  • UCITS scheme must be open ended
  • Scheme must follow UCITS regulation

**UCITS funds are no longer automatically passported from UK into EU, though some may still have limited access

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13
Q

What is AIFMD?

A

Alternative Investment Fund Manager Directive - covered management, marketing and administration of alternative investment fund managers, rather than the fund itself

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14
Q

What is an alternative investment fund?

A

A collective investment undertaking that is not subject to UCITS regime. It includes hedge funds, investment companies and real estate funds among others
- Harmonisation creates permission for AIMFDs to passport into EU rather than comply with local regime

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15
Q

What are the requirements under AIMFD?

A
  • Authorisation from home state regulator
  • AUM above 100,000EUR is the AIF uses leverage or
    -500m EUR if AIF does not use leverage and do not give investors right to redemption within 5 yeas of initial investment

AIFs that do not meet these thresholds are seen to be sub-threshold and lighter regulation applies

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16
Q

What are the 2 types of sub-threshold AIFs?

A
  • A small authorise UK AIFM which is FCA authorise but has not applied for AIFMD
  • A small registered UK AIFM - internal AIFM of a corporate body such as an investment trust, an unauthorised manager of a property fund, a fund manager which has applied for authorisation under European Venture Capital Funds Regulation or European Social Enterprise Funds Regulation
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17
Q

What FCA codes apply to AIFMs thresholds

A

SYSC and COBS

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18
Q

What type of broker and counterparties can UK AIMFs select?

A
  • Those subject to regulatory supervision
  • Financial sound
  • Have necessary organisational structure
19
Q

How often should AIFMs report?

A
  • Required to submit quarterly, semi-annually or annual in respect to their member state regulator with information about AIFs and AIFMs.

AIFMs are also required to submit annual financial reports - including remuneration

AIFMs must also disclose the leverage employed with their funds and prove that leverage in any amount has been limited and reasonable

20
Q

What does the FCA require from authorised fund mangers?

A
  • Assess the value for money of each fund
  • Take corrective action if it does not offer good value for money
  • Explain the assessment annually in a public report

*** COLL in FCA handbook

21
Q

What is the criteria for assessing the value of assets by AFMs?

A
  • Quality of service
  • Fund performance
  • Authorised fund manager costs
  • Economies of scale
  • Comparable market rates
  • Comparable services
  • Classes of units
22
Q

What are the features of pension funds?

A
  • An investment scheme where the contributor is saving for retirement

Provided the scheme is approve by HMRC Pensions Scheme Office it will have the following tax benefits:
- Contributions to an approve pension fund are tax free
- While investments are in the fund - any capital gains or income are not subject to tax
- However, when pension starts to be paid out, the recipient will be subject to income tax
- UK NI contributes towards pension schemes
- Sponsoring companies also have occupational pension schemes (OPS)
- A person may also take out a personal pension plan from a private operator

23
Q

What is a stakeholder pension?

A
  • Introduced in 2001
  • A low cost pension alternative to self employed and middle income employees
    -Employers are obliged to offer this unless they have other adequate arrangements in place for staff pensions
24
Q

What type of occupation pension schemes are there?

A
  • Defined contribution scheme
  • Defined benefit scheme
25
Q

What is a defined contribution scheme?

A
  • Company contributes a certain amount on the employees behalf
  • These contributions are invested to grow over time
  • Returns determine the pension paid
  • Personal pension are usually of defined contribution type
26
Q

What is a defined benefit scheme?

A
  • A guarantee to pay a pension of a certain size once the employees retires e.g fixed percentage of employees salary
  • The returns from the scheme are known as actuarial returns
  • Many defined benefit schemes have moved away from equities to bonds and derivatives to match liabilities
  • Adopted LDI investment strategy to
27
Q

What is the Pension Act 2008?

A
  • Implemented in 2012
  • Requires all eligible workers who were not already on a good workplace scheme to be automatically enrolled to their employers pension scheme
  • Eligible workers are essentially from ages 22 to state retirement age and who earn above £10,000 annually
  • If the employer does not have a scheme, they are enrolled onto NEST, the government’s National Employment Savings Trust
28
Q

What is a SIPP?

A

Self invested personal pension

29
Q

Who appoints the investment manager for a pension fund?

A

Trustee - legal guardian

30
Q

What must a statement of investment principle include?

A
  • Binding
  • Choosing investments
  • The kind of investments to be held and the balance between different types of investments
  • Risk including how risk should me measured and managed and the expected return
  • Realising investment
  • Using the rights (including voting rights) attached to investments if they are not available

** The SIP must be reviewed and revisited by the trustee

31
Q

What are the legal requirements when choosing investments for a pension?

A
  • Security, liquidity, profitability and quality
  • Nature and duration of expected future retirement benefits of the scheme
  • Diversification in the choice of investments for the scheme
  • The scheme assets are invested mainly in regulated markets
  • The trustee must ensure assets are held securely - if a custodian is not in place, arrangements must be in place for holding the schemes assets are satisfactory
32
Q

When was the Pensions Regulator established?

A

Under the Pensions Act 2004

33
Q

What’s the objectives of the pensions regulator?

A
  • Protect the benefits of members of work based schemes
  • Reduce risks of situations requiring compensation from the Pension Protection Fund
  • Promote good administration
  • Maximise employer compliance with employer duties
34
Q

Who protects against pension losses?

A

Pension Protection Fund

35
Q

What is the power of the pension regulator?

A
  • Investigating schemes - gathering information to help identify and monitor risks
  • Putting things right with problems have been identified
  • Acting against avoidance - ensuring employers do not sidestep their pension responsibilities
36
Q

How do pension regulator collect information?

A
  • Through the scheme return
  • Reports from whistleblowers
  • Trustees and scheme managers are responsible for changes in scheme address, details of trustees, type of benefits provided
37
Q

What warnings can the pensions regulator issue?

A
  • Contribution notices - where there is a deliberate attempt to avoid statutory debt
  • Financial support direction - financial support to be put in place for underfunded schemes
  • Restoration order - if there has been a transaction that has undervalued the schemes assets, the regulator can take action to have the assets or equivalent restored to the scheme
38
Q

What is a statement of funding principles?

A
  • Explains how each statutory funding objective will be met
  • Duty of trustees to issue this
    1. Regular actuarial reports - how they will be made and how often
    2. Preparing a schedule of contributors, showing the rates of contributions payable and how they should be paid
    3. Putting in place a recovery plan for when funding is not met
    4. These must be review every 3 years
39
Q

What is the Pensions Scheme Act 2021?

A
  • Additional guidance for trustees on pension payment requests
  • Higher fine for avoidance of duties and information deficiencies - up to £1m
  • Governance disclosures on climate related risks and activities
40
Q

What is the Pension Protection Fund?

A
  • Main function is to provide compensation to members of eligible defined benefit pensions schemes when there is qualifying insolvency in relation to an employer
  • Under the Pensions Act 2004
  • Run by the Board of the Pension Protection Fund
41
Q

What is the compensation issued by the Pension Protection Fund?

A
  • Up to 100% of benefits to existing pensioners
  • Up to 90% of benefits to those who have not yet retired
42
Q

What are the different type of Life Insurance policies?

A
  • Term insurance policy - cover the life on an individual over a specific period (usually 10 years) - in the event that a person survives the period, no payment is made
  • Whole-of-life policy will insure the life of an individual and pay a capital sum on the individuals death
  • Endowment policy - combines savings and life insurance element - will pay a fixed sum in the event of the policy holders death - popular in the 1980s and 90s and insurance covered mortgages on death
  • With profits endowment policies - gave the opportunity for surplus to be accrued over and above the basic sum assured
43
Q

What are is general insurance?

A
  • Covers against general problems e.g. car insurance, contents insurance, pets
  • Typically short term investment horizon
  • Highly liquid
  • Low tolerance to risk
  • Solvency requirements
44
Q
A

Chapter 1: The Regulatory Environment (10 decks)

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