Why Investment Governance Matters
Pension trustees bear a fiduciary responsibility that is both legally defined and practically demanding. They must act in the best interests of scheme members, balancing the need for investment returns against the imperative to manage risk. In practice, this means making complex investment decisions — often without the benefit of day-to-day market expertise — in an environment of regulatory oversight, sponsor pressure, and member expectations.
Good investment governance does not eliminate this complexity. What it does is create a structured environment in which trustees can make consistent, defensible decisions — and learn from them. Schemes with mature governance frameworks are better equipped to navigate market volatility, manage manager relationships, and demonstrate to regulators and members alike that assets are being managed prudently.
Building an Effective Investment Policy Statement
The Investment Policy Statement is the cornerstone of pension investment governance. At a minimum, it should define the scheme's investment objectives (return targets, risk tolerances, liquidity requirements), asset allocation policy (strategic allocation and permitted ranges), manager structure (number of managers, mandates, benchmarks), and decision rights (what trustees decide, what is delegated to an investment committee or consultant).
In our experience, the most common IPS weakness is a strategic asset allocation that was set at scheme inception and has never been revisited in light of changes in the liability profile, the investment landscape, or the sponsor's financial position. An IPS should be a living document — reviewed annually, updated when material changes occur, and approved by the full board of trustees.
“An investment policy statement is not a compliance document — it is a decision-making framework that should guide every allocation, every manager appointment, and every monitoring review the trustees undertake.”
— Niloyd Associates Pension Advisory Practice
Asset-Liability Matching: Principles and Practice
The fundamental purpose of a pension fund is to pay benefits. Asset-liability matching (ALM) is the discipline of constructing a portfolio whose cash flows and risk characteristics align with those projected benefit obligations. In its purest form, ALM involves duration-matching — ensuring that the interest rate sensitivity of assets is broadly comparable to that of liabilities, so that changes in long-term rates do not create large surpluses or deficits.
For most East African defined benefit schemes, a full liability-driven investment (LDI) approach is not yet feasible due to limited availability of long-duration local currency fixed income instruments. However, the principles of ALM should still inform strategic asset allocation — particularly the allocation between growth assets (equities, alternatives) and liability-matching assets (bonds, property), and the target level of interest rate and inflation hedging.
Manager Selection and Due Diligence
Selecting an investment manager is one of the most consequential decisions trustees make. Yet in many Kenyan pension schemes, manager selection remains informal — driven by relationships, historical performance, or fee levels — without a structured due diligence process. This creates governance risk: trustees may struggle to justify their appointment decisions if they are later challenged by regulators or members.
A robust manager selection process should assess investment philosophy and process consistency, team quality and stability, risk management and controls, operational and compliance infrastructure, performance attribution over a full market cycle, and fee structure and total cost of ownership. The output should be a documented recommendation to trustees — not a verbal briefing — that provides a clear audit trail of the decision.
Key insights
Governance quality determines long-term outcomes
Research consistently shows that pension schemes with structured governance frameworks — clear mandates, defined decision rights, and formal review cycles — deliver materially better risk-adjusted returns over the long term.
The IPS is a living decision-making framework
An Investment Policy Statement is not a compliance document filed once and forgotten. It should reflect the scheme's current liability profile, sponsor covenant, and market environment — and be reviewed at least annually.
Manager selection without due diligence is selection by chance
Appointing an investment manager based on recent performance alone is a well-documented governance failure. A structured due diligence process covering investment philosophy, team stability, risk controls, and fee transparency is essential.
Conclusion
Investment governance is not a one-time exercise. It is an ongoing discipline that requires trustees to maintain clear policy, monitor outcomes rigorously, and make adjustments when circumstances change. Niloyd Associates supports pension trustees through IPS development and review, asset-liability analysis, manager selection frameworks, and investment monitoring. Our aim is to help trustees build governance structures that are both technically sound and practically operable — structures that serve members well over the long term.
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