Silver Thatch Pensions manages nearly half-a-billion dollars, and has, during its nearly 20-year lifetime, returned an average 4.43 percent to 4.57 percent – probably insufficient to underwrite a retirement of uninterrupted luxury, but nevertheless a solid foundation.
Still, local pension plans, have long endured complaints of low returns, anemic investment strategies and antiquated regulations governing those strategies.
Pension plans, however, are unlike other discretionary investments. To begin with, they are compulsory. They are not founded on a family’s disposable income, but are aggregated from monthly salary deductions, matched by an employer’s contributions, with the idea of creating a self-sustaining resource that will provide ongoing support throughout retirement.
Pension plan administrators cannot lose their investments, and this mandates caution, and that caution is enshrined in the National Pensions Law.
Factors affecting returns
“Post-credit crisis, one of the challenges has been navigating what has become known as the low-return environment,” says Jack Leeland, a Saxon Pensions agent for Silver Thatch, pointing out that Silver Thatch has nonetheless produced consistently positive results.
Leeland explains the typical returns, pointing to two factors: National Pensions Law restrictions on the kinds of investments managers may pursue and a built-in conservatism among managers who are handling the life savings of its members.
“Under Cayman Islands law,” he says, “your asset allocation to fixed income has set ranges.”
The National Pensions Law, last revised in 1998, devotes most of its 15 pages to a list detailing where managers may and may not invest their plan’s funds and sets ranges for investments in specific asset classes. The pensions law mandates that between 20 percent and 40 percent of pension funds’ assets be allocated to fixed income. Between 40 percent and 70 percent should be invested in large capitalization equities which are traded publicly. And up to a maximum of 10 percent of the market value of pension funds’ assets can be invested in publicly traded small-to-medium capitalization equities, publicly traded investment-grade convertible debentures or “closed end or open end mutual or pooled funds, which themselves invest in “equities or convertible debentures” listed on one of 28 stock exchanges specified in the pensions law.
Elsewhere, the law stipulates 25 percent or less of pension fund assets must be invested in U.S. Treasury Bills or similar bills – approved by the superintendent – from other countries. The same 25 percent dictates funds placed in investment-grade commercial paper, money-market funds, certificates of deposit or fixed-term deposits or cash in a bank rated as “investment grade.”
Managers are warned against “undue risk of loss or impairment,” and must have “a reasonable expectation of fair return,” keeping in mind “the demographic composition of the members of the pension plan.”
They are also enjoined to hold “at least 70 percent of the market value of the assets” in U.S. currency, and no more than 20 percent in Cayman Islands dollars, and no one “selecting an investment for, or making a loan from, a pension fund” can select an investment or make a loan “except in a category or sub-category of investment or loan that is specifically permitted by these regulations.”
Six areas of investment are prohibited entirely, such as real estate, venture capital and derivative securities, and conflict-of-interest regulations are detailed in section 4(2).
Leeland says “limiting the ability to invest in more conservative asset classes can often lead to more volatility during periods of market stress.”
But he underlines the protections it affords pension members.
“The intent of the constraints is to encourage diversification, help[ing] to limit the potential for losses. These constraints also help to ensure that plans are investing in liquid vs. non-liquid assets, quality assets, etc.
“As you can see from our results, we have been able to produce consistently positive results. One of the [things] we have done is to lower our expense ratio – expenses as a percentage of total assets – each year.”
A summary of Silver Thatch results demonstrates consistent – if modest – gains. Leeland reminds investors that these gains were achieved after navigating the collapse of the tech bubble in 2000, the global financial crisis in 2007/2008 and in a subsequent low-return environment as global economies struggled to their feet.
The asset mix
Silver Thatch, similar to other plans, offers a choice among four investment plans, tailored to age, income, marital status and aspirations of any member.
A “conservative” plan invests 65 percent of its funds in bonds, 25 percent in equities, 10 percent in “alternatives,” hedge funds, and 5 percent in cash. The five-year average return on the conservative portfolio is 5.39 percent.
With slight changes to those elements, portfolios progress through “balanced,” which earned an average 4.48 percent in the last five years, “growth,” which has returned 4.89 annually percent since 2011, and “aggressive,” which recorded an average 4.99 percent during five years.
Silver Thatch is designing a new “ultraconservative” portfolio, but has not yet settled the details: “We plan to advertise it in our next handbook,” Leeland says, “which should be coming out before the end of the year – the portfolio will be active as soon as someone elects to use it.”
“Aggressive” investments, he says, “seek to maximize the long-term growth of capital. Current income is not a consideration as the portfolio does not allocate any portion to fixed-income investments.
“To pursue this goal, the portfolio, which is a fund of funds, normally invests approximately 90 percent of its assets in underlying funds that invest primarily in equity securities. The portfolio offers instant and broad diversification with exposure to a wide range of asset classes and investment styles. The fund may also gain exposure to alternative-asset classes including commodities and hedge funds.”
Silver Thatch’s list of investments takes up eight fine-print pages of the company’s June 30 financial statement. As expected the Balanced and Conservative portfolios largest holdings are in bonds, holding $51 and $22million of iShares Core U.S. Treasury bonds respectively (19 percent and 28 percent of their total respective portfolio). The Growth and Aggressive plans on the other hand have their largest holding in Vanguard S&P 500 ETF Equities, $30 and $1.5 million respectively (24 percent and 34 percent of their total respective portfolios).
Since inception Silver Thatch has outperformed its internal benchmark in the Balanced and the Conservative portfolios, which make up over 71 percent of the total plan, and underperformed in the Aggressive and Growth portfolios.
Silver Thatch’s internal “benchmark” goals, set by the investment board as a sort of ultimate target for managers, are derived from several global indexes such as the MSCI All Country World Index and the Barclays Capital U.S. Treasury Bond Index. The reason it makes sense to use a benchmark is that it helps define the appropriate level of risk and return, Leeland says, with the benchmark having a similar risk profile to that of the portfolio. [see chart]
The results are “net of investment management fees,” which range from 1.5 percent to 1.6 percent, and include management fees, audit fees, everything down to printing and posting of the statements.
Silver Thatch manages $493 million, among the largest of the six – with more than 18,000 individual members.
The Chamber of Commerce is the only other pension plan to publish annual figures – with more than 17,000 individual members, 900 businesses and a reported $305 million under management as of June 2016.
Silver Thatch funds are managed by Deutsche Bank, and the board of trustees – not remunerated for their pension-plan efforts – reviews its investments every two months.
“The trustees review both compliance and performance of the plan at each of these scheduled meetings,” Leeland says. “Deutsche Bank provides active management services and their portfolio-management team reviews each of the portfolios on a daily basis.
“Deutsche Bank’s regional investment committee reviews the [Silver Thatch] portfolios on a monthly basis. Meetings of the regional investment committee take place at minimum once per month and during periods of market-related stress (e.g. Brexit) can occur more often and on an ad hoc basis.”
Each trustee has an additional incentive to make sure Silver Thatch investments deliver attractive yields: All of them are members of “the plan.”
No one should be surprised to learn that Silver Thatch regularly changes its investments. Leeland explains: “This is why diversification is so critical. Asset classes perform differently year over year; the leader from last year may be this year’s laggard.
“A multi-asset class approach allows the investor to benefit by participating in broad-based asset classes. Put simply there would always be a winner to offset any losers,” he says.
Finally, Leeland points to “additional voluntary contributions” as a significant source of funding for a member account.
The Silver Thatch website describes AVCs as “contributions over and above the required basic contributions,” which can be invested in any of ST’s portfolios.
Contributions can be deducted automatically from a salary check and can be increased, reduced, stopped, restarted or – under pending changes to the National Pensions Law – withdrawn for a down payment on a home or other critical needs.
Pointing to government data, Leeland says all the portfolios outstrip average annual inflation of 1.64 percent between 2001 and 2016.
“You can see our results outweigh this considerably by 2 to 4 percent each year,” he says. While acknowledging that investment advice provided to individuals might differ from that provided to pension planners, Leeland reminds everyone that life savings and retirement accounts must be treated carefully: “We must remember that this is a pension plan and by nature should be a low-risk investment.
“I would like to highlight that all of our investments are in high quality liquid assets. We would not want to invest in any lower-quality, high-risk high-reward-type assets.”