Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697752593314.pdf (Georgia)
Investment Policy For Portfolio of Cash and Cash Equivalents Endorsed with the resolution of the Investment Board of the Pension Agency meeting N6 of 22 January 2020 Approved with the Order N 38 of the Director of the Pension Agency dated 22 January 2020 Objective 1.
The Investment Board endorses formation of the portfolio of Cash and Cash Equivalents (the Portfolio) with the objective to: a. define an acceptable level of risk for participants’ savings, and subsequently b. construct Portfolio to maximize returns within the accepted risk parameters.

2.

This Investment Policy (the Policy) establishes the framework for creation and management of the Portfolio within acceptable risk limits.
The Policy is based on the prudent person standard to ensure that the investment activities are carried out in the best interests of beneficiaries of the Pension Saving Scheme.

Eligible Assets 3.

The Portfolio shall include only the following national and/or foreign currency denominated financial instruments: a. current deposits at Georgian commercial banks; b. term deposits at Georgian commercial banks; c. certificate of deposits issued by Georgian commercial banks.

4.
4.

The rate of interest of individual financial instruments in the Portfolio shall either be fixed or variable.

5.

The maximum maturity of individual financial instruments in the Portfolio shall not exceed five (5) years.

6.

This Policy prohibits to borrow for investment purposes, or to invest in financial instruments using leverage, thus magnifying an inherent risk.

7.

The Chief Investment Officer shall not make any investment not explicitly permitted by this Policy.
Asset Allocation and Diversification 8.

Investments in certificates of deposits and bank deposits issued by the same issuer must not expose the Portfolio to the excessive concentration risk.

Therefore, the investment of more than 40% of the total Portfolio into the certificates of deposits and bank deposits issued by a single issuer (commercial bank) shall not be allowed.

2 9.
2 9.

In order to limit concentration on a particular issuer (commercial bank), the investment of more than 20% of the bank's total equity into the certificates of deposits and bank deposits of this bank shall not be allowed.

The issuing bank’s total equity shall be valued based on the most recent National Bank of Georgia’s Pillar Three quarterly reports.

10.
10.

The investments shall be made only in those financial instruments, issuers (commercial banks) of which are rated by the international credit rating agencies such as Standard & Poors, Moody’s, Fitch and Scope Ratings and the rating must be CCC or higher, per S&P Rating Agency’s scale, and/or equivalent, or as defined by the Decree N 258/04 of the President of the National Bank of Georgia, whichever is higher.

11.
11.

All investments of the Portfolio must comply with the requirements and restrictions imposed by the Law of Georgia on Pension Savings (the Law).

That said, when the Special Depository is contracted, the overall maximum of 75% of placements in cash and deposits, as set in the Law, Article 12 (a), shall be fulfilled by other investments as soon as reasonably and practically feasible.

12.

The maximum investment limit for cash and bank deposits imposed by the Law is 75% of total Pension Assets.
Risk Management 13.

In accordance with the best international risk management practices the Pension Agency adopts the ‘Three Lines of Defense Model’1 for creation of the organization wide risk management function.

14.

The risk management (control) function shall be considered functionally and hierarchically independent from risk taking operating units, including the portfolio management function.
The risk management function’s main responsibility is to identify, assess, measure and report all material risks on an individual asset and/or on an aggregate level.

15.

The Chief Investment Officer shall submit investment decisions to the Chief Risk Officer after transactions are executed in order for risk control function to monitor whether investment decisions are in compliance with this Policy.

1 ‘Three Lines of Defense Model’ was developed by the Institute of Internal Auditors in 2013.
The model has become the common benchmark for financial industry and it was also adopted by the Basel Committee for Banking Supervision.

3 16.

The Portfolio shall be exposed to low degree of risk since the corresponding risk appetite is limited because of the capital preservation objectives.

The risks inherent to the Portfolio are briefly summarized below.

a.
a.

Credit Risk - issuer of a debt financial instrument may be unable to pay interest and/or repay principal, when they become due, which could cause the value of the investment to decline and the Portfolio to lose money.

b.

Interest Rate Risk - when interest rates rise, the market value of a debt financial instrument tends to fall.

There is also income risk relevant to the instruments with a variable interest rates.
c. Exchange Rate Risk - when the relative value of a foreign currency depreciates, the market value of a debt financial instrument denominated in foreign currency falls.

d. Industry Concentration Risk - the Portfolio is overly exposed to adverse market, economic, regulatory, political or other developments affecting specifically to the banking sector.

17.

The Chief Risk Officer shall conduct periodic stress tests and Value at Risk computations to control inherent risks of the Portfolio.
95% VaR is defined as the maximum loss in the portfolio given confidence level of 95% over the predefined periods, i.e., loss in the 5th least favorable percentile of the distribution of losses.

The risk measurement processes, procedures and methodologies shall be adequately documented in accordance with the best international practices and comply with the Investment Policy and procedures set forth by the Investment Board.

18.
18.

The risk reports shall accurately communicate risk exposures, the results of stress tests, VaR computations and the corresponding recommendations.

19.
19.

The monthly risk reports shall be signed by the Chief Risk Officer and duly shared with the Investment Board, the Supervisory Board, the Director and the Chief Investment Officer and to other units as may be appropriate, as well as, the risk report shall be submitted to the National Bank of Georgia by the Chief Investment Officer or by the Investment Board as appropriate.

At the same time, significant risk events should be reported immediately.

20.
20.

The risk reports are not binding on the Chief Investment Officer and they have the function of “red flag” - providing the sign of some particular problem, which requires immediate attention.

21.

The final decision on investment activities rests with the Investment Board to ensure its independence, as set forth in the Law.
In case of breaches, the Investment Board shall revise this Policy and adopt a new Policy or it shall demand from the Chief Investment 4 Officer to provide in a reasonable timeframe plan of activities that needs to be taken in order to bring the Portfolio back in compliance with this Policy.

Valuation of Assets 22.

The Portfolio's assets shall be accounted at nominal values that should also include accrued interests accumulated from the time principal investment was made, less any relevant impairments.
The calculations shall be made daily.

23.

The Portfolio’s assets denominated in foreign currency shall be valued per the latest available official exchange rates reported by the National Bank of Georgia.

24.

The valuation methodology and any changes in it shall be duly disclosed to competent authorities, including the National Bank of Georgia.

Performance Measurement and Reporting 25.

The performance of the Portfolio shall be measured quarterly.
The benchmark shall be the Georgian Treasury Bill on a rolling five-year periods.

26.

The Chief Investment Officer is required to complete and send the daily compliance report to the National Bank of Georgia.

The report format will be provided by the National Bank of Georgia.

Roles and Responsibilities 27.

The Chief Investment Officer shall carry out duties and obligations stated both under this Policy and under the Law.

28.
28.

The Chief Investment Officer shall invest the pension assets in compliance with the provisions of this Policy.

29.

Certificates of deposits and bank deposits as Portfolio assets will be safekept at corresponding Pension Agency’s nominal ownership accounts at issuing commercial banks.

30.

The Pension Agency shall be responsible to provide the Chief Investment Officer assistance in the order execution process.
The Director of Pension Agency is responsible to duly 5 deploy the pension assets into the Certificates of deposits and bank deposits requested by the Chief Investment Officer.

31.

The Pension Agency holds the pension assets as fiduciary solely for the benefit and in the interests of the enrolled participants of pension saving scheme and their heirs.

6