In June The Pensions Regulator published their updated ‘Guide to Investment Governance’ which has been produced to support trustee boards meet the standards in the TPR’s ‘Code of practice 13: Governance and administration of occupational trust based schemes providing money purchase benefits’.
The other guides produced by the TPR for Code of practice 13 are on: the trustee boards; scheme management skills; administration; value for members; and communicating and reporting.
The intention of the guides is to help DC trustees interpret Code of practice 13 and help assist trustees with what they should be doing to meet the required standards. The guide does not introduce any ‘law’, but is helpful for trustees on how they should be applying the requirements.
We have provided a summary of some of the most useful sections of the updated guidance for DC trustees:
The Trustee Board’s Role in Investment Governance
The updated guidance highlights the need for suitably documented investment governance arrangements to be put in place. The governance structure should strike an appropriate balance between ‘speed and action’ against ‘checks and balances’ to ensure that any actions trustees take are proportionate. If you are uncertain whether your investment governance arrangements are consistent with the law, the guidance recommends you seek legal advice. Guidance is also provided on who you should consider on an investment sub-committee if you choose to set one of these up.
The guidance prompts trustees to consider which decision-making to retain and which to delegate. If trustees delegate certain decisions, they should take steps to ensure that whoever is undertaking the task has the appropriate knowledge and experience and is performing their role competently in accordance with section 36 of the Pensions Act 1995.
The guidance also reminds trustees of the importance of ensuring that the terms of the contractual arrangements and fund documents that are put in place with investment managers are reviewed and negotiated as appropriate.
Investment Decisions and your Statement of Investment Principles
The purpose of a SIP is to set out the scheme’s investment strategy, including the investment objectives and the investment policies that the trustee board adopts.
Useful reminders are provided for trustees on the requirements their policies need to adhere to in relation to financially material considerations (including those relating to ESG considerations) including how those considerations are taken into account in the selection, retention and realisation of investments.
From 1 October 2019, DC schemes with 100 or more members are required to include in their SIP and default SIP a stewardship policy to encompass the trustees’ policy in relation to voting, engaging and monitoring.
Unless exempt, schemes will need to produce a publically available implementation report free of charge on their website on how they have followed and acted upon their investment policies in their SIP from 1 October 2020. Useful guidance is provided on what the implementation report should cover.
Financial and non-financial factors
Guidance is provided on what factors trustees should consider when setting an investment strategy. In particular, this focuses on factors that may or may not be considered ‘material’ when designing an investment strategy. In determining the investment principles of a scheme, trustees may choose factors which are not ‘financially material’ to the scheme. This will include environmental, social issues that trustees may wish to highlight as important to the members.
Trustees may find the worked examples particularly helpful. One example provides how trustees may consider financial factors, which are worked into their SIP and then they decide to report annually in their SIP implementation report on how core elements relevant to this is applied.
Guidance is also provided on how to review and monitor fund performance.
The guidance sets out how trustees can deal with low levels of member engagement, which can make it hard to understand how members want their scheme’s assets invested. Pointers are also provided to help trustees understand how much they should consult with members on their investment preferences.
Monitoring Investment Governance
In order for trustees to monitor investments effectively, the TPR expects trustees to assess their effectiveness of investment making decisions and their governance processes.
The guidance sets out that trustees should consider the following in relation to the Scheme’s investment objectives:
- Performance as a trustee board, guidance is provided on how trustees can assess their performance.
- How trustees can develop and maintain an investment strategy, including the performance of the scheme’s fiduciary manager and monitoring costs and charges.
- How to carry out stewardship activities, including the monitoring of assets and service providers.
If trustees use fiduciary management, guidance is provided on what trustees should consider, if they have not already done so, in light of the Competition and Markets Authority order, which will be implemented in December 2019. This requires trustees to run a competitive tender process for fiduciary management arrangements where 20% or more of the scheme’s assets are under management in such an arrangement. Trustees should note that these requirements will be introduced before the order comes in to force and the DWP has launched a consultation about how current pensions legislation will be amended to integrate the order.
Designing Investment Arrangements
In order to assist trustees with understanding their membership to design an appropriate strategy (including the default arrangement) a table of sources that trustees can use to find relevant information is provided.
Strategy, Performance Monitoring and Review
Guidance is provided on what a significant change to the demographic of the membership might look like.