Jason Coates
Partner
Article
14
The Pensions Regulator has revised its 2017 guidance on investing for defined benefit pension schemes to take account of changes to the statutory environment.
Trustees should ensure they are familiar with the new requirements set out in the Guidance, which includes changes taking effect this year.
If your trustee board has not recently reviewed its governance structures around investment decisions, the publication of the revised guidance provides a good opportunity - and useful examples - of how you might proceed.
Trustees should ensure they are familiar with the revised Guidance and its associated regulatory Code. A number of changes have taken effect this year which trustees should be complying with. If you have not recently reviewed the governance structures around your trustee board's investment processes, the issuance of the revised Guidance provides a good opportunity for doing so.
From 10 December 2019, trustees will need to ensure that they have set objectives for their investment consultants (both new and existing), which should be set by reference to their scheme's statement of investment principles.
If not, it is worth considering if your trustee board is able to devote enough time, and respond quickly enough, to the necessary investment decisions. Establishing an investment sub-committee (with appropriate terms of reference to manage risk) can help maximise your trustee board's chances of complying with the governance requirements around investments and minimise the risk of missing the boat on good investment opportunities.
In November 2018, we published an article considering whether the outpouring of recent pension investment publications, legislation and guidance meant a sea change for trustees' investment duties, or whether it was just more of the same. That was followed by an article in early 2019 considering the Competition and Markets Authority's Final Report on its Investment Consultants Market Investigation.
In this new instalment of our series on trustees' investment duties, we consider what the Pension Regulator's revised "Investment guidance for defined benefit pension schemes" (the "Guidance"), published in September, means for trustees as they grapple with maintaining good governance in turbulent times.
The Guidance is an updated version of guidance published by the Pension Regulator ("TPR") in March 2017, consisting of the same six sections, including a focus on governance, implementation and monitoring. The Guidance provides information on how trustees might meet in practice the standards set out in TPR's "Code of Practice 3: Funding defined benefits", which are to be met when complying with the law. TPR recommends trustees familiarise themselves with the Code before reading the Guidance.
A large part of the Guidance is unchanged from the rather substantial document that trustees will be familiar with from 2017. There are, however, some key changes of which it is worth taking note.
In describing the role of trustees, there appears to be a greater emphasis in the Guidance towards ensuring trustees work well with their investment professionals. While the fundamental position remains unchanged - trustees are ultimately responsible for their scheme's investments - there is an increased emphasis on how good investment outcomes can be achieved through finding the right advisers.
Trustees should:
TPR emphasises the need for trustees' investment governance structures to strike the right balance between the ability to move quickly (one reason for the focus, noted above, on decisions most likely to make a difference) and ensuring the right checks and balance are in place. A simple investment structure could involve the trustee board determining the overall objectives and making strategic decisions such as asset allocation and risk appetite. The board will be supported by the investment consultant and legal adviser advising on the appropriate considerations for that decision-making process, while the investment manager makes the day-to-day investment decisions.
If the trustee board is not able to devote enough time, or be responsive enough, to manage the investment decisions needed, use of a sub-committee is recommended. TPR lists a number of questions to consider when deciding whether you need an investment sub-committee, including:
The use of investment sub-committees, while not new, is something we are seeing increasingly commonly in practice; it is a good way of ensuring the necessary time is given to this important issue, without dominating an entire trustee meeting or detracting from the consideration of other critical issues.
If trustees are considering moving to this structure, we consider it important to get the right terms of reference in place for the committee, to ensure a suitable level of governance and oversight is maintained, and risk is managed.
When delegating to a fiduciary manager, TPR considers that trustees should consider matters such as:
In addition to the Guidance, trustees should also consider the implications of the Competition and Market Authority's Order in respect of fiduciary management and investment consultants.
Unsurprisingly, given the statutory changes around these topics, a large part of the changes in the Guidance compared to the March 2017 version focus on these areas. Some key points to note from the Guidance include:
This is not to say the law has fundamentally changed in this area; Cowan v Scargill and investing in members' best financial interests remains good law when it comes to deciding what investments your scheme should be making. Nonetheless, there are other matters that trustees should also be giving consideration to.
You might be excused from wondering how the increased focus in the Guidance on delegation and working with ones' investment professionals fits with a greater emphasis on investor values and engagement. In reality, much of the above is going to be dependent on what your investment professionals are able to offer, but the Guidance expects trustees to be willing and able to engage with those professionals on these issues for the purpose of achieving good investment outcomes.
A number of issues come out of the Guidance for trustees:
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