The Pensions Regulator (TPR) has published guidance to help defined benefit (DB) scheme trustees improve the setting and monitoring of their investment strategies.
The new guidance follows the common principles set out in the watchdog’s DC investment guidance published in July last year.
TPR stressed the importance of trustees being aware that the law requires them to ensure they are familiar with the basic legal principles of pension scheme investment as well their scheme’s governing documents.
The guidance suggests the use of an integrated risk management (IRM) framework to set the investment strategy and includes examples of approaches and factors to consider when investing scheme assets to fund DB benefits.
These include taking a level of investment risk consistent with the scheme’s risk appetite and managing asset and liability cashflows.
Trustees are also urged to focus on areas that have the most impact for meeting their scheme’s objectives, and identify the necessary skills for the board of trustees.
In addition to setting the investment strategy, TPR advises trustees to consider operational risks, security of scheme assets, asset transitions and liquidity and collateral management.
The guidance also provides practical advice on how trustees can get the best from their advisers.
TPR head of investment consultancy Fred Berry said: “Good investment governance is essential to all pension schemes, indeed to any institutional investor, and we expect them all to adhere to those common principles.
“The investment strategy is one of the most important drivers of a scheme’s ability to meet the objective of paying the promised benefits as they fall due, and we expect trustees to set this in the context of their integrated risk management approach.”
Pensions and Lifetime Savings Association head of governance and investments Joe Dabrowski said more than 11 million people in the UK depend on DB schemes meaning it is vital trustees have the right skills to manage their investment strategies.
“As the FCA’s Asset Management Market Study Interim Report has highlighted, pension schemes operate in an increasingly complicated and heavily mediated sector so we welcome today’s announcement from TPR which highlights the importance of good investment governance,” he added.
However, Hymans Robertson head of trustee Calum Cooper is sceptical about TPR recommending model-driven asset recommendations, saying these models are often static when schemes need dynamic asset allocation to close funding gaps.
“Trustees may be surprised to find out that the models used to measure and manage risk and return typically don’t allow for the primary reason schemes hold assets: i.e. for income to pay the pensions promised,” he said. “Given this, how confident can trustees be in model driven asset recommendations?
“This is one of the reasons DB pension funds hold more growth asset risk than required. It boils down to a lack of clarity on risk, and crucially not modelling all the key risks. This is putting £250bn of members’ benefits on the line. Model misbehaviour matters. Cashflows matter. The models used by schemes should reflect both asset and liability cashflows to improve the chances of paying members’ pensions in full.”
