The Pensions Regulator has told trustees to look out for bias and ulterior motives of their investment advisers and other stakeholders they deal with in new guidance published today.
The guidance says trustees ‘need to be able to critically evaluate the main points of the information you receive and understand the key underlying assumptions. This would include consideration of any likely biases and any interest the person giving the input may have in the decisions you make’.
It also cites potential conflicts of interest when appointing a fiduciary manager, between ‘for example the existing investment consultant, third party advisers and the fiduciary manager’.
The guidance comes after the FCA’s Asset Management Market Study, published last November, considering recommending the investment consultant sector be to the Competition and Markets Authority.
The guidance follows the common principles set out in TPR’s DC investment guidance as well as specific considerations relevant to defined benefit schemes.
The guidance says a good investment strategy is likely to involve effective governance, delegation and monitoring, form part of an integrated risk management process, be consistent with the scheme’s objectives and any long-term plans, have an overall amount of risk consistent with risk appetite, involve risk-taking that is understood and balanced and allow for the scheme’s future cash flow and liquidity requirements.
The new guidance emphasises the importance of monitoring and outlines how trustees may find it helpful to put together an investment monitoring dashboard.
TPR head of investment consultancy Fred Berry says: “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.
“It’s important to set clear investment objectives for your scheme and to identify how and when they should be achieved. Our guidance states that trustees should focus on areas that have the most impact for meeting their scheme’s objectives, and identify the necessary skills for the board of trustees of their scheme. It also provides some practical guidance on how to get the best from their advisers.”
Pension and Lifetime Savings Association head of governance and investments Joe Dabrowski says: “Across the UK, over 11 million members rely on defined benefit pension schemes so it is vital that trustees have the right skills and capabilities to manage their investment strategies, service providers and costs appropriately. As the FCA’s Asset Management Market Study 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.”
Barnett Waddingham partner Rod Goodyer says: “The new investment guidance is a useful resource for trustees and should be applicable to schemes of all sizes.
“The Regulator has suggested concentrating governance time on areas where most value can potentially be added by trustees and makes clear what issues should be at the forefront when reviewing strategy – principally around risk, return, investment beliefs and long-term planning. The issue of cashflow management is recognised as an increasingly important issue as schemes mature.
“We would also agree with the guidance provided around the importance of monitoring investment in terms of the importance of understanding how a strategy as a whole is performing and why – this is key to successful strategies rather than simply spending governance time largely on manager performance. This can be particularly important where services have been delegated to third parties such as fiduciary managers and with the Regulator stressing the importance of promoting the importance of independent assessment and monitoring of performance.
“The guidance references the Regulator’s recent guidance on integrated risk management and encourages the use of tools pulling together key funding, investment and covenant metrics as an important element of a robust strategy which can adapt to changing conditions.”