UK Pensions Regulator Provides New Trustee Investment Guidance

New guidance stresses the importance of focused, timely monitoring.

The UK’s The Pensions Regulator (TPR), has published new investment guidance for trustees of occupational pension plans providing defined benefits.

The guidance includes examples of approaches and factors to consider when investing assets to fund defined benefit plans. TPR said it expects trustees to have suitably documented investment arrangements that are appropriate for their plan’s circumstances, including their level of complexity.

“It’s important to set clear investment objectives for your scheme and to identify how and when they should be achieved,” said Fred Berry, TPR’s head of investment consultancy. “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.”

The new guidance stresses the importance of focused, timely monitoring, and demonstrates how trustees can develop an investment-monitoring dashboard to provide a quick look at the plan’s financial position, and to make sure it’s meeting its objectives.

The guidance is divided into six sections:

Governance – Trustees should ensure they’re familiar with the basic legal principles around pension plan investment, as well as the investment provisions of the plan’s governing documents.

Investing to Fund Defined Benefits – Trustees may find it helpful to develop and maintain a set of beliefs about how investment markets function, and which factors lead to good investment outcomes. TPR says that investment beliefs, supported by research and experience, can help focus investment decision-making and make it more effective.

Matching Assets – Trustees are legally required to invest in assets backing defined benefit liabilities in a way that’s appropriate to the nature, timing and duration of the expected future retirement benefits payable under the plan. Many plans hold “matching assets” to manage investment risk relative to the liabilities. 

Growth Assets – Pension plans hold growth assets, known as “return-seeking investments” because they seek a positive return over time to grow the scheme assets. Trustees need to understand how the growth assets are expected to generate return, as well as the principal risks involved.

Implementation – It’s important to consider how the investment strategy can be implemented. This includes consideration of operational risks, security of plan assets, asset transitions and liquidity, and collateral management. TPR recommends trustees take an approach proportionate to the risks concerned. 

Monitoring – Trustees should monitor plan investments in the context of monitoring the employer covenant and funding level, and consider the results together. Monitoring is most effective when it is prioritized, timely and actionable.

By Michael Katz