The new investment guidance issued recently by the Pensions Regulator is a useful summary of what well run schemes have known for years. But the fact that it has been articulated by an independent and august body affords it the weight to make best practice normal practice going forward.
There is little, if anything, that we would disagree with and we welcome the additional clarity of thought that it provides in some areas.
The key elements of the guidance, plus some comments from us, are provided below.
Governance sits at the heart of a well run scheme. Having the right people doing the right things at the right time leads to sound and timely decisions that are implemented efficiently and effectively. It is good to see tPR recognising that this requires full trustee boards retaining key decision making powers, with duties delegated to sub-committees and experts appropriately.
Objectives need to be clear, but the act of discovering them is an iterative process as appetite for return and tolerance of risk is tested. It is reasonable to have primary and secondary objectives over different time periods, so long as they do not undermine each other. And risk exposure should be contained by the ability of the sponsor to meet contingency plans if strategies perform poorly.
Strategy must be consistent with those objectives, and focus on the four key issues: (a) the allocation to growth and matching assets (b) diversification across growth assets (c) protection for the growth assets (against interest rate falls, say) and (d) an eye on cash flow requirements so that assets aren’t realised at inopportune times. Stochastic models are useful, but beware their limitations. ‘What if?’ stress-testing is a useful supplement. The Regulator helpfully endorses the use of sophisticated derivative strategies for mitigating the effects of tail risks.
De-risking over time should be both strategic and opportunistic. The former suggests a plan to invest more in matching assets over time, even if experience is as assumed. The latter suggests accelerating that process if experience is better than assumed.
Implementation is a risk in itself, which includes operational risk, security of assets and reorganisation risks. Sound third party assistance should be sought to manage this.
Ongoing Stewardship is essential to ensure that the strategy remains fit for purpose and develops appropriately over time. This includes monitoring the progress of the funding level to an assumed flight path and identifying areas that might lead to problems in the future. It also includes regular reappraisal of the independence and efficacy of advisers as well as the performance of the trustee board itself plus its sub-committees.
Our View: Many will see the above as the codification of sensible best practice – and we agree. But we particularly like:
- the fact that the Regulator has expressed the view that sensible governance and adviser costs are both important; and that good value depends on what you get as well as what you pay.
- the suggestion that trustees put together an investment monitoring dashboard. This might be a one to two page rolling review of all of the above, to ensure that none of the key elements is forgotten.