Pensions Regulator issues new investment guidance for defined benefit scheme trustees

The guidance follows work by the regulator to produce investment principles for defined contribution (DC) schemes, but incorporates specific considerations relevant to DB schemes. It also includes practical examples of approaches and factors that trustees should consider when investing scheme assets to fund defined benefits.

Pensions expert Raj Sharma of Pinsent Masons, the law firm behind Out-Law.com, said that the guidance was "perhaps not unexpected" given increased focus by TPR on investment for DB schemes over the last year or so.

"The guidance doesn't say anything particularly new or startling but it is nonetheless a helpful gathering of the key areas of focus for trustees and worth a read – if only for trustees to check, and take comfort, that they are going about their investment duties in a way which TPR expects them to," he said.

"The working examples are provided with an integrated risk management (IRM) approach in mind. This reinforces the importance for trustees to have their actuary/covenant assessor/investment adviser joined up and in the room at the same time - something we would encourage from a good governance perspective," he said.

"The importance for trustees getting legal advice on their investment structures is also well made. The message here is: carry out proper due diligence before you enter into the investment contract and ensure that contract is properly negotiated on your behalf," he said.

DB scheme trustees are responsible for their scheme's investment governance arrangements, including determining its investment strategy. They are legally required to ensure that they are familiar with the basic legal principles of pension scheme investment, as well as the investment provisions in their scheme's governing documents.

As well as setting an investment strategy, trustees should also consider how that strategy is to be implemented, according to the guidance. This requires them to consider factors such as operational risk, security of scheme assets, asset transitions and liquidity and collateral management.

In TPR's view, a good investment strategy should feature effective governance, delegation and monitoring; and be consistent with the scheme's objectives and any long-term plans, according to the guidance. It should also allow for the scheme's future cash flow and liquidity requirements. Overall investment risk should be consistent with the trustees' risk appetite, and should be appropriately understood and balanced, according to the guidance.

Trustees are expected to have suitably documented investment arrangements that are appropriate for their scheme's circumstances, including their level of complexity. The guidance also emphasises the importance of focused, timely monitoring. Trustees may find it helpful to put together an investment monitoring 'dashboard' which can provide them with an at-a-glance view of how well the scheme is meeting its objectives and highlight potential risks and issues, according to the guidance.

The guidance makes clear that trustees are permitted to take non-financial factors, such as environmental, social and governance or ethical issues, into account in certain circumstances, in line with the Law Commission's recent guidance on the topic. For example, trustees may take non-financial factors into account where they have "good reason" to think that these reflect the interests of scheme members and there is no risk of "material financial detriment" to the scheme, according to the guidance.

"The idea that trustees might wish to amend their investment strategy to take account of DB members' views on ethical/social investments where the returns and risk profiles are no worse may seem to some trustees a case for common sense, but for others a risk in precedent-setting," said pensions expert Raj Sharma.

The guidance was also, perhaps unexpectedly, "very light touch on the question of how trustees should approach the question of investment fees and costs as part of their overall investment strategy and governance", he said.