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Investment arrangements

This guide was last updated in August 2011.

Pension scheme investment isn't easy.  Once you've got a strategy in place, you'll need to agree terms with your chosen investment providers.  Whatever the investment product, you'll need to understand exactly what it offers, what risks are involved and how much it's going to cost.  You may be able to negotiate improved terms with the provider.

What do the scheme rules allow?

You must check that the rules of your pension scheme allow the proposed investment.  This is particularly important if you're looking at more sophisticated products, like swap contracts.

Risks

Some investments hold hidden risks.

Some individual funds are held under one umbrella.  If your scheme invests in a low risk fund, will it be exposed if a high risk fund under the same umbrella becomes insolvent, or is each fund legally ring-fenced?  This will depend on the design of the product and on the law where it is based.

Check that the investment product really does what its name suggests at the outset.  If it's called a cash fund, does it really just hold cash?

Negotiation

Be prepared to negotiate.  Providers like to present some of their products as "take it or leave it".  But you may still be able to negotiate, especially if you are investing a significant amount.  In general, investment agreements are the most negotiable - insurance policies and investment funds less so.

Negotiate on price and other key commercial terms at an early stage.  A provider may be more flexible when it is competing with others for your scheme's assets.  Pay close attention to how risks are to be shared between you and the provider, and what level of service the provider is offering.

Moving assets between providers

Consider how you are going to transfer scheme assets to the provider and whether a separate agreement is necessary to cover this.  Also check what happens if you or the provider wish to bring the agreement to an end.  You may need to serve notice and there may be penalties.  Some contracts build in delays if assets are difficult to sell.

Monitoring investments

Think about what information you'll need from the provider to monitor your investments.  Ensure procedures are in place to pick up on errors and put them right.  If you have entered a swap contract, you will also need to monitor the security of the counterparties and the collateral.

Total cost

Make sure you understand the total cost. This isn't always clear, especially if more than one manager is involved.  If there is a performance-related fee, make sure it is clear how this works, and that it is calculated over an acceptable period.  Ask the provider for examples of what happens if performance fluctuates over a long period.

Eye on the prize

Don't forget the big picture. Understand how all your investment providers work together and ensure the agreements reflect this. Check whether your statement of investment principles needs to be updated.  If it does, remember that you'll need to consult with the employer.