The Pensions Regulator (TPR) has published a guide on investment for defined benefit (DB) trustees as the next stage of its campaign to raise governance standards.
The document lays out what the watchdog expects of trustees when setting their investment strategy, as well as examining governance structures and identifying potential conflicts.
It comes after TPR's head of investment consultancy Fred Berry said last week the watchdog wants trustees to have better relationships with their investment advisers, consultants and asset managers, including fiduciary managers.
The guidance shows what a good strategy should look like, such as effective governance, delegation and monitoring, form part of an integrated risk management (IRM) process, and allow for future cash flow and liquidity needs.
The regulator said trustees should focus on areas that have the most impact for meeting their scheme's objectives, and identify the necessary skills for the trustee board.
In a statement today, Berry said: "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 [IRM] approach.
"It's important to set clear investment objectives for your scheme and to identify how and when they should be achieved."
The document also sets out how trustees can get the best from their advisers, pointing out they must critically evaluate the advice and information, and manage any principal / agent issues within the governance arrangements.
The guidance was mostly welcomed by the industry, including the Pension and Lifetime Savings Association whose head of governance and investments Joe Dabrowski said schemes operate in an "increasingly complicated and heavily mediated sector". He added it was "vital" for trustees to have the right skills and capabilities to manage their investment strategies, service providers and costs.
Hymans Robertson head of trustee Calum Cooper welcomed TPR's heightened focus on managing asset cash flows, but said trustees may be "surprised" that models used to measure and manage risk and return typically do not allow for the primary reason schemes hold assets - to pay the pensions promised.
"Given this, how confident can trustees be in model-driven asset recommendations?" he said. "This is one of the reasons DB pension funds hold more growth asset risk than required. It boils down to a lack of clarity on risk, and crucially not modelling all the key risks. This is putting £250bn of members' benefits on the line. Model misbehaviour matters. Cash flows matter. The models used by schemes should reflect both asset and liability cash flows to improve the chances of paying members' pensions in full."
Barnett Waddingham partner Rod Goodyer agreed with TPR's focus on the importance of understanding how the whole strategy is performing as opposed to 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."
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