The Pensions Regulator

Guidance for trustees

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Scheme investments

A pension scheme has long-term liabilities. To be able to meet those liabilities when they fall due, trustees need to monitor the funding level of the scheme, manage the scheme's existing investments, and invest any new contributions they receive.

This section of the guidance describes your powers and responsibilities as a trustee in the investment of scheme assets:

• Setting the investment strategy
• Drawing up a statement of investment principles
• Making investments

See also the Trustee toolkit - particularly the modules covering the Four Asset Classes, Fund Management, Strategic Investment and How DC schemes work.

Setting the investment strategy

The trustees of most schemes are responsible for deciding the investment strategy to be adopted by the scheme. Only trustees of wholly fully insured schemes need not worry about this decision.

As a trustee you may be able to invest in different investments, including stocks and shares in companies (often called 'equities'), government stocks (often called 'gilts') and property. A range of 'alternative' vehicles such as hedge funds and derivatives may also be available to you.

When deciding upon an investment strategy you must consider:

• any limitations on investments contained in the trust deed and rules, and other legal requirements;
• your fiduciary duty to choose investments that are in the best financial interests of the scheme members – for example, you must not let your ethical or political convictions get in the way of achieving the best returns for the scheme,
• the suitability of different asset classes to meet the needs of the scheme and future liabilities;
• the risks involved in different types of investment and the possible returns that may be achieved; and
• appropriate diversification of the scheme's investments – in other words not 'putting all your eggs in one basket'.

All these decisions should be taken in light of appropriate advice taken from professional advisers such as the scheme actuary and investment consultants.

Having established the investment strategy you should prepare the scheme's statement of investment principles (SIP).

Drawing up a statement of investment principles

The trustees of most schemes must draw up a written statement of investment principles (SIP). The SIP sets out the principles governing how decisions about investments must be made.

What the SIP must include

The SIP must include your policy on:

• choosing investments;
• the kinds of investments to be held, and the balance between different kinds of investment;
• risk, including how risk is to be measured and managed, and the expected return on investments;
• realising investments;
• the extent, if at all, you take account of social, environmental or ethical considerations when taking investment decisions; and
• using the rights (including voting rights) attached to investments if you have them.

Preparing the SIP

Before the SIP is drawn up, you must:

• obtain and consider the written advice of a person who you reasonably believe to have the appropriate knowledge and experience of financial matters and investment management; and
• consult with the employer.

In this case, 'consultation' means considering the employer's views carefully. It does not mean that you have to agree with the employer or carry out their wishes. The law makes the point that you do not need the employer's agreement.

Reviewing and revising the SIP

You will need to review the SIP regularly - at least every three years and whenever there has been a significant change in investment policy. When you revise the SIP, you will need to take advice and consult with the employer in the same way as when the SIP was initially drawn up.

See the Trustee toolkit for a sample SIP.

Making investments

When considering the investment of scheme assets, trustees must be aware of some important provisions of pensions law:

• Delegating day-to-day investment decisions
• Legal requirements when choosing investments
• Limitations on investing in the employer's business
• Holding scheme assets securely

See also the Trustee toolkit.

Delegating day-to-day investment decisions

Pensions law allows you to delegate day-to-day investment decisions, and sets out your responsibility for the decisions taken.

The law allows trustees to delegate investment decisions to an investment manager (referred to in the legislation and in this guide as a 'fund manager') who is authorised under the Financial Services and Markets Act 2000.

Trustees' responsibilities

If you delegate decisions to a fund manager, you must ensure that the fund manager is suitably qualified to carry out the scheme's investment business on your behalf. They must also be correctly appointed.

The trustees should set up appropriate procedures to review:

• the fund manager's performance in accordance with the targets or mandate you have set them; and
• the fees and management charges they are levying.

Whenever you delegate day-to-day investment decisions, as a trustee you remain responsible for the investment strategy which the fund manager must follow. However, you are not personally liable for any mistake the fund manager makes as long as you have made sure that they:

• have the appropriate knowledge and experience for managing the scheme investments; and
• carry out their work competently and in line with your policy for choosing investments, as set out in the statement of investment principles (SIP).

Legal requirements when choosing investments

Regulations set out how trustees or fund managers must exercise their investment powers. This includes exercising those powers:

• in a manner to ensure the security, quality, liquidity and profitability of the fund;
• in a manner appropriate to the nature and duration of the expected future retirement benefits of the scheme;
• having regard to the need for diversification in the choice of investments for the scheme; and
• making sure that the scheme assets are invested mainly in regulated markets.

When choosing investments, you (or the fund manager acting on your behalf) must exercise your investment powers in line with the scheme's statement of investment principles (SIP).

No decision to make an investment should be made without first obtaining and considering the proper advice.

Limitations on investing in the employer's business

'Employer-related' investments (often called 'self-investment') include shares in the employer's business and acquiring property used in the business, such as the premises from which the business operates.

You can only invest in the business of the employer in limited circumstances. For most schemes, you cannot normally invest more than 5 per cent of the scheme's assets in employer-related investments. Any such investment can only be justified by the expected return to the scheme, which must be at least as good as could be produced by another comparable investment.

Prohibited employer-related investments

Certain employer-related investments are not allowed at all. These include:

• loans to the employer;
• guarantees over loans or other financial arrangements involving the employer and connected or associated people;
• transactions at less than their normal market value; and
• certain loan arrangements with third parties which involve the employer.

Holding scheme assets securely

As a trustee, you have a duty to make sure that the scheme's investments are held securely on your behalf. This includes share certificates, title deeds to property, and any other documents of title showing which assets belong to the pension scheme.

If you do not use the services of a custodian, you should check that the arrangements in place for holding the scheme's assets are satisfactory. It is important to consider all the possible risks, including fraud, theft and the destruction of property.

Trustees must be able to clearly identify scheme funds. You must keep scheme money you receive in a suitable account with a bank or building society separate from the employer's account. A third party – such as an insurance company or pensions administrator – can hold money on your behalf in a suitable account.

Appointing a custodian

If you plan to appoint a custodian to hold the scheme's assets, you should choose the custodian carefully after considering matters such as:

• what insurance arrangements the custodian has; and
• if the custodian uses sub-custodians to look after assets, how far will they guarantee the actions of those sub-custodians?

You should also check the arrangements in place between the custodian and the fund manager for making sure the assets the custodian holds are the same as those reported by the fund manager.

 

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