The Pensions Regulator has updated its guidance on investment for trustees of defined benefit pension schemes. Our note on the original guidance may be found here. In this note we describe the changes in the new guidance.
Fiduciary management
Some schemes use “fiduciary management” (also known as delegated consulting). This is a governance model which involves significant delegation of investment powers to the fiduciary manager. Following the Competition and Markets Authority’s (CMA’s) investigation into the fiduciary management market, the Regulator reminds trustees that they need to carry out a competitive tender, involving at least 3 providers, if implementing or retaining a fiduciary mandate that covers at least 20% of the scheme’s assets.
Governance and stewardship
Schemes’ governance arrangements should be reviewed regularly to ensure that they remain effective. This includes the governance model itself, for example is fiduciary management or a traditional advisory model more appropriate? The Regulator has issued separate guidance about choosing an appropriate investment governance model.
Stewardship is the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society. For many schemes, especially those investing through pooled funds, stewardship activities will be undertaken by the fund manager. TPR encourages trustees to become familiar with their manager’s policies and to seek to influence them.
The guidance contains sample questions that trustees can ask their fund managers about their voting policies.
Sustainability
The updated guidance has a new section on sustainability, noting that trustees should take account of the financially-material risks arising over the likely time horizon of their scheme. It encourages trustees to take environmental, social and governance (ESG) factors, including climate change risk, into account in the selection of funds. TPR recommends that trustees consult their advisers and fund managers to assess the materiality of ESG factors.
Another new section describes impact investment and patient capital, though notes that these will not be suitable for every scheme. Impact investment aims to deliver tangible positive impacts on society and the environment, for example the provision of clean drinking water and healthcare, alongside generating investment returns. Patient capital investment involves the provision of long-term finance to firms that have potential for growth over the long-term, typically start-ups, and will tend to be illiquid. This section also covers the risks connected with unregulated investments.
Monitoring costs
The updated guidance contains a link to the Cost Transparency Initiative’s cost templates.