Background and Context

The Principles for Investment Governance of defined contribution (DC) work-based pension schemes are designed to encourage better investment governance and decision making by all stakeholders, including trustees, employers, advisers, pensions providers and members. They provide a framework which can be used as a practical checklist to benchmark a scheme’s investment governance processes against ‘best practice’ agreed by stakeholder representatives within the Investment Governance Group (IGG). They reflect the growing importance of DC provision and that good governance is at the heart of a well-run pension scheme.

The IGG was set up to encourage industry ownership and promotion of the Myners’ Principles and to take account of the characteristics of DC and the differences between trust-based and contract-based schemes. The IGG’s new DC principles will be followed by guidance for small schemes and good practice case studies for DB schemes.

The DC Principles reflect the following beliefs:

  • A sound investment governance framework is essential to protect the interests of the members of a DC pension scheme
  • Greater employer engagement in investment governance of a contract-based scheme leads to better outcomes for members, and can lead also to more engaged employees. Engaged employers themselves can also derive benefits such as enhancing their reputation as a good place to work
  • All DC schemes, whatever their legal structure, should be able to demonstrate to members how their investment governance works in a transparent and coherent fashion
  • Schemes should be able to clarify to their members the allocation of responsibilities, and delegations thereof, within its investment governance framework
  • The effectiveness of investment governance should be continually monitored throughout the life of a scheme.

Users of these principles should be mindful of the following considerations:

  • The Principles are a guide to best practice for any employer, trustee and provider setting up a DC scheme and wishing to maximise the opportunity of a good outcome for its members
  • The Principles are not a legal requirement and should not be regarded as such
  • The Principles complement existing regulations. They do not duplicate them, nor are they a substitute
  • As Best Practice, the Principles are aspirational and, as such, full application of these principles will not be practical for all schemes. They can be used as a checklist against which decision makers can identify areas in need of improvement
  • The Principles are designed to be consistent with developing work by both The Pensions Regulator and Department for Work and Pensions.
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The structure of the Principles and how to use them

The six Principles cover the key areas of investment decision making and governance that are important to the health of a DC scheme. They cover initiation, set-up and design, ongoing monitoring, reviewing and communications to members. They apply to both trust-based and contract-based schemes.

The stages of investment governance can be categorised as follows:

Stage I: Governance structure

Principle 1: Clear Roles and Responsibilities
Principle 2: Effective Decision Making

Stage II: Investment choices and monitoring

Principle 3: Appropriate Investment Options
Principle 4: Appropriate Default Strategy
Principle 5: Effective Performance Assessment

Stage III: Communications

Principle 6: Clear & Relevant Communications

Best practice guidance is provided under each Principle. Trustees, employers, providers, advisers and members can assess how their scheme framework compares and make improvements where necessary. The Principles and best practice guidance are not founded in law, but are simply intended to encourage better investment governance practice in any DC scheme that chooses to consider them.

The essential first step in using the Principles is to allocate the responsibility for each element of investment governance to a recognised owner or lead decision maker. Under best practice, the employer or trustee of the scheme, in liaison with providers and advisers as appropriate, should document the allocation of each responsibility in an investment governance plan and make this available to members.

The Investment Governance Group has supplied an example of a simple governance plan (Annex A) to be completed, made available to members and reviewed periodically.

Note for Employers and Trustees:

To ensure the Principles are scaleable and relevant to all sizes and types of DC arrangement, you will find use of terms such as ‘appropriate’ and ‘sufficient’. If you are unsure of what this means for your scheme, we would suggest you consult your adviser or product provider for clarification.

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Principle 1: Clear roles and responsibilities

Principle rationale

This Principle aims to help decision makers lay firm foundations for the process of investment governance. It advocates that schemes have defined and documented roles and responsibilities for each element of the investment governance chain, ensuring each party, including members, are clear as to the role they are expected to play in the process.

DC Principle ‘Best practice’ guidance for DC

Principle 1: Clear roles and responsibilities

Roles and responsibilities in relation to investment decision making and governance are clearly defined and communicated to interested parties

Decision makers

  • are those responsible for investment governance and they must decide which responsibilities are allocated to which roles within the operation of the pension plan. A decision maker can be an employer, trustee, provider, adviser or member representative
  • should record the roles and responsibilities of each stakeholder, including delegations of responsibilities, in an investment governance plan or as part of the Statement of Investment Principles (where one exists)*
  • should make all decision makers and scheme members aware of the allocation of responsibilities among the decision makers , particularly those responsibilities which members must take on in relation to their own pension planning
  • should identify and document any conflicts of interest together with a plan to manage those conflicts where appropriate
  • should agree a policy on responsible ownership, to the extent that it is practical in the context of the funds offered or under consideration, monitor its implementation and report on it to interested parties, including members and member representatives

* A template for a Governance Plan can be found in Annex A
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Principle 2: Effective decision making

Principle rationale

This Principle builds on Principle 1. It aims to ensure the process is effective through sound decision making based on quality and timely information and reference to relevant regulatory requirements and guidance.

It also advocates decision makers adopt a proactive approach to their decision making, building in regular assessment and reviews of the people and processes within the decision making structure, and making improvements where appropriate.

DC Principle ‘Best practice’ guidance for DC

Principle 2: Effective decision making

Decisions relating to investment governance are taken on a fully informed basis and the investment governance processes are sound

Decision makers should

  • have or acquire the relevant knowledge, understanding and skills to take decisions, which may be based on advice from those reasonably expected to have the necessary expertise
  • make available sufficient time and resources for making investment governance decisions
  • develop an investment strategy and options which are within their governance capabilities
  • exercise sufficient control to allow them to adapt and develop their strategy as circumstances and market conditions require
  • be sufficiently familiar with scheme documentation, regulatory requirements and supporting guidance to enable them to observe these principles and carry out their duties in accordance with the requirements set out in these documents
  • regularly assess the effectiveness of the investment decision making and governance process with reference to investment performance including net of fees, make improvements to the process as appropriate and report to interested parties (including members)
  • regularly review the management of any external investment advisers, their contracts and their remuneration
  • produce guidelines for the selection and removal of investment managers and for any alteration to the range of investment options/funds and apply them consistently
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Principle 3: Appropriate investment options

Principle rationale

This Principle requires decision makers to provide investment options that take account of a range of risk profiles and needs within the pension scheme membership. It also aims to ensure pension scheme members receive the appropriate level of fund choice to meet their needs, without being overwhelming or restrictive.

DC Principle ‘Best practice’ guidance for DC

Principle 3: Appropriate investment options

The investment options provided take account of a range of member risk profiles and needs and are designed appropriately

Decision makers should

  • offer an appropriate default strategy (see Principle 4)
  • consider the number of funds (as components of the investment options or as standalone entities) to be made available and how the number on offer might impact the ability of members to make effective investment decisions
  • offer an adequate range of investment options given the expected risk tolerances and requirements of scheme members, including the likely format and structure of their retirement benefits, and consider how these options may change as they approach retirement
  • consider:
    • the way investment options are classified and described with a view to making it easier for members to make appropriate choices (eg through the use of a core fund range or listing funds by risk rating of asset type)
    • the operational characteristics of funds including dealing frequency and liquidity
    • the costs, including management fees and other fund expenses
    • the security and stability of the firm(s) providing investment management services and products
  • ensure that the investment options/funds offered have appropriate names, clear investment objectives and relevant benchmarks
  • ensure that investment fees/costs are reasonable and competitive given the performance expectations of the fund
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Principle 4: Appropriate default strategy

Principle rationale

This principle determines a sound investment strategy principally for those members who prefer not to take an active investment decision.

DC Principle ‘Best practice’ guidance for DC

Principle 4. Appropriate default strategy

An appropriately designed investment strategy is offered for members who prefer not to make a choice

Decision makers should

  • ensure the default strategy meets the requirements described in Principle 3
  • allow appropriate time for design, review and monitoring of the default strategy as compared with other investment options
  • ensure there are clearly defined strategic objectives for the default strategy in terms of the levels of risk and returns inherent in achieving the desired outcomes for members
  • ensure the membership data on which the default strategy is based is as robust and detailed as is practical
  • ensure the design of an appropriate default strategy considers, as far as is possible, the needs of the broad membership, including:
    • risk and return (net of fees/costs)
    • its position in relation to all other investment options
    • members’ expected term to retirement
    • members’ attitude to risk
    • the expected format and structure of their retirement benefits
  • ensure that investment fees/costs are reasonable and competitive given the performance expectations of the strategy

NB: The Department for Work and Pensions' guidance on 'Offering the Default Option for Defined Contribution Automatic Enrolment Pension Schemes' will be published in 2011. This will set out further detail for design and monitoring of default options in DC arrangements
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Principle 5: Effective performance assessment

Principle rationale

The aim of this Principle is to ensure decision makers monitor the performance of investment options, including the default strategy, and take appropriate action where necessary

DC Principle ‘Best practice’ guidance for DC

Principle 5: Effective performance assessment

The performance of investment options is monitored

Decision makers should

  • regularly assess the default strategy against its strategic objectives
  • regularly assess the performance of each investment option, and the constituent components of the default strategy, against its stated performance objectives
  • consider removing any investment option which is not expected to perform well against its objectives
  • spend an appropriate amount of time and resources reviewing and managing each investment option
  • monitor the suitability of any investment wrapper and be prepared to swap to other arrangements when appropriate
  • report performance including net of fees, risks and any alterations to members (expanded in Principles 1 and 6)
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Principle 6: Clear and relevant communication

Principle rationale

The aim of this Principle is to provide pension scheme members with clear, relevant and timely information so they can:

  • make an informed choice relevant to their circumstances about which fund(s) to invest in
  • understand their personal responsibility for their pension plan, the choices they have available and how these affect the value of their fund and retirement income.
DC Principle ‘Best practice’ guidance for DC

Principle 6: Clear and relevant communication to members

Clear information on the investment options and their characteristics that will allow members to make informed choices is provided

Decision makers should ensure scheme members receive effective and relevant communications. Such communications should

  • be tailored to the expertise of the members, using plain language and an appropriate format to engage their interest and further their understanding
  • state the investment objectives, benchmarks and fees for all funds together with the risk/return characteristics of each fund in such a way as to enable members to make a meaningful choice between them (including explanation of the risks and implications of making these choices)
  • provide or signpost tools, seminars and further information that can help members to understand the basic tenets of investment strategy including, most particularly, the interaction between risk and return
  • provide or signpost tools to help members to appreciate that the contribution levels, term to retirement, net investment returns can all affect the size of the fund which will be available to them to provide a retirement income
  • provide members with regular and consistent performance reporting, net of fees, on the investment options available to them
  • provide members with timely investment information relevant to their term to retirement and the decisions they will need to make to secure an income
  • set out clearly the options which will be available at retirement emphasising the importance of shopping around and how members can seek advice and guidance
  • provide members with access to the scheme’s Governance Plan, or equivalent document
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Annex A: Template for Governance Plan

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Annex B: Supporting guidance for Principles for Investment Governance in DC Schemes

Overarching guidance – ie relevant to all the Principles

Trustee Toolkit
http://www.trusteetoolkit.com/arena/index.cfm

Trustee Guidance
http://www.thepensionsregulator.gov.uk/guidance/guidance-for-trustees.aspx

Guidance on Internal Controls
http://www.thepensionsregulator.gov.uk/codes/code-internal-controls.aspx

Money Made Clear
http://www.moneymadeclear.org.uk/
Guidance on roles, responsibilities and accountability
Trust-based

Guidance on Relationships with Advisers
The Pensions Regulator, May 2008
http://www.thepensionsregulator.gov.uk/guidance/guidance-relations-with-advisers.aspx

Guidance on Conflicts of Interest
The Pensions Regulator, October 2008
http://www.thepensionsregulator.gov.uk/guidance/guidance-conflicts-of-interest.aspx

Guidance on Role of the Employer
The Pensions Regulator
http://www.thepensionsregulator.gov.uk/employers/employer-role-running-a-scheme.aspx
Contract-based

Guide on Regulation of Work-Based Contract-Based Pensions
The Pensions Regulator, November 2007
http://www.thepensionsregulator.gov.uk/docs/TPR-FSA-guide-on-regulation-of-contract-based-schemes.pdf

Voluntary Employer Engagement in Work-Based Contract-Based Pension Schemes
The Pensions Regulator, January 2008
http://www.thepensionsregulator.gov.uk/guidance/guidance-employer-engagement.aspx
Guidance on fund choice/default strategy and monitoring performance

Improving Customer’s Retirement Experiences
Association of British Insurers (ABI), April 2009
http://www.abi.org.uk/Information/Codes_and_Guidance_Notes/534.pdf

Global Investment Performance Standard
Pension Fund Disclosure Code
Investment Management Association (IMA)
http://www.gipsstandards.org/

Dept of Work and Pensions: Current Practices in Default Funds in Workplace Personal
 Pensions: report of a qualitative study
http://campaigns.dwp.gov.uk/asd/asd5/summ2009-2010/628summ.pdf

The UK Stewardship Code (formerly the ‘Institutional Shareholders Committee Code on the Responsibilities of Institutional Shareholders’)
Financial Reporting Council
http://www.frc.org.uk/images/uploaded/documents/UK%20
Stewardship%20Code%20July%2020103.pdf
Guidance on communications with members

Research on Attitudes Towards Investment Choice and Risk within the Personal Accounts Scheme: Report of a Qualitative Study
Department for Work and Pensions, 2009
http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep565.pdf

Review of Retirement Information for DC Members
The Pensions Regulator, Nov 2009
http://www.thepensionsregulator.gov.uk/docs/defined-contribution-retirement-info-review.pdf

Promoting Pensions to Employees – A Guide for Employers
The Financial Services Authority
http://www.fsa.gov.uk/pubs/other/guide4employers.pdf
Links to existing regulation relevant to DC schemes

FSA: Treating Customers Fairly (TCF)
http://www.fsa.gov.uk/pages/doing/regulated/tcf/

FSA: Conduct of Business Sourcebook (COBS)
http://www.fsa.gov.uk/pages/Doing/Regulated/newcob/index.shtml

FSA: Financial Promotion Regime
http://www.fsa.gov.uk/Pages/Doing/Regulated/Promo/regime/index.shtml
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© The Pensions Regulator 2012