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Investment decision-making

Code in force: 28 March 2024

This module forms part of our expectations for trustees of those schemes required to operate an effective system of governance, see Systems of governance.

  1. Under section 249A of the Pensions Act 20041, governing bodies of certain schemes must establish and operate an effective system of governance (see Systems of governance) including internal controls (see Internal controls). However, there are certain exemptions2. The system of governance must be proportionate to the size, nature, scale, and complexity of the activities of the scheme.
  2. An effective system of governance includes having processes in place to ensure prudent investment management.
  3. Governing bodies of trust-based pension schemes with 100 or more members must:
    1. invest in a way that ensures
      • security
      • quality
      • reasonable liquidity
      • profitability
      for the scheme’s portfolio as a whole3
    2. make sure the principles above are followed where investment is carried out by a financial manager
    3. invest mainly in regulated markets4,5
    4. make sure scheme assets are properly diversified
  4. Governing bodies of trust-based schemes with fewer than 100 members do not have the same obligations by law, but it is good practice for them to follow the principles set out above, and they must ensure their investments are appropriately diversified6.
  5. Governing bodies should:
    1. have processes in place to make sure investment decisions can be made in an effective and timely manner
    2. ensure all the involved parties are clear on where responsibility and accountability sit for providing oversight, advice, and decision-making
    3. be able to critically evaluate the main points of the investment information received and understand the basis on which that information has been provided
    4. ensure costs and charges for any advice sought and/or investment transactions that may result represent reasonable value
    5. consider any likely personal biases and any conflicts of interest the person giving the input may have in the decisions to be made (see Conflicts of interest)
    6. regularly assess the effectiveness of their investment decision making and governance processes (see Own risk assessment)
    7. have clear terms of reference for any sub-committees
    8. set objectives for investment holdings, considering the different requirements of the accumulation and decumulation phases
    9. document objectives and strategies appropriately
    10. ensure the investment structure and decisions made in relation to investments aim to deliver the objectives and outcomes in accordance with the principles set out in the SIP (see Statement of investment principles)
    11. appropriately document any changes to investment strategy and/or material changes to investments, including the reasons they were needed, and the improvements expected
    12. if using a bespoke arrangement to meet specific requirements, document a clear explanation of their strategy and objectives and how the specific requirements will be met
    13. clearly identify any investments not traded on a regulated market, document why such investments are being used, and how they fit in with the agreed investment objectives
    14. understand the types of protection available, such as indemnity insurance or the Financial Services Compensation Scheme, for their different investments in the event of fraud, wrongdoing, or other adverse events
    15. review the investment managers’ fund documentation, obtain investment advice and, where appropriate, legal advice, and put the right level of protection in place for members, having considered that advice
    16. consider informing members and employers on the overall conclusions of the security of assets

Glossary and legal references

Bespoke arrangement

A defined contribution investment arrangement that has been tailored by an investment manager to meet specific requirements for a scheme’s membership.

Decumulation

The phase during which a member converts their pension savings into retirement income or makes a legitimate withdrawal from their pension pot.

1Article 226A of The Pensions (Northern Ireland) Order 2005

2Section 249A(3) of the Pensions Act 2004 [Article 226A (3) of The Pensions (Northern Ireland) Order 2005]

3Regulation 4(3) Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 4(3) Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

4Regulation 4(5) Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 4(5) Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

5As defined in Regulation 4(11) Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 4(11) Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

6Regulation 7(2) Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 7(2) Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]