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Statement of investment principles

Important

Early draft of the code of practice

This code is not in force yet. It is an early version for the new code of practice consultation.

To give us feedback on issues such as the design, usability and navigation of this code, email us at webfeedback@tpr.gov.uk.

You can also read more information about the consultation.

Published: 17 March 2021

Governing bodies of trust-based occupational pension schemes with 100 members or more must prepare a statement of investment principles (SIP) and review it at least every three years.SA1 They must also review it as soon as possible after any significant change in investment policy.

When preparing the SIP governing bodies must obtain and consider professional advice,SA2 and consult any sponsoring employer.

The purpose of a SIP is to set out the governing body’s investment strategy, including the investment objectives and investment policies they adopt. We have issued guidance of best practice for preparing a SIP for DB schemes. Governing bodies may have separate SIP documents for each individual arrangement within a scheme, but this is not a requirement. The law requires the governing bodies of relevant schemesSA3 to make the most recent SIP relating to any default arrangement(s) available to members as part of the chair’s annual statement and the scheme’s annual report and accounts.

Governing bodies of all schemes required to prepare a statement of investment principles in accordance with section 35 of the Pensions Act 1995 must publish that SIP online, publicly available and free of charge. When publishing a SIP online, governing bodies need to follow our expectations on General principles for member communications.

In cases where preparing a SIP is not a legal requirement, in our view it would be good practice for governing bodies to prepare a document that is similar in nature, and to publish it online as if it were a SIP.

The SIP must contain:

  • the governing body's policy for securing compliance with the legislation on choosing investmentsSA4
  • the governing body's policies relating to:
    • the investments to be held by the scheme
    • the balance between different investments
    • risks – including how they are to be measured and managed
    • the expected return on investments
    • the realisation of investments
    • financially material considerationsSA5 and how they are taken into account in investment decisions
    • the extent to which non-financial matters are taken into account in investment decisionsSA6
    • how the governing body exercises rights, including voting rights, attached to investments
    • undertaking engagement activities in respect of investments, including but not limited to the methods set out in legislationSA7
    • any arrangement with the asset manager, setting out the matters described in legislationSA8

A default SIPSA9 must contain:

  • the aims and objectives of the trustees or managers in respect of the investments in the default arrangement
  • the matters set out in the Investment RegulationsSA10
  • an explanation of the intention to ensure that assets of the default strategy are invested in the best interests of the members using it, and their beneficiaries

There are various steps that a governing body needs to go through when preparing their SIP. Under section 249A of the Pensions Act 2004,SA11 governing bodies of certain schemes must, with certain exemptions,SA12 establish and operate an effective system of governance (see Scheme governance) including internal controls (see Managing risk using internal controls ). We expect that such governing bodies with investment responsibilities will have the following measures in place. Other schemes may wish to adopt these principles as best practice:

When preparing their SIP, the governing body should:

  • ensure that relevant membership data is accurate
  • consider the interests of active and deferred members and any members who are in a decumulation phase within the scheme
  • consider any information they have obtained about when and how members may wish to take their benefits
  • regularly assess the performance of investments and any investment options, including any default arrangement, within the context of the relevant objectives
  • consider evaluating performance by referring to recognised and credible industry benchmarks for investment funds with similar risk/reward profiles
  • document the evaluation process for each fund and consider the total amount of costs and charges levied on each fund, including transaction costs wherever possible
  • consider the scheme’s whole investment strategy (not just individual funds) taking into account the characteristics of different segments of members
  • review the governance structure relating to how investment risks are assessed and investment decisions made
  • consider the benefits of delegating some of the duties and the potential for establishing an investment sub-committee
  • assess the financial materiality of environmental, social and governance (ESG) factors and allow for them when developing and implementing the investment strategy. See also Stewardship and Climate change.
  • ask their investment manager(s) and investment adviser for help with assessing the financial materiality of ESG factors if they do not have the necessary expertise in-house
  • take into account the types of investments scheme member prefer
  • carefully consider the demographics of members of the scheme
  • carefully consider whether potential ESG issues may affect the risk adjusted return members may receive
  • take account of risks affecting the long-term financial sustainability of the scheme investments
  • where a pooled fund is chosen, understand the ESG approach of the available funds, including in the selection criteria for new funds
  • where a pooled fund is chosen, monitor how managers take into account ESG factors in practice
  • consider the risks and opportunities of climate change (see Climate change)

In addition, when preparing their SIP, trustees of DB schemes should:

  • set out overall DB investment objective(s) for the fund, which allow for:
    • the scheme's liabilities
    • the strength of the employer covenant
    • the risk capacity and appetite of the sponsor and trustees

Glossary and legal references

Decumulation

Taking money out a pension in a legitimate way. For example, as a lump sum or by buying an annuity.

Pooled funds

The investment manager pooling all the investments to be invested in the stock market and managing them into a single fund

Relevant scheme

Schemes defined by Regulations 1 or 2 of the Occupational Pensions Schemes (Scheme Administration Regulations) 1996

SA1Regulation 2(1) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(1) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA2Regulation 2(2) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(2) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA3within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations 1996
[within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations (Northern Ireland) 1996]

SA4Section 36 of the Pensions Act 1995
[Article 36 of the Pensions (Northern Ireland Order 1995]

SA5Regulation 2(4) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(4) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA6Regulation 2(4) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(4) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA7Regulation 2(3)(c) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(3)(c) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA8Regulation 2(3)(b) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(3)(b) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA9Regulation 2A (1) Occupational Pension Schemes (Investment) Regulations 2005
[Regulation 2A(1) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA10Regulations 2(3)(b), 2(3)(c) and 2(3)(d) Occupational Pensions Schemes (Investment) Regulations 2005
[Regulation 2(3)(b), 2(3)(c) and 2(3)(d) Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

SA11Article 226A of the Pensions (Northern Ireland) Order 2005

SA12Section 249A(3) of the Pensions Act 2004
[Article 226A(3) of The Pensions (Northern Ireland) Order 2005]