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DB investment governance

Understanding your trustee duties and setting up an appropriate governance structure for your scheme’s investments.

Issued: March 2017
Last updated: August 2019

See all updates to this guidance

1 August 2019
We have made some small updates to this guide to reflect the fact that an industry led body: The Cost Transparency Initiative, has produced standardised templates which we encourage trustees to use to obtain information about costs and charges from their provider.

Other minor changes have been made including minor editorial changes.

30 March 2017
First published.

DB investment guidance
PDF 1155KB , 89 pages
Download a PDF version of this guidance

What you need to do

  • Understand your responsibilities relating to investments.
  • Put effective governance arrangements in place.
  • Focus the trustee board on those decisions most likely to make a difference to meeting scheme objectives.
  • Consider delegating less significant matters with appropriate oversight.
  • Decide when to use advisers and who is appropriate.
  • Critically evaluate the advice and information you receive.
  • Manage the principal / agent issues within your governance arrangements.
  • Seek to develop a mutual understanding of investment and risk issues with the employer.
  • Document your governance arrangements in a suitable form.
  • Assess the effectiveness of the trustee board.
  • Understand the issues relating to appointing and retaining fiduciary managers when assessing how appropriate this governance model may be for your scheme.

The trustee board's role in investment governance

As a trustee, you should ensure you’re familiar with the basic legal principles around pension scheme investment as well as the investment provisions of your scheme’s governing documents. The fundamental purpose of your investment powers is to generate returns in order to enable the scheme to pay promised benefits as they fall due. However, this doesn’t mean that you have to (and you may not be permitted to) do everything yourself.

Many tasks and decisions, including day-to-day investment decisions, can (and may need to) be delegated.

It is important to obtain relevant professional advice in relation to the scheme’s investments, but (even if you have delegated day-to-day investment decisions) it is your role to decide how scheme assets should be invested, at least at a strategic level.

Your scheme’s investment governance arrangements need to be consistent with your legal powers and responsibilities regarding investment.

For a brief summary of your legal duties in relation to investment, go to understanding your legal duties. If you’re unsure about these requirements in general, you should undertake relevant trustee training. If you’re unsure whether your scheme’s particular investment governance arrangements are consistent with the law, you should obtain appropriate legal advice.

In this guidance, we’ve indicated some additional circumstances where you may consider it appropriate to seek professional advice to support your decision-making in relation to investment issues.

Where you outsource or delegate any part of the investment governance structure, you will need to be confident that those functions are still carried out with the best interests of beneficiaries in mind, and by people with the right expertise. It is important that the terms of contractual arrangements and fund documents in place with investment managers and advisers are reviewed (including legal review) and negotiated as appropriate to ensure this is achieved.

Further information on ensuring your trustee board has the right governance, skills and knowledge to work together and with scheme advisers can be found in our conflicts of interest guidance and scheme management skills guide (this guide has been prepared for schemes with money purchase benefits, however other trustees may also find it helpful).

Working with your investment advisers

The legal duties section sets out when you are required by law to obtain investment advice. You may also decide to get investment advice in other situations. You should consider what advice and other input you need in order to govern the scheme’s investments effectively (including consideration of what advice may be needed beyond just compliance with legal requirements). It’s your responsibility to decide when to use advisers for the specific circumstances of your scheme, taking into account the investment knowledge and experience at the board’s disposal and the relevant legal requirements.

The role of the person giving the investment advice can vary depending on the nature of the advice, scheme size and complexity, and the governance structures used. When we refer to ‘investment adviser’ in this guidance, we’re not being prescriptive about their precise role. For example, they may be in-house for the largest schemes, an external investment consultant, or the scheme actuary. You may find it appropriate to seek advice from different sources on different investment matters.

As well as appropriate use of investment advisers, we would encourage you to make use of the other sources of investment knowledge available to you, which may include independent trustees, investment managers, investment service providers and, for larger schemes, in-house investment teams.

You need to be able to critically evaluate the main points of the information you receive and understand the key underlying assumptions. This would include consideration of any likely biases and any interest the person giving the input may have in the decisions you make.

Collaborative working

The law requires you to consult with the scheme’s employer when forming or revising the scheme’s SIP. In this context, 'consultation' involves exchanging views and giving proper consideration to the employer’s perspective. The requirement to consult doesn’t mean you need to reach agreement with the employer, as the trustee board retains responsibility for the investment strategy.

However, we anticipate better outcomes will generally be achieved if trustees and employers work together to develop an understanding of the investment and risk issues.

Where possible, a collaborative approach should be followed, with trustees, employers and their respective advisers communicating regularly about notable developments relevant to the scheme’s investments. Our DB code provides further detail on how trustees should engage with employers.

Investment decisions and your statement of investment principles (SIP)

The law requires you to prepare a SIP and ensure it’s reviewed at least every three years and without delay after any significant change in investment policy[1]. You should take written advice when preparing and reviewing your SIP[2].

The purpose of a SIP is to set out your investment strategy, including the investment objectives and investment policies you adopt.

Different advisers will have different views on the relative importance of different aspects of investment, which will vary with your scheme circumstances. However, you may find it useful to consider your various investment decisions in order, from those most likely to impact future outcomes, to those least. That order will depend on your scheme’s particular circumstances, but a suggested broad order is set out below:

  • investment governance structure
  • investment beliefs (if you have developed these)
  • investment objectives
  • risk capacity and risk appetite
  • long-term journey plan (if you have developed one) and short-term milestones
  • risk management approach (structures for de-risking and re-risking)
  • strategic liability hedge (eg inflation and interest rate target hedge ratios)
  • strategic asset allocation (eg target return and risk levels)
  • cash flow and collateral / liquidity management strategy
  • monitoring

Your SIP should cover these areas (in addition to the items required by legislation[3]).

Other investment decisions with a lower impact that you may wish to include are:

  • the design of matching and growth asset portfolios
  • investment manager selection
  • manager implementation
  • cash flow and collateral / liquidity operations

Consideration of these aspects will help you determine which decision-making to retain and which to delegate. For example, you may wish to delegate decisions about the selection and implementation of a liability hedging strategy or responsibility for selecting and replacing investment managers to an investment sub-committee. You may also decide to delegate the management of a part (or all) of the scheme assets to a fiduciary manager and retain responsibility for setting the strategic objectives and monitoring that mandate.

Footnotes for this section

  • [1] Regulation 2(1) of the Investment Regulations.
  • [2] Regulation 2(2) of the Investment Regulations.
  • [3] Regulation 2(3) of the Investment Regulations.

Investment governance structures

You need to have effective investment governance arrangements in place and for these to be suitably documented. You need to be confident that you have adopted governance arrangements so effective decisions can be taken in a timely manner by people or organisations with the necessary skills, knowledge, advice and resources. In addition, you need to monitor your own effectiveness as a trustee board, and the effectiveness of any sub-committees and those you have delegated activities to.

Your governance structure should strike a balance between speed of action and checks and balances.

Example 1: investment governance structure

A simple investment structure might involve four parties: the trustee board, the investment consultant, the legal adviser and the investment manager.

Under this structure, the trustee board determines the overall investment objectives in light of the scheme circumstances and makes the strategic investment decisions to achieve these, eg the risk / return profile and proportion of the investments to hold in which asset classes.

Suitable advisers, such as the investment consultant and legal adviser, will advise the trustee board in its decision-making. The day-to-day investment decisions, eg which individual investments to hold, are delegated to investment managers. This structure can be suitable, as long as the trustee board is able to devote enough time and skill to the strategic investment decisions, and is able to convene quickly to make decisions if required.

Learning points: Trustees should ensure the investment governance structure used by their scheme allows effective decisions to be taken in a timely manner, by people or organisations with the necessary skills, knowledge, advice and resources. A simple structure may be suitable.

Your investment governance arrangements need to be appropriate for the complexity of your scheme’s investment arrangements, so the risks are properly managed. If you think the trustee board does not have the skills and expertise necessary to do this, then you should increase your skills and expertise, delegate, or simplify the scheme’s investment arrangements so you can govern them effectively.

However, simplification should not be used as a substitute for training and you should document your reasons for simplifying. You should also be aware that a certain level of complexity may be necessary to adequately address your scheme’s particular circumstances, in which case simplification would not be an appropriate option.

Investment sub-committees

You may be able to improve your scheme’s investment governance by setting up an investment sub-committee. This can remove some of the investment workload from the trustee board and improve the board’s ability to take and implement effective investment decisions.

The trustee board may delegate its powers to a trustee sub-committee, provided it has not already externally delegated those powers to fund managers, and subject to any restrictions in the scheme’s governing documentation. When using a sub-committee for this purpose, the whole trustee board remains liable for its acts and decisions.

While it is good practice for trustee boards to have an investment sub-committee to provide an appropriate focus on investment, this may not always be necessary.

Things to consider

When deciding whether you need an investment sub-committee, consider questions like:

  • What is the size of your scheme and its membership?
  • Does your scheme have the resources to cover the cost of a sub-committee?
  • What benefits might it offer? For example, would it enable the trustee board to make better decisions on investment, assess and implement a particular investment or risk management strategy, or broaden the range of investment and risk management techniques considered?
  • Does the complexity of your scheme require you to spend significant time on investment issues outside of regular trustee board meetings?
  • Do members of the proposed investment sub-committee understand their legal duties and responsibilities?
If you decide to set up an investment committee, you may wish to consider the balance between independent, employer-nominated and member-nominated trustee (and perhaps non-trustee, eg investment consultant) members of the committee. You should regularly monitor the effectiveness of any committees you set up.

Fiduciary management

Fiduciary management is a form of governance model which involves significant delegation of investment powers to the chosen fiduciary manager. Some schemes delegate the management of all their assets to the fiduciary manager; others delegate a part of their portfolio. As with all governance models, under fiduciary management the trustees remain responsible for the stewardship of the scheme, including setting the overall investment strategy.

If you consider this an option for your scheme, you should commit sufficient time and resources to the process of selecting and appointing the fiduciary manager. This includes taking appropriate advice and considering a suitably wide range of potential managers, as for any other investment management appointment.

You should carry out enough due diligence to be comfortable that the proposed fiduciary manager has the appropriate experience and skill-set for the mandate, bearing in mind the degree of delegation proposed. This is particularly relevant if you propose to appoint your existing investment consultant; the skills required to be a successful consultant are not exactly the same as those required to be a successful investment manager.

There is a potential for conflicts of interest between various parties when appointing a fiduciary manager, for example the existing investment consultant, third party advisers and the fiduciary manager. You should ensure that appropriate measures are in place to identify, mitigate and manage those conflicts. For more information, see our conflicts of interest guidance and scheme management skills guide. (This guide has been drafted for schemes with money purchase benefits, however other trustees may find it a useful guide to ensuring their trustee board has the right governance and the skills and knowledge to work effectively together, and with advisers.)

If you are considering appointing a fiduciary manager, you may wish to consider appointing an independent consultant or intermediary who has specific expertise in this area. An intermediary should be able to provide specific advice on the structuring of the mandate and the selection of the fiduciary manager. They should also be able to assist with the ongoing monitoring and evaluation of the fiduciary manager’s performance.

Example 2: appointing a fiduciary manager

The trustees have just completed their annual review of the performance of the trustee board and have identified their future training needs as part of that exercise. They realise that, due to retirements and leavers, the trustee board membership has changed significantly recently. Many of the trustees feel that, due to work commitments, they are unable to spend enough time on pension scheme issues.

They conclude that the lack of continuity of the trustee board membership and lack of sufficient knowledge of some more complex asset classes and risk management strategies has been a barrier in implementing investment and risk management decisions.

The trustees are aware that fiduciary management is just one form of governance model and decide to get some independent advice on the most appropriate investment governance structure to adopt for the specific circumstances of their scheme.

They decide to appoint a fiduciary manager to look after part of their portfolio. This reduces the implementation burden on the trustee board and enables them to focus on more strategic issues for the scheme.

Learning points: Trustees should periodically review how their investment governance structure is functioning and consider whether any changes, including greater delegation of responsibilities, should be made to improve future scheme outcomes.

Things to consider

When delegating to a fiduciary manager, trustees should consider things like:

  • the objectives for appointing a fiduciary manager
  • the range of fiduciary models available and the benefits, risks, costs and value that different approaches can offer
  • the potential for conflicts of interest (for example, agency issues – and how to avoid, mitigate or manage them
  • the extent of separation between those providing strategic investment advice (and liability management) and those implementing the mandate, as well as the impact this has on the extent of independent advice required on the fiduciary mandate and how any potential conflicts are managed
  • governance arrangements, their alignment with your objectives, and responsibilities for the management of the scheme
  • how performance will be delivered, the cost implications for the scheme, the total costs of the mandate and how you expect the mandate to add value. In this context it will also be useful to understand how past performance has been delivered and, in particular, what contribution to historic returns has come from return-seeking assets and hedging implementation over different times
  • potential risks and issues associated with the mandate and governance structures, now and in the future
  • establishing appropriate reporting relationships with suitable oversights in place to effectively monitor the performance of the fiduciary manager and the underlying mandates
  • how to ensure that you and your advisers have sufficient access to information to understand the mandate’s performance and risks on an ongoing basis
  • how the assets could be transferred away from the fiduciary manager, in full or in part, and the costs involved in doing this (for example, you may wish to transfer assets for an insurance company buy-in, or to replace the fiduciary manager following a period of underperformance or a change in scheme strategy)

Clear roles and responsibilities

Regardless of the investment governance structure in place, all the parties involved need to be clear on areas where they make decisions, provide oversight, or give advice. Clear terms of reference are important for any sub-committees, as are appropriate contractual arrangements with providers.

It may be helpful to prepare a matrix, or table of accountabilities, showing the delegation and control structure within your scheme, to help provide this clarity.

You need to consider the potential for conflicts of interest between the parties to your investment governance arrangements, for example, agency issues. These can arise within the trustee board, with investment advisers, as well as with fiduciary and other types of investment managers.

They may be particularly relevant in situations where different parts of the same service provider are giving investment advice and undertaking investment management activities. You need to ensure that appropriate measures are in place to identify, mitigate and manage those conflicts. Getting clarity over roles and responsibilities is an important part of doing this.

Monitoring investment governance

You need to regularly assess the effectiveness of your investment decision making and investment governance processes, considering the impact on the scheme performance and meeting the scheme objectives of:

The level of attention you pay to these areas should reflect their potential contribution to your scheme’s objectives. Your review should focus on value and not just cost.

Things to consider: reviewing your own performance as trustees

Some examples of issues to consider are:

  • Does the investment governance structure of the trustee board enable appropriate oversight and for decisions to be made effectively?
  • Is sufficient investment advice and knowledge available to enable decisions to be made in a considered manner?
  • Could the same level of investment performance be delivered more efficiently at a lower cost (eg by replacing some active management with passive management)?
  • Are investment decisions made in a timely fashion?
  • Are the investment service providers, such as the investment adviser and investment managers, being held to account and agency issues addressed?

Footnotes for this section

  • [4] and [5] This guide has been prepared for schemes with money purchase benefits, however other trustees may find it a useful guide to evaluating your trustee board / service providers.

Investment stewardship

For many pension schemes, stewardship activities, including engagement, are likely to be undertaken by the investment manager on the trustee board’s behalf. This especially applies where investments are made via pooled funds.

We’d encourage you to understand the stewardship policies that your existing or prospective investment managers adopt, and where you consider it appropriate, seek to influence them. For some schemes, a formal scheme stewardship approach may be appropriate (eg by following the principles set out in the UK Stewardship Code – see link below), particularly where your scheme holds a significant amount of assets.

Good stewardship includes the exercising of rights attaching to investment, such as voting rights attached to shares. Where practicable, you may wish to agree specific voting criteria with your investment managers or consider potential managers’ willingness to abide by your preferred voting criteria when selecting investment managers. Services that provide analysis and voting recommendations are available and can assist you in setting criteria.

Things to consider

Where you don’t agree specific voting criteria with your investment managers, you might still wish to ask them questions like:

  • Who is their proxy voting adviser?
  • How often have they disagreed with their adviser’s recommendations, and are there any particular issues on which they consistently disagreed?
  • Are there any instances where they did not cast votes at all – for example in specific markets – and why?
  • Can they provide voting records?

Your scheme’s SIP is required to include (among other things) statements about your policy (if any) on voting rights and the extent to which you take ethical considerations into account in the selection, retention and realisation of investments[6].

You may wish to expand these statements into meaningful policies on long-term sustainability, how you apply the principles of the Stewardship Code, and how you will take non-financial factors into account.

Useful links

Information on quality engagement between institutional investors (which includes pension schemes) and the companies they invest in is available from the Financial Reporting Council’s (FRC) pages on the UK Stewardship Code.

The Association of Member Nominated Trustees (AMNT) has developed the Red Line Voting initiative to enable pension schemes to take a more active asset ownership role.

Further information on the quality of engagement and reporting by asset managers may also be found at:

Trustee toolkit online learning

The module 'An introduction to investment' contains a tutorial called 'Investment in a pension scheme'. You must log in or sign up to use the Trustee toolkit.

Go to the Trustee toolkit

Footnotes for this section

  • [6] Regulation 2(3) Investment Regulations.
1. Overview
3. Investing to fund DB