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Set objectives for your investment consultant

This guide helps trustees understand their legal duties and sets out approaches to setting objectives.

Purpose of this guidance

This guidance is for trustees of occupational pension schemes and those responsible for Local Government Pension Schemes (LGPS). It will also be of interest to providers of investment consultancy services and employers. For the purposes of this guidance, where we refer to trustees we also include scheme managers and pension board members in relation to LGPS.

The law requires trustees to set strategic objectives for providers of investment consultancy services as defined in part 2 of The Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the CMA Order). These are described further in the section understanding your legal duties. The Department for Work and Pensions intends to bring these duties into pensions legislation during 2020 and we will make the necessary amendments to ensure references to legal duties are consistent with pensions legislation. We recognise that the range of advice and services provided by investment consultants is broader than those subject to the legal requirements and we would encourage trustees, as a matter of good governance, to set objectives even where the legal requirement may not directly apply. This guidance therefore aims to provide you with practical information and key matters to consider when:

  • setting objectives for your provider of investment consultancy services, and
  • deciding on the services you want to obtain from your investment consultant

We use phrases such as the ‘law requires’ and ‘you must’ to indicate legal duties. We use ‘you should’ to indicate good practice approaches to setting objectives for your provider of investment consultancy services.

Potential benefits of setting objectives

Setting objectives for advisers is an important part of an effective system of governance. We expect that by putting objectives in place, trustees will be better positioned to assess the quality of the service they receive and to deliver better outcomes for their members.

The CMA’s 2018 investigation found that trustees had difficulty monitoring the quality of investment consultancy services, due to the limited information available to them. By increasing trustee engagement in the adviser appointment process and by setting objectives and monitoring performance against those objectives, we expect trustees will achieve better outcomes for their schemes and better value for money. We also expect that monitoring the investment adviser’s performance against their objectives will enable trustees to better identify and manage areas of poor performance and to consider switching to an alternative service provider where appropriate.

We would expect trustees, as a matter of good practice, to consider setting objectives for all their providers of advisory services. For more information on working well with advisers, please visit our guide to scheme management skills. While that guidance is primarily intended for trustees of defined contribution (DC) schemes, it also contains information which will be useful for trustees of defined benefit (DB) schemes.

Understanding your legal duties

Duties in relation to mandatory tendering for fiduciary management appointments and setting strategic objectives for investment consultants have been introduced by the CMA Order.

For information relating to the requirement to run a competitive tender exercise see our guidance Tender for fiduciary management services.

In relation to the requirement to set objectives for providers of investment consultancy services, unless the scheme is exempt applies, the trustees must not:

  • enter a new contract, or
  • continue to obtain investment consultancy services

except where the trustees have set objectives in relation to the services they are going to receive or are already receiving.

This prohibition is effective from 10 December 2019 and will apply to new and existing contracts for investment consultancy services.

For the purposes of identifying if you need to set objectives, you will need to consider and/or take advice on whether you are or will be receiving investment consultancy services as defined in part 2 of the Order. You should be aware that other types of advisers, who may not identify themselves as investment consultants, could be providing you with investment consultancy services. For example, you might be receiving advice that amounts to ‘investment consultancy services’ from an independent financial adviser or wealth manager, or advice from your scheme actuary on whether the scheme’s strategic asset allocation is appropriate for the scheme’s liabilities.

High-level commentary from an actuary, as referred to in the Order, is explicitly excluded. However, trustees should be aware that where the scheme does not have an investment adviser and the scheme actuary provides investment advice as part of their actuarial work, that work is unlikely in our view to be exempt in relation to that investment advice. If you are receiving investment consultancy services from a provider that does not identify as an investment consultant, you are still required by law to set objectives for that provider.

As trustees, you remain ultimately responsible for your scheme. You should:

  • carry out checks that the provider is suitably qualified to provide these services (and has specific knowledge of the requirements that apply to trust-based occupational pension schemes or LGPS), and
  • monitor the activities and performance of service providers to ensure they are operating in accordance with the trustees’ legal obligations and are helping to deliver good scheme and member outcomes

For more information on trustees’ responsibility for investment matters, see our DB investment guidance and our DC guide to investment governance.

It is possible that the trustee board has chosen to delegate investment decisions. Find out more about investment governance models in our guide choosing an investment governance model.

Please be aware that some advice elements of fiduciary management services may be subject to the requirement to set objectives, and you may wish to consider seeking professional advice as to whether this applies in light of the services you receive.

Documenting compliance

As a matter of good practice, you should consider documenting any key decisions and how they were met. Minutes of trustee meetings could be used to record key decisions or objectives set for investment consultancy services. It could also be helpful to have a standalone document setting out what the objectives are, how and when they will be measured, and when actions arising from any review will be addressed by.

Investment consultancy services

A wide range of investment consultancy services are available to trustees of occupational pension schemes. Depending on whether your scheme is DC or DB and the specific circumstances of your scheme, these service requirements will differ.

In order to set strategic objectives for your adviser, you will first need to understand the services to which objectives relate. As outlined in the introduction, only those areas that come within the legal definition of investment consultancy services trigger the requirement for you to set strategic objectives, but as a matter of good governance we would encourage you to consider setting objectives for any additional services you receive.

Below, we have listed some examples of investment consultancy services that trustees can receive for DB and DC schemes, together with a brief explanation of what these typically involve. These lists are not exhaustive and the requirements for the level of service provided will vary due to scheme circumstances.

Defining investment beliefs

This often involves a review of the trustees’ investment preferences, informed by appropriate evidence and knowledge such as whether the trustees prefer active or passive fund management, illiquid investments over liquid investment etc, and using these findings to agree a set of core investment beliefs that represent the trustees’ preferences.

Investment strategy review

This involves a review of the nature and term structure of the pension scheme liabilities and advice on an appropriate asset allocation to adopt to best meet those liabilities, in light of objectives set by the trustees and considering the financial support that is available from the scheme’s employer(s).

Risk modelling

This can involve the analysis of risk using a range of different tools and metrics, for example asset liability modelling and scenario/sensitivity analysis. It is frequently included as part of the investment strategy review service but can be tendered for and provided separately. In large schemes, a risk review by an independent third party can be very useful.

Setting investment performance and risk targets

This involves taking the output from the investment strategy review and any associated risk modelling to set the performance and risk targets for the scheme.

Portfolio construction

This involves advice on how a portfolio of investments or investment funds could be constructed to best align with the proposed asset allocation strategy and the trustees’ investment beliefs, allowing for the investment performance and risk targets set.

Investment manager selection

This process would aim to identify a list of managers, based on research and due diligence completed, that might be appropriate to include within the portfolio, individually or in combination, to meet the performance and risk targets set for all or part of the portfolio. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending manager interviews (and site visits).

Appointment of investment manager

The degree of service required is likely to depend to an extent on the type and structure of investment fund offered and the degree of discretion allowed. However, the service could involve advice (in relation to the investment elements) on the structure and terms and conditions of the fund mandates. In addition, it could involve advice in relation to the level and structure of any investment fees, the design of any performance fee elements and advice on the mandate guidelines, tolerances and restrictions to be applied.

Transition management

This would involve advice on any portfolio re-organisation or changes to investment managers to help ensure that the assets can be moved efficiently, with minimum costs and to limit ‘out of market’ exposure. This service could include advice on the use of derivatives to optimise the transition process.

Risk mitigation and risk transfer

This would involve advice on how different risks the scheme is exposed to could be mitigated, managed and/or transferred to another party.

Investment risk and performance monitoring

This would often include preparation of regular reports and information in relation to the performance of the investment managers invested in by the scheme and the risk exposures arising. This would also include advice in relation to the ongoing suitability of the investment strategy and the individual investment management arrangements. This could also include periodic reviews of whether the fees being paid continue to be appropriate.

Fiduciary manager selection

This process aims to identify a list of fiduciary managers, based on research and due diligence completed, which might be appropriate to meet the trustees’ requirements for the management and governance of all or part of the scheme’s assets. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending fiduciary manager interviews (and fiduciary manager site visits).

Fiduciary management monitoring

This would involve providing oversight of the performance of any fiduciary manager appointed by the trustees and considering their ongoing suitability to meet the requirements of the scheme. This would also include advice on whether any changes in the fiduciary manager or the remit of their mandate were necessary.

Provision of regulated advice

This would include the provision of written advice in relation to investments (as required under s36 of the Pensions Act 1995) and the review and preparation of the scheme’s statement of investment principles (required under s35 of the Pensions Act 1995).

Governance structures

This would involve advice on the alternative ways in which investment and risk management might be governed, and the terms of reference and delegated responsibilities that might apply to each element of the governance structure.

Additional investment advice

This could be in relation to the selection and appointment of investment platform providers, custodians or sub-custodians or advice in relation to tactical asset allocation, structured equity or option strategies.

Trustee training

This could include basic investment training on investment duties and investment structures through to training on the implementation of complex derivative and risk management strategies.

Defining investment beliefs

This often involves a review of the trustee’s investment preferences informed by appropriate evidence and knowledge, such as whether the trustees prefer active or passive fund management, illiquid investments over liquid investments and using these findings to agree a set of core investment beliefs that represent the trustees’ preferences.

Scheme design and objective

This would involve advice on the design of the default fund(s) and the range of self-select funds that might be made available to meet members’ needs. This would also include consideration of how the investment management components could best be structured to allow for the trustees’ requirements around administration and communications.

Modelling tools

This could involve advice on the range of modelling tools that could be made available (and maintained) to help members assess the impact of different investment options (and contribution levels) on their expected future benefit outcome.

Investment manager selection

This process would aim to identify a list of managers, based on research and due diligence completed, which might be appropriate to include within the portfolio, individually or in combination, to meet the performance and risk targets set for all or part of the portfolio. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending manager interviews (and site visits).

Appointment of investment manager

The degree of service required would depend to an extent on the type and structure of investment fund offered and the degree of discretion allowed. However, the service could involve advice (in relation to the investment elements) on the structure and terms and conditions of the investment mandates. In addition, it could involve advice in relation to the level and structure of any investment fees, including on the design of any performance fee elements included and advice on the mandate guidelines, tolerances and restrictions to be applied.

Member engagement

This could involve a range of activities from running engagement programmes with members to better understand their needs and requirements (to enable the default fund and range of options to be appropriately designed), to assisting with member communications (for example, following a change of fund manager or investment approach) to assisting with member investment education.

Performance monitoring

This would involve preparing regular reports and information relating to the performance of the investment managers used. It would also include review of the performance of any investment platform provider.

Review of scheme’s investment arrangements

This is likely to include a triennial review, or more frequently following any significant change in membership profile, in relation to the ongoing suitability of the scheme arrangements, default arrangement, the self-select investment fund options and the investment management arrangements.

Transition management

This would involve advice on any re-organisation of the scheme’s investment arrangements or changes to investment managers to help ensure that the assets can be moved efficiently, with minimum costs and to limit ‘out of market’ exposure. This service could include advice on the use of derivatives to optimise the transition process.

Fiduciary manager selection

This process would aim to identify a list of fiduciary managers, based on research and due diligence completed, which might be appropriate to meet the trustees’ requirements for the management and governance of all or part of the scheme’s assets. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending fiduciary manager interviews (and fiduciary manager site visits).

Fiduciary management monitoring

This would involve providing oversight of the performance of any fiduciary manager appointed by the trustees and considering their ongoing suitability to meet the requirements of the scheme. This would also include advice on whether any changes in the fiduciary manager or the remit of their mandate were necessary.

Chair’s statement

This would involve analysis and providing investment advice relating to a range of inputs into the annual chair’s statement, such as the value for members assessment and the assessment of charges and transaction costs, including in relation to cumulative illustrations.

Provision of regulated advice

This would include providing written advice relating to investments (as required under s36 of the Pensions Act 1995) and reviewing and preparing the scheme’s statement of investment principles (required under s35 of the Pensions Act 1995).

Governance structures

This would involve advice on the alternative ways in which investment and risk management might be governed, and the terms of reference and delegated responsibilities that might apply to each element of those governance structures.

Additional DC investment advice

This could be in relation to the selection and appointment of investment platform providers or in relation to the emergence of new investment or fund opportunities for DC schemes.

Trustee training

This could include a range of training from basic investment training on investment duties and investment structures, to training on the design and implementation of default arrangements, lifestyle strategies and decumulation options.

Objectives for investment consultancy services

Setting adviser objectives

When in receipt of investment consultancy services, unless the scheme is exempt, you must set objectives for the provider of this service. When setting these objectives, you should include how these will contribute to achieving the scheme’s overall investment objectives.

Where you engage with more than one adviser in respect of investments, you must set objectives for each respective adviser. You are not limited in the number of objectives you may set. It will likely be proportionate to set multiple objectives for your adviser, in accordance with the range of services you receive.

Where trustees retain a fiduciary manager, they should consider the extent of investment services they receive from them as part of the overall engagement. Trustees should also be aware of the extent to which investment objectives have been set and form part of the fiduciary management agreement entered into and consider whether it is appropriate to set any additional objectives for the investment services provided.

You may also wish to set a combination of short and long-term objectives, ensuring the objectives are appropriate and achievable for the given timeframe.

Adviser objectives can be quantitative and qualitative in their nature, for example these could be set in relation to investment performance delivered relative to the liabilities, adviser performance against service level agreements, communication skills, value for money and performance against specific tasks, such as asset transitions or investment manager selection exercises. Examples of the areas that objectives may cover are outlined in the DB and DC case studies later in this guidance.

You may also wish to consider the balance between behaviours that you are looking to encourage through setting specific objectives. In particular, consider whether there could be any unintended consequence of the emphasis you apply. For example, adviser objectives based mainly on the level of investment return could result in your adviser being focused solely on the level of investment return, which may be detrimental to other elements of the service you require to be provided, such as risk management.

In setting objectives for your investment adviser, you will want to receive their input to ensure the objectives being set are consistent with the service being offered and are reasonably achievable by your adviser. In obtaining your adviser’s input, you should be aware of the potential for conflicts of interest and you should be prepared to challenge their input. You should also consider whether to involve a third party to help you set those objectives.

Once objectives have been agreed, we would expect these to be signed off in accordance with your existing governance framework, ensuring all members of the trustee board have sight of and, if relevant, agree with the adviser objectives that have been set and the ongoing monitoring process of these.

Monitoring and assessing performance

When putting in place a set of performance objectives with your adviser, you should also consider the method and regularity for assessing your adviser’s performance against these objectives. In most cases you should look to assess performance on an annual basis and complete a detailed assessment of performance at least every three years, to ensure that this continues to meet with your expectations.

You may wish to incorporate the review of your investment consultant’s performance with the effectiveness review of your board.

You should conduct reviews of the objectives to ensure these remain suitable at least triennially, and after any significant change to your scheme’s investment strategy and objectives. Where you have set multiple objectives for your adviser and / or they are advising you on particular pieces of work, you may also wish to consider ad-hoc reviews as appropriate following completion of any significant discrete pieces of work.

There are many ways to monitor and assess performance. Ultimately it is for you to decide how you want to set and monitor objectives for your provider of investment consultancy services and the approach you adopt will likely depend on the characteristics and circumstances of your scheme.

One approach that can be used is a balanced scorecard, which seeks to identify, in advance, a range of measures that are important to the delivery of the overall outcome or service and then, after a suitable period, can be used to assess performance of your provider against those measures.

Measures may be quantitative or qualitative in nature. The number of measures and the importance attached to each of these will vary with your circumstances. Some may be much more important in driving the outcome desired than others and may change over time, for example these may change:

  • to reflect changes in circumstances
  • to reflect changes in desired future outcomes or to reflect refinement of existing measures
  • to encourage the development of (or improvement in) specific behaviours

There is no “one size fits all” approach to performance assessment and what may be effective for one scheme may not be appropriate for another, even if they are of similar scale. Ultimately, the service you want to monitor and assess is the service that your scheme needs and your trustee board requires, and you should reflect the characteristics of that service in the objectives you set.

In the case studies that follow, we have illustrated a way of setting objectives using a balanced scorecard approach. You or your investment adviser may prefer to use an alternative approach or may choose to use a balanced scorecard approach which focuses on different drivers of performance, such approaches may be equally valid. However, you should make sure that any approach and measures proposed by your investment adviser focuses on your service needs and does not unduly favour the service aspects that can be easily met by the adviser.

The purpose of the case studies is to illustrate how you could use this type of balanced scorecard approach. The ‘objective themes’ and the examples of the types of services that might fall under the sample ‘objective themes” are only set out as an illustration.

In all cases you should look to develop an appropriate approach for your scheme’s circumstances and you should look to attach greater emphasis to those services which are more important to your own trustee board and scheme. You may find the examples useful as you discuss and develop the appropriate performance monitoring and assessment frameworks for your provider of investment consultancy services.

In reviewing performance, you should also seek to understand whether any structural issues hinder the delivery of outcomes. For example, ‘good’ advice may not be acted on or may not be acted on in a timely fashion. Similarly, ‘good advice’ may not be delivered well or may not be delivered at an appropriate level to meet the needs of the trustees as decision-makers. In assessing performance and in addressing future performance needs, you should be mindful of any ‘structural’ barriers which may be impeding performance and outcomes and you should be prepared to make (or encourage) appropriate change.

Proportionality

The example balanced scorecards set out in the case studies are quite detailed. In developing a performance monitoring and assessment approach you should take a proportionate approach, appropriate for your scheme and the governance structure and investment arrangements that you have implemented.

You should ensure that the outputs from any performance monitoring and objective review sessions are documented, together with your review considerations and with a clear statement of any decisions taken or actions arising, so that it may be referred to in future.

To find out more, see our scheme management skills guide.

Case studies

We have developed the following case studies to assist you in identifying the areas of investment consultancy services you should consider when setting objectives for your adviser.

Case studies

We have developed the following case studies to assist you in identifying the areas of investment consultancy services you should consider when setting objectives for your adviser.

The trustees of the XYZ DB pension scheme had retained ABC Investment Consultants as their investment advisers for many years. XYZ was a full service client of ABC and any investment-related issues the scheme had were dealt with by ABC. Fees were generally charged on a time-cost basis but the fees for more significant items, like manager selection exercises and asset-liability modelling, were based around an agreed fixed fee scale or agreed separately in advance.

The trustees acknowledged the following:

  • Appropriate investment and risk management advice, in the absence of unlimited employer contributions, was the key driver in ensuring that members received their benefits in full and recognised that the service was of significant value to their scheme.
  • The balance between an adviser providing advice and the trustee being the decision-maker added complexity to any assessment of “value added”.
  • There was a risk that the “potential value” of good advice could be lost due to the trustees being unable to make effective decisions in a timely manner or being unwilling to make a decision to the full extent of the advice provided.
  • It was important to distinguish between the difference made by process driven improvements (arising, for example, from the impact on the funding level from employer deficit repair contributions) and value add driven improvements (arising, for example, from recommendation of investment managers that out-performed).
  • It was difficult to define an appropriate period to measure and attribute performance given the potential for investment market volatility and general market noise to distort.
  • It would be challenging to develop a robust framework that could work in all environments.
  • They would also need to consider how the trustees’ governance and decision-making structures contributed to (investment) outcomes.
  • Changes to their current governance arrangements should also be considered (for example, appointment of a professional trustee, creation of an investment committee or increasing the number and frequency of trustee meetings).

The trustees agreed to adopt a balanced scorecard approach, where performance against a number of clear objectives set for their investment consultant would be assessed using a combination of quantitative and qualitative measures.

The trustees looked at the services outlined as part of ABC’s response to the invitation to tender they had submitted a number of years previously and decided to group them into six key objective themes to monitor:

  1. Demonstration of value added.
  2. Delivery of specialist processes.
  3. Proactivity of advice.
  4. Support with scheme management and compliance.
  5. Relationship and service standards.
  6. Support with additional matters arising.

The trustees acknowledged that short-term market movements and the trustees’ and employer’s business planning cycles could both distort and influence activity undertaken and agreed to monitor performance over both a one and three-year horizon, using different weights against each key objective.

The trustees were mindful that the investment activity required varied from time to time. They set out under each key objective the individual services they felt should be considered in forming a view on the investment adviser’s performance against the main objective. The trustees did not assign weightings to the individual services under each objective as they recognised that not all services were required within each monitoring period.

The trustees shared their proposed performance monitoring framework with their investment consultant and included a proposal that the effectiveness of the trustees’ governance and decision-making framework over the performance period, would also form part of the assessment. Following discussion and some revisions, the template set out in the table below was agreed.

The investment consultancy firm also outlined an offer to the trustees, whereby an element of their fees (10%) would not be paid if their service did not meet a particular level and that a “bonus” fee (5%) would be paid if their service exceeded a particular higher level. The trustees were interested in this concept but were concerned about their ability to apply a consistent approach when assessing objectives qualitatively.

The trustees asked their consultant to prepare a further version of their template against which they set out what they believed “good” and “bad” service looked like. Following further discussion and some revisions, the trustees agreed the template and the date at which the first assessment would take place.

As part of their ongoing annual assessment cycle, the trustees and the investment adviser also agreed to consider whether any changes to the template or their investment governance structure were necessary.

The trustees also provided a copy of their agreed monitoring framework with the employer for information.

Example balanced scorecard for the XYZ Pension Scheme

Please note that the objectives and weightings in the table below are illustrative only. You will need to decide the appropriate objectives to set and the appropriate weightings to apply to your scheme, based on your requirements for the investment consultancy service you receive. We would expect you to take a proportionate approach in developing the scorecard for your scheme.

Objective theme

1 year  3 year 
1. Demonstration of value added 30% 30%
  • Help the trustees to deliver an investment return of liabilities + x% per annum measured over rolling N- year periods.
  • Help the trustees to stabilise and improve the scheme’s funding level over time.
  • Help the trustees to increase the asset value of the scheme through their investment manager selection, research and
    recommendations and through their portfolio construction.
  • Help the trustees to increase the asset value of the scheme through tactical and medium-term asset allocation.
  • Enable the trustees to implement their scheme’s investments on a more competitive fee basis through negotiation on implementation and periodic benchmarking of fees.
  • Help the trustees to transition any assets between investment managers on a cost-effective basis.
  • Help the trustees to implement an investment strategy which adds value through the integration of ESG (including climate change) and stewardship considerations into their investment and risk management arrangements.
  • Enable the trustees to access a wider range of opportunities and portfolios of assets (and/or build portfolios of assets).
  • Help the trustees to manage their scheme cashflows needs in a more cost-effective manner.
   

Objective theme

1 year 3 year
2. Delivery of specialist services 20% 30% 
  • Complete asset liability modelling and scenario/sensitivity modelling using their in-house models (or proprietary modelling tools).
  • Help the trustees to decide on an appropriate risk and performance objective for the scheme.
  • Help the trustees to develop and define their investment beliefs.
  • Help the trustees to review their investment governance arrangements and terms of reference for any sub-committees or delegated authorities.
  • Help the trustees to develop and maintain an appropriate framework to track progress against strategic objectives.
   
Objective theme 1 year 3 year 
3. Proactivity of advice 15% 5%
  • Advise the trustees on new investment opportunities or emerging risks.
  • Advise the trustees on market pricing opportunities to mitigate or transfer risk.
  • Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to transfer risk.
  • Advise on any changes in the investment governance arrangements or delegated authorities which are necessary to enable the trustees to best access the emerging opportunities.
   
Objective theme 1 year 3 year 
4. Support with scheme management and compliance 20%  20%
  • On a regular (quarterly) basis, monitor the performance of the scheme’s investments relative to the liabilities and also the performance of the scheme’s investment managers and any investments directly held.
  • Produce investment reports, briefing papers and investment advice in advance of trustee meetings and on a timely basis.
  • Review and update as appropriate the scheme’s statement of investment principles.
  • Provide periodic written advice on direct investments held.
  • Provide trustee training as required.
  • Help the trustees to ensure compliance of the scheme’s investment arrangements with developments in regulation and all legislation in relation to investment matters.
   
Objective theme 1 year 3 year
5. Relationship and service standards 10% 10%
  • Agree any changes of (named) investment consultant(s) and meeting cover with the trustees in advance.
  • Maintain fees in line with tender submission and inform trustees (in advance) of any significant variations that might arise due to changes in remit or strategy.
  • Agree fee budget with trustees for any significant piece of work.
  • Clear understanding of the scheme’s goals and objectives.
  • Appropriate quality and quantity of resourcing to meet the needs and requirements of the scheme.
  • Strong positive working relationship with the trustees.
  • Work collaboratively with other advisers and provide effective support to trustees when engaging with other stakeholders.
  • Appropriate management and mitigation of any conflicts of interest.
   
Objective theme 1 year 3 year
6. Support with additional matters arising 5% 5% 
  • Provide advice and assistance to the trustees on any other issues arising (for example, following corporate transaction or significant corporate event impacting the pension scheme).
   
 Scheme’s governance and decision-making framework Y/N Y/N
  •  Has the governance structure and the level of engagement by the trustees helped or hindered the delivery of improved investment and funding outcomes?
   

The trustees of the XYZ pension scheme had recently appointed an investment consultant to help them with their growing DC scheme and decided to put in place a formal objective and performance assessment structure for them. The trustees acknowledged the following:

  • Appropriate investment and risk management advice was a key driver in delivering good outcomes for members.
  • The balance between an adviser providing advice and the trustees being the decision-maker added complexity to any assessment of “value added”.
  • There was a risk that the “value” of good advice could be lost due to the trustees being unable to make effective decisions in a timely manner or being unwilling to make a decision to the full extent of the advice provided.
  • It was important to distinguish between services based around processes (for example, from running a tender exercise for an investment service provider) and services based around value add (arising, for example, from recommendation of active investment managers that out-performed).
  • It was difficult to define an appropriate period to measure and attribute performance given the potential for investment market volatility and general market noise to distort.
  • It was difficult to understand how the performance of the investment strategy contributed to outcomes for different segments/age groups of the membership.
  • It would be challenging to develop a robust framework that could work in all environments.
  • They would also need to consider how the trustees’ governance and decision-making structures contributed to (investment) outcomes for members.
  • Changes to their current governance arrangements should also be considered (for example, appointment of a professional trustee, creation of an investment committee or increasing the number and frequency of trustee meetings).

The trustees agreed to adopt a balanced scorecard approach, where performance against a number of clear objectives set for their investment consultant would be assessed using a combination of quantitative and qualitative measures.

The trustees reviewed the range of services outlined as part of the investment consultant’s response to the invitation to tender and decided to group the range of services under seven key objective themes that they would base their monitoring on the following:

  1. Demonstration of value added.
  2. Delivery of specialist processes.
  3. Proactivity of advice.
  4. Support with member engagement and communication.
  5. Support with scheme management and compliance.
  6. Relationship and service standards.
  7. Support with additional matters arising.

The trustees acknowledged that short-term market movements and the trustees’ and employer’s business planning cycles could both distort and influence activity undertaken and agreed to monitor performance over both a one and three-year horizon, using different weights against each key objective.

The trustees were mindful that the investment activity required varied from time to time. They set out under each key objective the individual services they felt should be considered in forming a view on the investment adviser’s performance against the main objective. The trustees did not assign weightings to the individual services under each objective as they recognised that not all services were required within each monitoring period.

The trustees shared their proposed performance monitoring framework with their investment consultant and included a proposal that the effectiveness of the trustees’ governance and decision-making framework over the performance period, would also form part of the assessment. Following discussion and some revisions, the template set out in the table below was agreed.

The trustees asked their consultant to prepare a further version of their template against which they set out what they believed “good” and “bad” service looked like. Following further discussion and some revisions, the trustees agreed the template and the date at which the first assessment would take place.

As part of their ongoing annual assessment cycle, the trustees and the investment adviser also agreed to consider whether any changes to the template or their investment governance structure were necessary.

Example balanced scorecard for the XYZ Pension Scheme

Please note that the objectives and weightings in the table below are illustrative only. You will need to decide the appropriate objectives to set and the appropriate weightings to apply to your scheme, based on your requirements for the investment consultancy service you receive. We would expect you to take a proportionate approach in developing the scorecard for your scheme.

Objective theme

1 year  3 year 
1. Demonstration of value added 15% 15%
  • Help the trustees to put in place an appropriate default arrangement and range of self-select funds that enable members’ needs to be met and improved outcomes to be delivered.
  • Increase the value of the individual member funds through their investment manager selection, research and recommendations.
  • Help the trustees to implement an investment strategy which adds value through the integration of ESG (including climate change) and stewardship considerations in their investment and risk management arrangements.
  • Enable the trustees to implement their scheme’s investments on a more competitive fee basis.
  • Help the trustees to transition any assets between investment managers on a cost-effective basis.
  • Enable the trustees to access a wider range of opportunities and portfolios of assets (and/or build portfolios of assets).
   

Objective theme

1 year 3 year
2. Delivery of specialist services 20% 30% 
  • Analyse/model the scheme’s membership profile and expected member outcomes and provide recommendations on the appropriate investment strategy and investment manager fund combinations to adopt.
  • Help the trustees to decide on an appropriate risk and performance objective to set for their default arrangement(s) and the range of self-select funds to meet the needs of members.
  • Help the trustees to develop and maintain an appropriate framework to track progress against expected member outcomes.
  • Help the trustees to decide on an appropriate range of decumulation options, in consultation with key stakeholders to enable members to take their benefits in the form they require.
  • To help the trustees to develop and define their investment beliefs.
  • To help the trustees to review their investment governance arrangements and terms of reference for any sub- committees or delegated authorities.
   
Objective theme 1 year 3 year 
3. Proactivity of advice 15% 5%
  • Advise the trustees on new investment opportunities or emerging risks.
  • Advise the trustees on market pricing opportunities to mitigate or manage risk.
  • Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to manage risk.
  • Advise on any changes in the investment governance arrangements or delegated authorities which are necessary to enable the trustees to best access the emerging opportunities.
   
Objective theme 1 year 3 year 
4. Support with member engagement and communication 15%  15%
  • Through the use of communication and behavioural techniques, help the trustees effectively engage with their membership to better understand their needs and assess how the default arrangement(s) and range of self-select funds meets their needs.
   
Objective theme 1 year 3 year
5. Support with scheme management and compliance 20% 20%
  • On a regular (quarterly) basis, monitor the performance of the scheme’s investment strategies and also the performance of the scheme’s investment managers.
  • Produce investment reports, briefing papers and investment advice in advance of trustee meetings and on a timely basis.
  • Review and update as appropriate the scheme’s statement of investment principles.
  • Provide periodic written advice on any direct investments held.
  • Provide trustee training as required.
  • Provide support in the assessment of value for members and the impact of cost and charges in preparation of the chair’s statement.
  • Help the trustees to ensure compliance of the scheme’s investment arrangements with developments in regulation and all legislation in relation to investment matters.
   
Objective theme 1 year 3 year
6. Relationship and service standards 10% 10% 
  • Agree any changes of (named) investment consultant(s) and meeting covers with the trustees in advance.
  • Maintain fees in line with tender submission and inform trustees (in advance) of any significant variations that might arise due to changes in remit or strategy.
  • Agree fee budget with trustees for any significant piece of work.
  • Clear understanding of the scheme’s goals and objectives.
  • Appropriate quality and quantity of resourcing to meet the needs and requirements of the scheme.
  • Strong positive working relationship with the trustees.
  • Work collaboratively with other advisers and provide effective support to trustees when engaging with other stakeholders.
  • Appropriate conflicts of interest or management and mitigation of any conflicts.
   
Objective theme 1 year 3 year
7. Support with additional matters arising 5% 5%
  • Provide advice and assistance to the trustees on any other issues arising (for example, following corporate events, or change in corporate pension policy).
   
 Scheme’s governance and decision-making framework Y/N Y/N
  • Has the governance structure and the level of engagement by the trustees helped or hindered the delivery of improved investment and member outcomes?
   

Terms used in this guidance

Delegation

The transfer of responsibility for exercise of one or more of the trustees’ powers to a third party. For example, where trustees delegate day-to-day investment decisions to an investment manager or fiduciary manager but retain overall responsibility for the investment strategy. Pensions law permits delegation of investment decisions to fund managers on this basis, but you should note that you remain liable for defaults or acts of the manager unless you have taken all reasonable steps to satisfy yourselves that the manager has the appropriate knowledge and experience and is carrying out their work competently in compliance with relevant legislation.

Investment beliefs

An agreed and documented view in respect of investments, based on knowledge, understanding and experience.

Investment consultant

A person or firm that provides investment consultancy services.

Investment consultancy services

This term is generally used (including in this guidance) to describe the provision of advice to the trustee board to support decisions on matters such as investment strategy, strategic asset allocation and manager selection. However, for the purposes of the legal requirement to set strategic objectives, this is defined in Part 2 of the CMA Order as advice to trustees on one or more of the following:

  • Investments that may be made or retained by or on behalf of the trustees.
  • Any matters in respect of which the trustees are required by law to seek advice in relation to the preparation or revision of the statement of investment principles.
  • Strategic asset allocation.
  • Manager selection.

The reference to ‘advises’ means providing advice on the merits of the trustees taking or not taking a specific course of action and includes a recommendation or guidance to that effect. The services do not include:

(a) the provision of advice by a provider to the trustees of a pension scheme of which the provider (or a group company of the provider, or a partnership or joint venture with the provider) is the principal employer or controlling employer

(b) the high-level commentary provided by the scheme actuary in respect of triennial valuation reports and regarding the link between the investment approach and the pension scheme’s funding objectives