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UK Pensions speedbrief: Regulator guidance on DB investment

  • United Kingdom
  • Pensions - Defined benefit


The Pensions Regulator has issued guidance on factors to consider when trustees are investing DB scheme assets.  It is intended to be read alongside the DB funding code which stresses the need for trustees to take investment and covenant risk into account when setting scheme funding strategies. 

What is the guidance for?

The Regulator says that the guidance aims to provide trustees with “practical information, examples of approaches [they] could take and factors to consider when investing scheme assets to fund defined benefits. Often the methods and approaches… will depend on the nature of [the] scheme’. 

Some provisions are phrased as things which trustees “should” or “need” to do and these represent matters which the Regulator regards as best practice and trustees should test their own practices against.  In other places, the Regulator “encourages”  trustees to do things or suggests that they may “wish to” do so, which is intended to indicate matters that trustees may find helpful to consider but which fall short of being best practice.   Trustees need to be careful to identify which are which.

What does it cover?

The guidance is divided into six sections:

  • Governance:

As might be expected, there is an emphasis on the need for trustees to ensure that they have effective governance structures in place and that they are appropriate to manage the risks and complexities faced by their scheme.  The guidance gives examples of different governance structures and key considerations for each.

The guidance stresses the need for trustees to understand what their obligations are, when they need professional advice, what the advice they receive means and where responsibility for different investment functions lies. It also encourages trustees to adopt a collaborative approach with the employer, but reminds them that they retain responsibility for the investment strategy.

  • Investing to fund defined benefits: 

This section picks up many of the themes from the DB Funding Code on the need to integrate investment strategy with considerations about employer covenant strength and scheme funding.  In particular, the approach to risk should be consistent with the employer’s ability to deal with any adverse experience.  The guidance reminds trustees that they should focus on where their scheme is going in the long term.     

The section also includes the Regulator’s views on trustees considering financial and non-financial factors in investment decisions, picking up on themes in the Law Commission’s guidance on the topic.

  • Matching assets: 

Trustees have a legal obligation to ensure that assets are appropriate to the nature of the liabilities and are properly diversified.  This section looks at how trustees might meet these obligations.  It also encourages them to consider how they deal with risks in relation to things such as inflation and interest rates and any additional risks posed by derivatives.  

  • Growth assets: 

This refers to return seeking investments intended to improve the scheme’s funding position (as opposed to those held to match liabilities).  Trustees need to understand the nature of the return expected on such assets and the risks that they pose.  Again, the guidance looks at the need for diversification but sounds a cautionary note that in a global crash, diversification might not offer much protection.

  • Implementation:

The Regulator highlights the need for trustees to obtain appropriate legal and investment advice on fund management documentation and, where possible, to negotiate the documentation.  The guidance flags in particular the need to understand the legal risks around liquidity and security. 

The guidance says that trustees should “understand, and mitigate where appropriate, the principal risks associated with implementing [a] scheme’s investment arrangements”. It cautions that establishing the level of protection available to scheme assets is not straightforward and trustees “may not always be able to definitively establish the extent to which… scheme’s assets are covered.” 

  • Monitoring:

Trustees should focus on the key things that affect investment and funding and monitor them in a timely manner and take appropriate action when necessary.  They also need to identify the information they need to do this and ensure that they receive it.  Once again, there is an emphasis on the need to take a long term view. 

Next steps for trustees

The guidance is very long and detailed and we would expect that most trustees would already have practices in place which are consistent with the guidance.  However, trustees may wish to use this as an opportunity to review their existing investment and governance practices and determine whether there are any changes that need to be made.  They should also consider whether they are receiving the right level of both investment and legal advice and how conflicts are managed with their advisers. 

In general, the guidance expects that trustees will have a significant level of knowledge about complex investment issues.  There are a number of signposts to the trustee tool kit to help them with this but trustees should also consider whether they need additional support from advisers to help them understand what the guidance expects from them.

The full guidance is here and there is a summary here.