Regulatory requirements for Target Date funds

While failing to prescribe a particular approach to be taken to building up a pension pot, the regulator states trustees should ‘ensure that a default strategy is provided which is suitable for the needs of the membership’.

According to the watchdog, in a quality defined contribution scheme trustees will:

• ensure that investment objectives for each investment option are identified and documented in order for them to be regularly monitored;

• ensure that the number and risk profile of investment options offered reflects the needs of the membership;

• ensure that a default strategy is provided which is suitable for the needs of the membership; and

• act in the best interests of all beneficiaries.

Trustees of most schemes are responsible for deciding the investment objectives and strategy adopted by the scheme. Only trustees of fully insured schemes do not need to make this decision.

Trustees have a very wide power to invest scheme assets. Subject to any restrictions imposed by the scheme rules, trustees have the same power to make investments of any kind as if they were absolutely entitled to the assets of the scheme, the regulator states.

However the watchdog specifies that trustees need to consider the interests of both active and deferred members in a scheme when they make decisions relating to investment options.

Schemes which are not fully insured must also draw up a written statement of investment principles, the regulator rules.

A statement of investment principles should include the trustees’ policy on the following issues:

• setting the investment objective and defining, monitoring and reviewing the default strategy;

• monitoring and reviewing all investments and investment funds in which the scheme assets are invested;

• choosing investments and investment funds, and the balance between different kinds of investment and investment funds;

• risk, including how risk is to be measured and managed, and the expected return on investments;

• realising investments;

• the extent to which the trustees take account of social, environmental or ethical considerations when taking investment decisions; and

• using the rights (including voting rights) attached to investments (if the trustees have them).

Trustees must review the statement of investment principles regularly – including whenever there has been a significant change in investment policy.