Defined BenefitMar 30 2017

Regulator clarifies DB investment requirements

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Regulator clarifies DB investment requirements

The Pensions Regulator has published new investment guidelines for defined benefit pension schemes, in a move to clarify how schemes should be approaching investment strategy.

The new guidance broadly follows the regulators' defined contribution investment guidance, adding some "specific considerations" relevant exclusively to DB schemes.

It outlines trustees' duties regarding areas such as investment philosophy, risk management, and governance, listing six criteria that a "good investment strategy" should fulfill.

These criteria include: an integrated risk management process; consistency with the scheme’s objectives and any long-term plans; an overall amount of risk consistent with risk appetite; risk-taking that is understood and balanced; and consideration of the scheme’s future cashflow and liquidity requirements.

The document also contains guidelines for the implementation of the investment strategy, including the consideration of operational risks, security of scheme assets, asset transitions and liquidity and collateral management.

Fred Berry, TPR’s head of investment consultancy, said trustees were expected to adhere to the principles set out in the document.

"The investment strategy is one of the most important drivers of a scheme’s ability to meet the objective of paying the promised benefits as they fall due, and we expect trustees to set this in the context of their integrated risk management approach," he said.

"It’s important to set clear investment objectives for your scheme and to identify how and when they should be achieved.

"Our guidance states that trustees should focus on areas that have the most impact for meeting their scheme’s objectives, and identify the necessary skills for the board of trustees of their scheme. It also provides some practical guidance on how to get the best from their advisers."

The regulator's new guidance adds to the ongoing debate over the future regulatory approach to the troubled DB sector.

In February the government launched a wide-ranging green paper looking at issues such as indexation and consolidation, to address the growing collective deficit and the increasing risk that funds will collapse.

It also comes after members of the Royal Mail DB scheme proposed, through their union, a new hybrid DB-DC scheme that had a much more aggressive, equity-heavy investment strategy than the average DB scheme.

Commenting on the regulator's new guidelines, Calum Cooper, head of trustee at Hymans Robertson, said: "Trustees may be surprised to find out that the models used to measure and manage risk and return typically don’t allow for the primary reason schemes hold assets: i.e. for income to pay the pensions promised.

"Given this, how confident can trustees be in model driven asset recommendations?"

He said this was one reason why DB pension funds held more growth asset risk than required.

"It boils down to a lack of clarity on risk, and crucially not modelling all the key risks. This is putting £250bn of members benefits on the line.

"Model misbehaviour matters. Cashflows matter. The models used by schemes should reflect both asset and liability cashflows to improve the chances of paying members’ pensions in full," he said.

james.fernyhough@ft.com