Pensions Quick Guide

Investments

What Do Trustees Need to Know About

Investment?

Under law, there are certain duties that trustees must comply

with when exercising their investment powers.

The Pensions Regulator (TPR) requires trustees to:

• Have knowledge and understanding of the principles

relating to pension plan investment. Key investment

issues are listed in TPR’s “scope guidance” of the trustee

knowledge and understanding requirements.

• Have “working knowledge” of the plan’s Statement of

Investment Principles (SIP).

What General Legal Duties Are Trustees

Under When Investing?

In choosing any investment, trustees must (among other

things):

• Invest prudently, as if they are under a moral obligation to

provide for others

• Use the power of investment for the purpose for which

it was given, which will usually mean investing in the

beneficiaries’ best financial interests

• Comply with any restrictions on investment set out in the

trust deed and rules of the pension plan

• Ensure the security, quality, liquidity and profitability of the

overall investment portfolio

• Bear in mind the nature and duration of the future benefits

payable under the pension plan

• Ensure the investment portfolio is diversified so as to avoid

relying too much on any particular asset, issuer or group of

undertakings

• Monitor the suitability of the default funds in the case of

defined contribution plans and those with money purchase

benefits such as AVC funds

For plans with fewer than 100 members the above is replaced

by a simple obligation to have regard for the need for

diversification.

Whom Must the Trustees Appoint and

When Must They Take Advice?

Trustees must formally appoint an authorised investment

manager, unless the plan is a wholly insured plan.

Before investing in any manner, trustees must take “proper

advice” on the suitability of an investment having regard to

their statutory obligations and the plan’s SIP. This applies even

when making the move to a buy-in policy with an insurance

company. The advice will usually be sought from an individual

authorised by the Financial Conduct Authority (FCA). The

advice must be in writing or confirmed in writing. It must

address whether the investment meets the requirements of

the legislation.

Trustees must also consider advice during the course of an

investment. Trustees must decide how often and in what

circumstances “proper advice” should be taken.

Legislation does not require trustees to take legal advice on

any particular investment. However, latest guidance from

TPR on both deﬁned beneﬁt and deﬁned contribution (DC)

investment governance recommends that trustees take legal

advice in the area of investment management and we always

suggest taking legal advice. This is particularly important

where:

• The trustees are not investment experts or experienced in

investment matters.

• The proposed investment forms a large proportion of the

pension plan’s assets.

• The investment is of an international nature.

• The investment is complex. For instance, it is in derivatives

or the investment does not trade on a regulated market.

Similarly, if the investment is difficult to terminate easily

without penalty, trustees should be aware of their rights.

• Trustees are being asked to give warranties and

indemnities. These can expose the trustees to liability,

which could exceed the pension plan’s assets.

Must Trustees Record Their Investment Policy?

Trustees must maintain a written SIP, covering:

• Their policy for complying with the legislation on choosing

investments

• Their policies in relation to:

– Kinds of investments to be held

– Balance between different kinds of investments

– Risks and how they are measured and managed

– Expected return on investments

– Realisation of investments

– Financially material considerations (which include

environmental, social and governance considerations)

– Extent (if at all) to which non-financial matters (the views

of members) are taken into account

– Exercise of the rights (including voting rights) attaching to

the scheme’s investments

– Undertaking engagement activities in respect of the

scheme’s investments (including the methods by which,

and the circumstances under which, trustees would

monitor and engage with relevant persons about relevant

matters such as performance, strategy, risks, etc.)

– Any arrangements with asset managers

– In relation to DC default funds, trustees are required

to disclose and explain their policies on illiquid asset

investments in the scheme’s default SIP (to be included

in the first default SIP published after 1 October 2023 and

by 1 October 2024 at the latest)

The trustees must review the SIP at least every three years.

Further, the trustees must review the SIP if they make a

significant change in investment policy. They must obtain

“proper advice” before preparing or revising their SIP.

Trustees of occupational pension schemes providing DC

benefits (excluding schemes where the only DC benefits are

additional voluntary contributions) are required to publish their

SIP in a publicly available format and to produce and publish

an implementation report. Trustees of schemes providing DB

benefits are also required to publish their SIP and to produce

a shorter form implementation report.

What Governance Requirements Should

Trustees Be Aware Of?

Under legislation, but subject to any restrictions in their deed

and rules, trustees have the power to make investments of

any kind as if they were absolutely entitled to the assets of

the pension plan. Employers will be interested in investment

decisions and must be consulted over changes to the SIP.

However, it is important to remember that the employer

cannot limit the investment powers of the trustees in any

way. Note, also, that no more than 5% of the plan’s assets

can be in “employer related investments” such as group

company shares or property for the employer’s business.

Employer-related loans and employer-related transactions at an

undervalue are prohibited.

TPR’s investment guidance for defined benefit plans

highlights the importance of trustees maintaining a sense of

proportionality. They should identify those investments likely

to have the greatest impact if they go wrong and focus their

attention accordingly.

Trustees may delegate their investment powers to a sub-

committee of two or more trustees. This is good practice

where there are members of the trustee board who do

not feel they have the required skills to make investment

decisions.

For trustees of DC plans with default arrangements, the

default arrangements and default funds must be reviewed

at least every three years. Trustees must also review the

default arrangements and funds after any significant change

in investment policy or the demographic profile of the relevant

members.

Conflicts of interests can arise between the trustees and the

employer or the plan’s investment adviser and investment

manager(s). Under legislation, if the trustees identify a

potential conflict of interest, they must still exercise their

investment powers for the purposes for which they were

given, which generally means in the sole interests of

beneficiaries of the pension plan. Any conflict should be

managed under the trustees’ conflicts of interest policy.

What Formalities Must Trustees Comply

With?

Trustees must follow certain formalities in appointing an

investment manager as set out under section 47 of the

Pensions Act 1995.

Trustees may be required to sign investment documents.

Individual trustees must check who is authorised to sign

documentation under their pension plan’s governing

documentation.

What Liability May Trustees Have for

Investment Decisions?

Trustees cannot exclude or restrict liability for not acting

with reasonable skill and care in their investment functions.

However, the law absolves them from responsibility for

investment decisions taken by an investment manager that

is FCA-authorised and to whom they have delegated their

investment discretion. This is provided that the trustees

take “all reasonable steps” to satisfy themselves that the

investment manager:

• Has appropriate knowledge and experience

• Is acting competently and complying with the legislation on

choosing investments

Therefore, trustees should take professional advice when

appointing investment managers and continue to monitor,

with the benefit of professional advice, the performance of

investment managers. They should also make sure that to the

fullest extent possible the manager accepts responsibility for

the delegated investment functions.

squirepattonboggs.com

The opinions expressed in this update are those of the author(s) and do not necessarily reﬂect the views of the ﬁrm, its clients, or any of its or

their respective aliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

63383/09/23

Some Practical Points

Stage Required Trustee Actions “Good Practice”

Recommendations

Appointment of

new trustee

New trustee must comply with TPR’s knowledge and

understanding requirements for investment.

Consider formal investment training

for new trustees.

Appointment of

advisers

Comply with Section 47 of the Pensions Act 1995 in appointing

advisers and the CMA Order relating to the appointment of

fiduciary managers and investment consultants.

Consider procedures for reviewing

adviser performance and take

advice on contract terms.

Preparing a SIP Ensure SIP covers all matters set out in legislation.

Take advice on the content of the SIP.

Consult with the employer on the content of the SIP.

Consider taking covenant advice

to help match the investment

risk profile to covenant risk, in

view of the plan’s Integrated Risk

Management policy.

Establishing good

governance

Identify and manage conflicts of interest.

Invest solely in accordance with the purpose for which the

investment power was given, usually meaning in the best

interests of the beneficiaries.

Consider whether to appoint an

investment sub-committee – and, if

so, prepare terms of reference for

that committee.

Choosing individual

investments

Take “proper advice” on the suitability of an investment.

Take legal advice on trustees’ investment powers under the

plan rules if there is any uncertainty.

Take legal advice on the features

and risks of any investment before

entering into it.

While holding an

investment

Consider how often, and in what circumstances, to take

“proper advice”.

For trustees of defined contribution plans with default

arrangements, the default arrangements and default funds must

be reviewed at least every three years.

The trustees are also required to provide an annual statement

containing confirmation that the default fund provides value for

money (this must be in the form of a chair’s statement).

Consider:

• Maintaining a written policy for

the assessment of investment

managers

• Monitoring performance more

frequently than annually

What Are the Consequences of Failing to Comply?

Civil Penalties

Failure to comply with a statutory requirement can result in a fine of up to £5,000 for an individual and up to £50,000 for

a company.

Criminal Penalties

Additionally, failure to comply with section 40 of the Pensions Act 1995 (restrictions on employer related investments) can

result in a trustee who agreed to make the investment being subject to an unlimited fine and/or imprisonment.

Breach of Trust

Failure to comply with trustees’ investment duties (whether derived from trust law, the trust deed and rules or

legislation) can result in one or more trustees facing a claim for breach of trust. In some cases, a successful breach of

trust claim against an individual trustee could result in personal (uncapped) liability.

Contact

Chris Harper

Partner, London

T +44 20 7655 1025

E [email protected]