Setting Strategic Investment Objectives for your adviser (by 10th December 2019)

You must set strategic objectives for your investment adviser before 10th December this year.  If this is not done before 10th December 2019 then you will not be able to continue to receive investment advice from your investment adviser.  This applies to both Defined Benefit (DB) and Defined Contribution (DC) arrangements and also applies to advice received as part of a fiduciary management or delegated investment mandates.

 

Background

 CMA Orders

In June this year the CMA published the Investment Consultancy and Fiduciary Management Investigation Orders.  Part Seven of the orders requires trustees to set strategic investment objectives for their Investment Consultancy Services before 10th December 2019.  If this is not done, then you will be unable to continue to receive investment consultancy services from your appointed investment adviser(s).

 

The Pensions Regulator Draft Guidance on the Order

On 31st July 2019 the Pensions Regulator (TPR) published draft guidance on complying with Part Seven of the CMA Orders (see attached).  Comment on the TPR draft is required by 12 noon on 11th September 2019.  We therefore do not expect the final guidance to be published until October at the earliest, less than three months before the date for completion of your investment advisers objectives.

 

Definition of Investment Consultancy Service Provider

The CMA has defined an Investment Consultancy Service Provider as a provider that advises the Pension Scheme Trustees in relation to one or more of the following:

  1. Investments that may be made or retained by or on behalf of the Pension Scheme Trustees;
  2. Any matters in respect of which the Pension Scheme Trustees are required by law to seek advice in relation to the preparation or revision of the statement of investment principles;
  3. Strategic asset allocation;
  4. Manager selection.

TPR, in their draft guidance on the order, has identified that other advisers that do not identify themselves as investment advisers, for example a Scheme Actuary providing advice on strategic asset allocation, may also be providing investment advice.

In addition, TPR have also stated in the draft guidance, that some advice elements of fiduciary management services may be subject to the requirement to set objectives.  We interpret this as, any fiduciary management service where the same firm provides both the advice and delegated investment services.

 

Complying with the order

Setting strategic investment objectives that will be effective in enhancing the management of your scheme is complex and will need to cover a number of different aspects of the service.  In addition to setting the objectives, trustees will also need to decide on how they assess or score each objective and the weight that should be applied to each objective.  Given the short time remaining and the typical trustee meeting cycle, it is unlikely that sufficient agenda time will be available to give this the necessary consideration.

Whilst we fully support the balanced scorecard approach recommended by TPR in their guidance, we do not believe there is sufficient time before December to fully implement this if it is not already in place.

Furthermore, as one leading law firm has suggested, it would obviously be contrary to the spirit of the Order (which is all about conflicts of interest and how to protect trustees from the distortive effects of too concentrated a market) for investment consultants to draft their own strategic objectives.

 

Recommendation

If you do not already have appropriate objectives in place, then, to ensure that you are able to comply by 10th December, we would recommend that you immediately put in place a small number of objectives.  This can then be developed into a more detailed strategic objective balanced scorecard framework and scoring methodology during 2020.

Defined Benefit Arrangements

Our recommendation for the immediate objectives for DB advisers for completion by 10th December, taken from the Pension Regulator draft guidance, are:

  1. Demonstration of added value
  • Help the trustees to stabilise and improve the schemes funding level over time
  • Helping the trustees to deliver an investment return of gilts + X% per annum measured over rolling three year periods
  • Increase the asset value of the scheme through investment manager selection and oversight
  • 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 competitive basis
  1. Delivery of specialist services
  • Help the trustees to decide on appropriate risk and performance objective for the scheme
  1. Proactivity of advice
  • Advise the trustees on new relevant investment opportunities or emerging risks
  • Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to transfer risk.

Defined Contribution Arrangements

Our recommendation for the immediate objectives for DC advisers for completion by 10th December, taken from the Pension Regulator draft guidance, are:

  1. Demonstration of added value
  • Help the trustees 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.
  • Enable the trustees to implement their scheme’s investments on a competitive fee basis
  • Help the trustees to transition any assets between investment managers on a cost-effective basis.
  1. Delivery of specialist services
  • Help the trustees to decide on an appropriate risk performance objective to set for their default arrangement(s) and the range of self-select funds to meet the needs of members.
  1. Proactivity of advice
  • Advise the trustees on relevant new investment opportunities or emerging risks
  • Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to manage risk.
  1. Support with scheme management and compliance
  • Assist the trustees with the review and update as appropriate of the scheme’s statement of investment principles (SIP)

It should be noted that you are not required to decide how to assess each of these objectives nor the weight to give to each objective before 10th December 2019.  The only requirement is to set the objectives.  Good governance requires that you do have a framework in place for assessing each objective but this can be done after 10th December.

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Monday, 18 November 2019