The guidance is divided into the following six sections.
DB investment governance
Unsurprisingly,the need for effective governance structures is emphasised. This section includes the trustee board's role in investment governance, and sets out key considerations for working with investment advisers and preparing the statement of investment principles. TPR also stresses that it anticipates better outcomes will be achieved where trustees, employers and their respective advisers adopt a collaborative approach with regular communications.
Investing to fund DB
This section, at 21 pages, is the most substantialin the guidance and includes sub-sections on setting an appropriate investment strategy, understanding investment risks and using models to help with setting the investment strategy. TPR states that, in setting investment objectives, trustees need to identify how and when those objectives need to be achieved. As TPR considers the scheme’s investment strategy to be a key part of an integrated risk management approach, it should be considered alongside the employer covenant.
There is also a section on “journey planning”. This is TPR’s description of how the evolution of asset allocation and risk mitigation could be considered over the life-span of a scheme. Trustees are encouraged to take into account the changing profile of the membership and how they propose to meet any long-term objectives and interim milestones.
Matching DB assets
This section looks at the trustees’ legal obligation to invest DB assets in ways which are appropriate in terms of the scheme’s aim to meet the expected future benefit liabilities . The focus is on the use of matching assets, understanding the associated risks, and the requirement for such assets to be properly diversified. TPR expects trustees to manage properly any risks related to matching assets and encourages them to consider how the use of derivatives can introduce investment and operational risks which require careful oversight. A detailed example is provided on the use of liability driven investment.
DB growth assets
This section sets out how trustees are expected to understand the use of growth assets, the aim of which is to provide positive investment returns to meet the scheme’s funding obligations (in contrast to those held to match liabilities). TPR outlines how diversification may provide greater stability of investment returns, while reducing risk. Trustees are encouraged to consider how diversified the scheme’s assets are from the employer, since the overall risk may be increased if the same factors significantly affect both the employer covenant and the scheme assets.
Implementing a DB investment strategy
In this section, TPR focuses on the need for trustees to understand the risks associated with implementing an investment strategy. This includes the risks relating to the management of scheme investments which can potentially arise from the operations of a custodian, investment manager, derivative counterparties or scheme administrators. Trustees should obtain appropriate advice before appointing any such third party, and in relation to document negotiation where possible. The trustee duty to ensure the security of the scheme’s investments is flagged, together with the importance of undertaking due diligence on the extent and effectiveness of any third party’s operational risk framework.
Monitoring DB investments
Trustees need to focus on the key factors affecting the scheme’s funding level and investment performance, monitor performance in a timely manner and take appropriate action when necessary. Trustees should identify the information required to achieve this and ensure that it is provided to them clearly so that well-informed decisions can be taken. As part of an integrated risk management approach, the scheme’s investments should be monitored in the context of monitoring the employer covenant and the funding level.