CDC code in force: 1 August 2022
Members’ retirement outcomes in the CDC environment will be materially influenced by the performance of the investment strategy, and so it is an important part of a scheme’s design.
Trustees will play a critical role in shaping, implementing and then monitoring this investment strategy, and while expert advisers can help them with their responsibilities, ultimate fiduciary responsibility for the design, ongoing suitability and performance of the investment strategy sits firmly on the shoulders of the trustee board.
We therefore place significant importance on the need for trustees to show sufficient focus and expertise, and a deep understanding of all material aspects of the investment proposition, both at the time their arrangement is authorised and during subsequent supervision.
Through our supervision of the scheme, we will monitor the trustees’ activity and assess their stewardship of the investment strategy, their advisers and suppliers. Where we identify activity, omissions or behaviour that fall short of the standards we require, in line with the criteria for fitness and propriety and systems and processes (in particular scheme governance), we will hold the trustees accountable.
Where the scheme rules set prescriptions with regard to the investment strategy set by the trustees we will expect:
- an explanation of how the prescriptions fit within current UK law.
- justification for the prescriptions and how they support the scheme’s design.
- a statement that the trustees are comfortable with the prescriptions.
- that there is provision for reviewing and amending the scheme rules relating to investment, and at what intervals or events this is triggered.
- an explanation of who can amend the relevant scheme rules.
- that trustees are required to agree the changes for them to be enacted.
- that trustees understand the circumstances the scheme may encounter which require changes, and that there are processes in place to bring about the necessary changes in a timely manner.
- that there is provision for the trustees to change the investment strategy if necessary during a triggering event period.
At authorisation, we expect the trustees to show that they:
- take advice from appropriate advisers
- pursue a strategy consistent with their defined investment philosophy
- have the necessary expertise to challenge the advice they receive
- thoroughly understand the investment strategy from a risk and return perspective
- have clarity in the roles and responsibilities for the implementation of investment strategy
- monitor the ongoing suitability, relevance and appropriateness of the investments and associated benchmarks
- monitor material changes in process, policy, or strategy that affect the investment proposition
- have access to relevant data that enables a prompt analysis of their investment strategy
- have established an effective investment governance framework
As part of our ongoing assessment of the trustees’ oversight of the investment strategy and the framework in which the investment arrangements operate, we will assess the quality of the investment-related documentation presented by the trustees. These documents should contain enough detail to give us a thorough understanding of the investment strategy and the roles and responsibilities of the individuals involved in implementing it.
More specifically, we expect these documents to enable us to clearly understand key elements of the strategy, including:
- the trustees’ investment philosophy and the style of investment management being pursued
- the investment objectives, benchmarks and estimated target returns for the strategy
- the range of permissible asset classes, markets, and instruments together with the process for adding new or additional investments
- the asset allocation framework detailing the parameters for tactical and strategic asset allocation discretion
- the size and nature of the risk budget or the risk factors permitted under the agreed investment arrangements
- the trustees’ policy on ESG and climate change
Similarly, in the context of the ongoing monitoring of the performance of the investments, we expect trustees to show that they:
- have maintained specific accountability for each element of the investment strategy and that any conflicts of interest are identified, understood, and addressed
- actively monitor the absolute, and relative performance of their investments against appropriate benchmarks and peers
- receive sufficiently detailed information regarding the attribution of performance in the portfolio to fully understand all the components of the investment performance of their strategy
- employ a suitable range of risk metrics to fully understand the nature and magnitude of risk being deployed across their investment
- understand the resilience of their investment strategy to a range of economic and market scenarios and stresses
- can assess whether those responsible for strategic and tactical asset allocation decisions, portfolio construction and manager selection decisions are adding or detracting value for the trustees
- are immediately aware of material changes to relevant benchmarks, objectives, risk budgets, investment process or philosophy and the associated implications for the strategy
- fully understand and appropriately manage the liquidity profile of their underlying investments and the potential implications for members’ cashflow requirements
- are immediately aware of any material breaches of agreed investment guidelines
Regarding ongoing investment governance, any significant change to the investment strategy must be reported to us as a significant event and we also expect any material breach of the investment management arrangements to be reported to usIS1. The statement of investment principles must be updated without delay following any significant changes to the investment policyIS2.
Legal references
IS1 Regulations 23(1)(c) and (k) of the Regulations
IS2 Regulation 2(1)(b) of the Occupational Pension Schemes (Investment) Regulations 2005