19 July 2017

The Pensions Regulator recently issued guidance to trustees of defined benefit pension schemes, focussing on six key areas which are discussed below. 

What is clear is that a minimum compliance approach with regard to investments is not sufficient for trustees in order to properly discharge their duties.

The core message is that working collaboratively with the employer, and creating an investment framework that takes into account a scheme’s funding level and the strength of the sponsoring employer’s covenant, creates better investment outcomes. This is the very essence of the Regulator’s Integrated Risk Management (IRM) framework for trustees and sponsors. 

Throughout the guidance, the Regulator makes reference to the Trustee toolkit, which contains modules and tutorials.


Whilst noting that day to day decision making can be delegated, the guidance notes that trustees:

  • are responsible for a scheme’s investment strategy; 
  • must consult with the sponsoring employer when changing a scheme’s investment strategy; and
  • have a statutory obligation to take written advice when preparing the Statement of Investment Principles (where one is required). 

The investment governance framework must enable trustees to make effective investment related decisions. Where appropriate, advice should be sought to strengthen this process. 

Investing to Fund Defined Benefits 

Whilst risk is required to achieve an investment return, not all risks are rewarded. When setting their investment strategy, trustees need to consider their risk CAPACITY and risk APPETITE. Their investment objectives, which should be consistent with these, can then be set. 

If trustees consider Environmental, Social and Governance factors (ESG) to be financially significant, they should also be allowed for. 

Investment advisors can model investment risks, enabling trustees to set an investment strategy that takes into account a scheme’s funding position and the strength of the employer’s covenant. 

Figure 1 provides an example breakdown of investment risk for a pension scheme.



Matching Assets 

Matching assets can reduce the volatility of a scheme’s funding level by hedging interest rate and inflation risks: de-risking the investment strategy. They can also be used in preparation for securing a scheme’s liabilities with an insurer either partially or as a whole. 

Growth assets 

Growth assets are used to fund a deficit in a scheme, reducing the reliance on the sponsoring employer’s contributions. However, the investment returns can be volatile. Diversifying the sources of these investment returns can reduce this volatility, adding stability to the growth returns. 

Multi-asset funds can help with this diversification of risk and return. As can other assets classes: Private credit, infrastructure, property etc.


Implementing an investment strategy creates more areas for consideration: operational risks; security of assets; transition of assets; liquidity; and collateral management.

Assets transitions move very large amounts of money, sometimes from one investment manager to another, exposing a scheme to a variety of risks. Working with advisors to create a transition plan, detailing explicit costs and risk reduction techniques can reduce the costs and risks. 

However, these issues should be seen in the context of improving a scheme’s investment strategy by improving the risk/reward profile. 


Ongoing monitoring of an implemented investment strategy is a fundamental part of an IRM framework. The Pensions Regulator notes that the investment strategy is likely to have a far greater impact than individual manager performance (Figure 2).



Regular and timely monitoring of the agreed strategy, with agreed actions can help. Additional areas to be monitored could include:

  • Scheme funding level – including any triggers;
  • Key risks – Total Value at Risk and risk breakdown;
  • Investment performance – performance of assets relative to benchmark; 
  • Liability hedging – changes of interest and inflation hedging ratios with associated triggers; 
  • Asset allocation – rebalance if required; 
  • Investment manager review – regular updates of manager performance and changes in structure; 
  • Responsible investment – ongoing review of ESG issues; and
  • Stewardship – voting and engagement reporting. 


Trustees should consider whether their existing investment strategy is targeting the appropriate level of risk. Getting the balance between growth assets and matching assets is the first step in achieving this. 

An investment strategy should not be set in stone. It should evolve as funding levels and employer covenants change, adjusting the risk profile over time. 

Trustees should consider their ongoing monitoring to requirements and ensure that their Statement of Investment Principles reflects these risks.

To discuss how best to benefit from a governance review please consult your JLT Investment Consultant or contact Jig Sheth on 0161 253 1154 or email:

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