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Investment governance

General code in force: 28 March 2024

This module forms part of our expectations for trustees of those schemes required to operate an effective system of governance, see Systems of governance.

  1. The term ‘investment governance’ refers to the policies and procedures that ensure a governing body complies with any obligations it has in relation to investment.
  2. A governing body’s powers and responsibilities regarding investment will be scheme specific, and so its governance arrangements must also be relevant and tailored to the scheme. See Investment decision-making.
  3. The scheme managers of Local Government Pension Schemes do not have the same obligations in pensions legislation, but it is good practice for them to approach investment governance in the same way.
  4. Governing bodies of most defined contribution (DC) and defined benefit (DB) schemes must:
    1. have a good working knowledge of investment matters relating to their scheme1
    2. understand the investment powers and duties they have under the scheme trust deed, rules and legislation2 (see Knowledge and understanding)
    3. appoint an investment manager to manage scheme investments3 (see Managing advisers and service providers)
    4. obtain and consider advice from a suitably qualified person before making investment decisions4 (see Managing advisers and service providers)
    5. produce a statement of investment principles (SIP), which covers their policies relating to the scheme’s investments, unless exempt5 (see Statement of investment principles)
  5. Governing bodies of schemes that are required to produce a SIP, must produce an annual implementation statement as part of their annual report and accounts. See Stewardship.
  6. The governing bodies of most DC schemes must produce a SIP for their default arrangement(s) if they have them, which is subject to different requirements. See Statement of investment principles.
  7. Under section 249A of the Pensions Act 20046, governing bodies of certain schemes must establish and operate an effective system of governance (see Systems of governance) including internal controls (see Internal controls). However, there are certain exemptions7. The system of governance must be proportionate to the size, nature, scale, and complexity of the activities of the scheme.
  8. We expect that governing bodies required to operate an effective system of governance and that have investment responsibilities will have the measures set out in paragraphs 9 to 11 in place.
  9. The governing body should:
    1. clearly document the objectives, roles, responsibilities, and reporting relationships of all parties involved in making investment decisions
    2. ensure that investment decisions are taken by those with the necessary skills, knowledge, information, and resources
    3. obtain advice and other inputs required to properly govern the scheme’s investments (including considering what advice may be needed)
    4. ensure the governance structure relating to the assessment of investment risks and how investment decisions are made is reviewed regularly and is appropriate for the scheme’s circumstances and level of complexity
    5. delegate investment decisions where appropriate for the scheme’s circumstances and level of complexity. This may include delegating to an investment sub-committee or a qualified investment manager.
    6. have appropriate oversight of any bodies with delegated responsibilities, with clearly written terms of reference and/or contractual arrangements
    7. have written policies covering the use of advisers, including when to use advisers. These policies should consider the specific circumstances of the scheme, such as the investment knowledge and experience available to the governing body and the relevant legal requirements
    8. have sufficient expertise to evaluate and challenge the advice they receive from advisers and service providers (see Managing advisers and service providers and Knowledge and understanding)
    9. ensure investment policies take account of potential long-term effects on scheme investments (see also Stewardship)
    10. have procedures in place to regularly monitor the performance of scheme investments (see Investment monitoring)
    11. regularly monitor the performance of investment managers and advisers and consider their performance formally at least every three years, acting upon any issues identified (see Managing advisers and service providers)6
  10. The governing body of a scheme with a DC element should:
    1. offer an appropriate choice of investment arrangements for members who do not wish to invest in any default arrangement
    2. provide access to information to enable members to make an informed choice about where their contributions are invested, where more than one investment arrangement is available
    3. inform members in advance of potential changes to an investment arrangement
    4. allow members the opportunity to actively choose to switch to a new DC investment arrangement where their existing arrangement is changed or replaced
    5. if replacing or modifying an existing investment arrangement, manage the transition costs with consideration given to value for members (see Value for members)
  11. The governing body of a scheme with a DB element should:
    1. have governance policies that ensure the form and structure of liabilities, the strength of the employer covenant, the risk of sponsor default, life expectancy of members, and the need to access cash at particular times are taken into account in investment decision-making
    2. clearly communicate the policies above to advisers, investment managers, and other relevant stakeholders

Glossary and legal references

Employer covenant

The extent of the employer’s legal obligation and financial ability to support the scheme now and in the future.

Sponsor default

When a sponsoring employer does not meet or is unable to meet its financial commitments to the pension scheme.

1 Sections 247 and 248 of the Pensions Act 2004 [Articles 224 and 225 of the Pensions (Northern Ireland) Order 2005]

2Sections 247 and 248 of the Pensions Act 2004 [Articles 224 and 225 of the Pensions (Northern Ireland) Order 2005]

3Section 47 of the Pensions Act 1995 [Article 47 of the Pensions (Northern Ireland) Order 1995]

4Section 36 of the Pensions Act 1995 [Article 36 of the Pensions (Northern Ireland) Order 1995]

5Regulation 6 Occupational Pensions Schemes (Investment) Regulations 2005 [Regulation 6 Occupational Pensions Schemes (Investment) Regulations (Northern Ireland) 2005]

6Article 226A of The Pensions (Northern Ireland) Order 2005

7Section 249A(3) of the Pensions Act 2004 [Article 226A (3) of The Pensions (Northern Ireland) Order 2005]