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DB investment governance

Understanding your trustee duties and setting up an appropriate governance structure for your scheme’s investments.

Issued: March 2017
Last updated: September 2019

19 September 2019
The latest updates to this guidance reflect a number of regulatory changes introduced in 2018 and 2019, including The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018, and The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019.

The update has involved significant rewriting of various sections throughout the Investment Governance and Investing to Fund DB Schemes portions of the guidance; you may, therefore, find it useful to re-acquaint yourself with the guidance as a whole.

Updated information on investment decisions and your statement of investment principles, stewardship, reporting, sustainability and financial and non-financial factors may be of particular relevance.

1 August 2019
We have made some small updates to this guide to reflect the fact that an industry led body: The Cost Transparency Initiative, has produced standardised templates which we encourage trustees to use to obtain information about costs and charges from their provider.

Other minor changes have been made including minor editorial changes.

30 March 2017
First published.

DB investment governance

What you need to do

  • Understand your responsibilities relating to investments.
  • Put effective governance arrangements in place.
  • Focus the trustee board on those decisions most likely to make a difference to meeting scheme objectives.
  • Consider delegating less significant matters while retaining appropriate oversight.
  • Decide when to use advisers and who is appropriate.
  • Critically evaluate the advice and information you receive.
  • Manage the principal / agent issues within your governance arrangements.
  • Seek to develop a mutual understanding of investment and risk issues with the employer.
  • Document your governance arrangements in a suitable form.
  • Assess the effectiveness of the trustee board.
  • Understand the issues relating to appointing and retaining fiduciary managers when assessing how appropriate this governance model may be for your scheme.

The trustee board's role in investment governance

As a trustee board, you retain ultimate responsibility for a scheme’s investments, but this doesn’t mean that you have to (and you may not be permitted to) do everything yourself and you may find professional advice is required to understand where delegation is appropriate.

Certain tasks and decisions can be delegated, but you should take reasonable steps to satisfy yourself that whoever is undertaking the task has the appropriate knowledge and experience and is performing their role competently in accordance with section 36 of the Pensions Act 1995.

See section 36 of the Pensions Act 1995 for more information.

It is important to obtain relevant professional advice in relation to the scheme’s investments, but (even if you have delegated day-to-day investment decisions) it is your role to decide how scheme assets should be invested, at least at a strategic level.

Your scheme’s investment governance arrangements need to be consistent with your legal powers and responsibilities regarding investment. The Law Commission has prepared an overview (see chapters 3 and 4 specifically) which summarises the interaction between relevant parts of the law including trust law, pensions law, financial services legislation and the scheme’s trust deed and rules.

We expect you to have suitably documented investment governance arrangements that are appropriate for your scheme’s circumstances, including their level of complexity. These arrangements should enable effective and timely decision-making, focused on those decisions most likely to make a difference.

If you think the trustee board does not have the skills and expertise necessary to do this, it is important for you to consider your options for addressing these weaknesses, for example by increasing your skills and expertise, delegating, simplifying the investment arrangements, or winding up the scheme. In taking such steps you will also find it is appropriate to document your actions and the reasons they were needed, and the improvement to the situation you aim to achieve.

For a brief summary of your legal duties in relation to investment, go to understanding your legal duties. If you’re unsure about these requirements in general, you should undertake relevant trustee training. If you’re unsure whether your scheme’s particular investment governance arrangements are consistent with the law, you should obtain appropriate legal advice.

In this guidance, we’ve indicated some additional circumstances where you may consider it appropriate to seek professional advice to support your decision-making in relation to investment issues.

Where you outsource or delegate any part of the investment governance structure, you will need to be confident that those functions are still carried out with the best interests of beneficiaries in mind, and by people with the right expertise. It is important that the terms of contractual arrangements and fund documents in place with investment managers and advisers are reviewed (including legal review) and negotiated as appropriate to ensure this is achieved.

Further information on ensuring your trustee board has the right governance, skills and knowledge to work together and with scheme advisers can be found in our scheme management skills guidance (this has been prepared for schemes with money purchase benefits, however other trustees may also find it helpful).

Investment decisions and your statement of investment principles (SIP)

The law requires trustees of a scheme with more than 100 members to prepare a SIP and ensure it is reviewed at least every three years and without delay after any significant change in investment policy[9]. You should take written advice when preparing and reviewing your SIP[10].

The purpose of a SIP is to set out your investment strategy, including the investment objectives and investment policies you adopt.

Different advisers will have different views on the relative importance of different aspects of investment, which will vary with your scheme circumstances. However, you may find it useful to consider your various investment decisions in order, from those most likely to impact future outcomes, to those least. That order will depend on your scheme’s particular circumstances, but a suggested broad order is set out below:

  • investment governance structure
  • investment beliefs (if you have developed these)
  • investment objectives
  • risk capacity and risk appetite
  • long-term journey plan (if you have developed one) and short-term milestones
  • risk management approach (structures for de-risking and re-risking)
  • strategic liability hedge (eg inflation and interest rate target hedge ratios)
  • strategic asset allocation (eg target return and risk levels)
  • cash flow and collateral / liquidity management strategy
  • monitoring

It is good practice for your SIP to cover these areas (in addition to the items required by legislation[11]).

Other investment decisions with a lower impact that you may wish to include are:

  • the design of matching and growth asset portfolios
  • investment manager selection
  • manager implementation

Consideration of these aspects will help you determine which decision-making to retain and which to delegate. For example, you may wish to delegate decisions about the selection and implementation of a liability hedging strategy or responsibility for selecting and replacing investment managers to an investment sub-committee. You may also decide to delegate the management of a part (or all) of the scheme assets to a fiduciary manager and retain responsibility for setting the strategic objectives and monitoring that mandate.

Collaborative working with the employer

The law requires you to consult with the scheme’s employer when preparing or revising the scheme’s SIP. In this context, 'consultation' involves exchanging views and giving proper consideration to the employer’s perspective. The requirement to consult doesn’t mean you need to reach agreement with the employer, as the trustee board retains responsibility for the investment strategy.

However, we anticipate better outcomes will generally be achieved if trustees and employers work together to develop an understanding of the investment and risk issues.

Where possible, a collaborative approach should be followed, with trustees, employers and their respective advisers communicating regularly about notable developments relevant to the scheme’s investments. Our DB code provides further detail on how trustees should engage with employers.

Investment delegation structures

Your governance structure should strike an appropriate balance between speed of action, and checks and balances to ensure that actions are appropriate.

A simple investment structure might involve four parties: the trustee board, the investment consultant, the legal adviser and the investment manager.

Under this structure, the trustee board determines the overall investment objectives and makes the strategic investment decisions, eg the strategic asset allocation and overall risk appetite. Suitable advisers, such as the investment consultant and legal adviser, will advise the trustee board in relation to what they need to consider as part of their decision-making process. The day-to-day investment decisions, eg which individual investments to hold, are delegated to investment managers.

This structure can work well, provided that the trustee board is able to devote enough time and skill to the scheme investments, and is able to convene quickly to make decisions if required.

You may be able to improve the investment governance by setting up an investment sub-committee. Depending on the terms under which the committee is set up, it may be able to take some of the investment workload from the whole trustee board.

When deciding whether you need an investment sub-committee, consider questions like:

a. Does your scheme have the resources to cover the cost of a sub-committee? Does the size of the scheme and the number of members justify this?

b. What benefits might it offer? For example, would it enable the trustee board to make better decisions on investment, assess and implement a particular investment or risk management strategy, or broaden the range of investment and risk management techniques considered?

c. Do members of the proposed investment sub-committee understand their legal duties and responsibilities?

d. Does the complexity of the investments held by your scheme require you to spend more time on investment issues outside of regular trustee board meetings? [You may wish to consider the implications of the CMA’s investigation of the investment consultancy market, and whether you really need such complex expensive investment solutions and in whose interests such products have been designed and sold].

e. What are your scheme’s liabilities and the level of maturity of the scheme?

f. How developed is your scheme’s approach to integrated risk management?

If you decide to set up an investment subcommittee, you may wish to consider the balance between independent, employer and member-nominated trustees (and perhaps non-trustee, eg investment consultant) members of the committee. It is worth considering whether the trustee appointments are based primarily on the individual skill set and its ‘fit’ with the skill set needs of the trustee board.

Working with your investment advisers

The understanding your legal duties section sets out when you are required by law to obtain investment advice.

We expect you to consider what advice and other input you need to govern the scheme’s investments effectively (including consideration of what advice may be needed beyond just complying with legal requirements). It’s your responsibility to decide when to use advisers for the specific circumstances of your scheme, taking into account the investment knowledge and experience at the board’s disposal and the relevant legal requirements.

The role of the person giving the investment advice can vary depending on the nature of the advice, scheme size and complexity, and the governance structures used. When we refer to ‘investment adviser’ in this guidance, we’re not being prescriptive about their precise role. For example, they may be in-house for the largest schemes, an external investment consultant, or the scheme actuary. You may find it appropriate to seek advice from different sources on different investment matters.

As well as appropriate use of investment advisers, we would encourage you to make use of the other sources of investment knowledge available to you, which may include independent trustees, investment managers, investment service providers and, for larger schemes, in-house investment teams.

You need to be able to critically evaluate the main points of the information you receive and understand the key underlying assumptions. This would include consideration of any likely biases (certainly in relation to potential legal or commercial conflicts of interest) and any interest the person giving the input may have in the decisions to be made.

It is also important to consider value for money in relation to the nature of any costs and charges applicable to any advice you seek and/or investment transactions that may result.

Clear roles and responsibilities

Regardless of the investment governance structure in place, all the involved parties need to be clear on where responsibility and accountability sits in relation to the provision of oversight, advice and decision-making. Clear terms of reference are important for any sub-committees, as are documented service level agreements with providers.

See also the guide on scheme management skills for more information.

It may be helpful to prepare a matrix or table of accountabilities, showing the delegation and control structure within your scheme.

You may wish to prepare a high-level summary of the governance arrangements, explaining in a few key points what they are and why they have been chosen. This could form part of the scheme’s statement of investment principles (SIP) or be part of a larger, overall governance plan. You could make this summary available to members, eg by publishing on the scheme’s website or the employer’s intranet.

The document may help when you review the investment governance arrangements, as it will record the outcome of the previous review and the rationale behind it.

Monitoring investment governance

You need to regularly assess the effectiveness of your investment decision making and investment governance processes, considering the impact on the scheme performance and meeting the scheme objectives of:

  • your own performance as a trustee board
  • the advice received relating to setting investment strategy and implementing investment decisions
  • the costs of delivering investment services

The level of attention you pay to these areas should reflect their potential contribution to your scheme’s objectives. Your review should focus on value and not just cost.

Things to consider: reviewing your own performance as trustees

Some examples of issues to consider are:

  • Does the investment governance structure of the trustee board enable appropriate oversight and for decisions to be made effectively?
  • Is sufficient investment advice and knowledge available to enable decisions to be made in a considered manner?
  • Could the same level of investment performance be delivered more efficiently at a lower cost (eg by replacing some active management with passive management)?
  • Are investment decisions made in a timely fashion?
  • Are the investment service providers, such as the investment adviser and investment managers, being held to account and agency issues addressed?

Fiduciary management

Fiduciary management is a form of governance model which involves significant delegation of investment powers to the chosen fiduciary manager. Some schemes delegate the management of all their assets to the fiduciary manager; others delegate a part of their portfolio. As with all governance models, under fiduciary management the trustees remain responsible for the stewardship of the scheme, including setting the overall investment strategy.

If you consider this an option for your scheme, you should commit sufficient time and resources to the process of selecting and appointing the fiduciary manager. This includes taking appropriate advice and considering a suitably wide range of potential managers, as for any other investment management appointment. You should also consider the implications of the CMA’s report on its investigation of the investment consultancy market, and take advice on how to comply with the new requirements which will, following that investigation, be imposed (probably with effect from October 2019 and April 2020) in relation to competitive tendering and re-tendering for the appointment of a fiduciary manager where certain conditions are met.

You should carry out enough due diligence to be comfortable that the proposed fiduciary manager has the appropriate experience and skillset for the mandate, bearing in mind the degree of delegation proposed. This is particularly relevant if you propose to appoint your existing investment consultant; the skills required to be a successful consultant are not exactly the same as those required to be a successful investment manager.

There is a potential for conflicts of interest between various parties when appointing a fiduciary manager, for example the existing investment consultant, third party advisers and the fiduciary manager. You should ensure that appropriate measures are in place to identify, mitigate and manage those conflicts. For more information, see the conflicts of interest module of our code of practice and scheme management skills guide (conflicts of interest section). (This guide has been drafted for schemes with money purchase benefits, however other trustees may find it a useful guide to ensuring their trustee board has the right governance and the skills and knowledge to work effectively together, and with advisers.)

If you are considering appointing a fiduciary manager, you may wish to consider appointing an independent consultant or intermediary who has specific expertise in this area. An intermediary should be able to provide specific advice on the structuring of the mandate and the selection of the fiduciary manager. They should also be able to assist with the ongoing monitoring and evaluation of the fiduciary manager’s performance.

Example 2: appointing a fiduciary manager

The trustees have just completed their annual review of the performance of the trustee board and have identified their future training needs as part of that exercise. They realise that, due to retirements and leavers, the trustee board membership has changed significantly recently. Many of the trustees feel that, due to work commitments, they are unable to spend enough time on pension scheme issues.

They conclude that the lack of continuity of the trustee board membership and lack of sufficient knowledge of some more complex asset classes and risk management strategies has been a barrier in implementing investment and risk management decisions.

The trustees are aware that fiduciary management is just one form of governance model and decide to get some independent advice on the most appropriate investment governance structure to adopt for the specific circumstances of their scheme.

They decide to appoint a fiduciary manager to look after part of their portfolio. This reduces the implementation burden on the trustee board and enables them to focus on more strategic issues for the scheme.

Learning points: Trustees should periodically review how their investment governance structure is functioning and consider whether any changes, including greater delegation of responsibilities, should be made to improve future scheme outcomes.

Things to consider

When delegating to a fiduciary manager, trustees should consider things like:

  • the objectives for appointing a fiduciary manager
  • the range of fiduciary models available and the benefits, risks, costs and value that different approaches can offer
  • the potential for conflicts of interest (for example, agency issues – and how to avoid, mitigate or manage them
  • the extent of separation between those providing strategic investment advice (and liability management) and those implementing the mandate, as well as the impact this has on the extent of independent advice required on the fiduciary mandate and how any potential conflicts are managed
  • (their interaction with your) governance arrangements, their alignment with your objectives, and responsibilities for the management of the scheme
  • how performance will be delivered, the cost implications for the scheme, the total costs of the mandate and how you expect the mandate to add value. In this context it will also be useful to understand how past performance has been delivered and, in particular, what contribution to historic returns has come from return-seeking assets and hedging implementation over different times
  • potential risks and issues associated with the mandate and governance structures, now and in the future
  • establishing appropriate reporting relationships with suitable oversights in place to effectively monitor the performance of the fiduciary manager and the underlying mandates
  • how to ensure that you and your advisers have sufficient access to information to understand the mandate’s performance and risks on an ongoing basis
  • how the assets could be transferred away from the fiduciary manager, in full or in part, and the costs involved in doing this (for example, you may wish to transfer assets for an insurance company buy-in, or to replace the fiduciary manager following a period of underperformance or a change in scheme strategy)

Investment stewardship


Stewardship is the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society. Stewardship activities include monitoring assets and service providers, engaging issuers and holding them to account on material issues, and publicly reporting on the outcomes of these activities. It is up to the trustees to exercise stewardship and ensure, as far as they are able, that this is done through the whole length of the investment chain. This is particularly relevant for the management of macro-economic, systemic risks such as climate change, which cannot be sufficiently hedged through portfolio construction and asset allocation alone.

For many pension schemes, stewardship activities, including engagement, are likely to be undertaken by the investment manager on the trustee board’s behalf. This especially applies where investments are made via pooled funds.

We would encourage you to become familiar with your managers’ stewardship policies. Where you consider it appropriate, seek to influence them, and use stewardship as a criterion when shortlisting and selecting managers. For wholly insured schemes, it is unlikely to be possible to engage directly with your provider’s fund managers, but you should ask your provider for information about the fund manager’s stewardship policies.

From 1 October 2019, DB schemes with 100 or more members will be required to include in their SIP details of the trustees’ policy in relation to voting, engaging, and monitoring.

In this context, engagement is:

  • with ‘relevant persons’ (including an issuer of debt or equity, an investment manager, or another holder of debt or equity) – explicitly acknowledging that stewardship can include direct engagement with an investee or debtor company, indirect engagement via an investment manager and ‘peer-to-peer’ engagement with fellow shareholders of an investee company. By 1 October 2020, such policies must be updated so that ‘relevant persons’ also include any other stakeholders as well.
  • on ‘relevant matters’ - including matters concerning the investee or debtor entity, including performance, strategy, risks, social and environmental impact and corporate governance. By 1 October 2020, policies must be updated so that a relevant matter will also include capital structure and management of actual or potential conflicts of interest.

The practices by occupational pension scheme trustees of voting, of giving investment managers voting instructions, expressing an interest or engagement with asset managers’ voting behaviour, would not generally constitute the regulated activity of managing investments. You would therefore not usually need to apply for FCA authorisation for these activities.

While there is no requirement for schemes with fewer than 100 members to have a policy on stewardship, and smaller schemes will have more limited influence over firms in whom they invest, you should be mindful of your duties to act in the best interests of beneficiaries. While trustees of smaller schemes may not have the resources to carry out stewardship activities on the same scale as larger schemes, they can act collectively with other investors to ensure that the interests of beneficiaries are protected. A stewardship policy for a smaller scheme might set out its policy for the appointment, monitoring and where necessary switching of investment managers, and how the trustees will monitor and publicise how their scheme’s investment policies, eg in relation to ESG and climate change, and member preferences are reflected in the voting behaviour of their investment managers.

Stewardship includes the exercising of rights attaching to investments, such as the voting rights attached to shares (although considering stewardship in relation to other asset classes, eg corporate bonds, is also relevant). Where practicable, you may wish to agree specific voting criteria with your investment managers or consider potential managers’ willingness to abide by your preferred voting criteria when selecting investment managers. Services are available that provide analysis and voting recommendations and can help you set criteria.

Where you don’t agree specific voting criteria with your investment managers, you might still wish to ask them questions like:

  • Who is their proxy voting adviser?
  • How often have they disagreed with their adviser’s recommendations and are there any particular issues on which they consistently disagreed?
  • Are there any instances where they did not cast votes at all – for example in specific markets – and why?

Information on quality engagement between institutional investors (which includes pension schemes) and the companies they invest in is available from the Financial Reporting Council’s (FRC) pages on the UK Stewardship Code.

Read the UK Stewardship Code for more information.

This code outlines best practice on stewardship, and trustees are encouraged to sign up. We would like trustees to adhere to the code in their stewardship activities with a view to improving long-term returns and reducing the risk of poor outcomes due to poor strategic decisions.

The FRC is to be replaced in due course by the Audit, Reporting and Governance Authority (ARGA).

The Association of Member Nominated Trustees (AMNT) has developed the Red Line Voting initiative to enable pension schemes to take a more active asset ownership role.

Further information on the quality of engagement and reporting by asset managers may also be found at:

You may wish to expand these statements into meaningful policies on longer-term sustainability, how you apply the principles of the Stewardship Code, and how you will take non-financial factors into account.

Things to consider

Where you don’t agree specific voting criteria with your investment managers, you might still wish to ask them questions like:

  • Who is their proxy voting adviser?
  • How often have they disagreed with their adviser’s recommendations, and are there any particular issues on which they consistently disagreed?
  • Are there any instances where they did not cast votes at all – for example in specific markets – and why?
  • Can they provide voting records?

Your scheme’s SIP is required to include (among other things) statements about your policy (if any) on voting rights and the extent to which you take ethical considerations into account in the selection, retention and realisation of investments[6].

You may wish to expand these statements into meaningful policies on long-term sustainability, how you apply the principles of the Stewardship Code, and how you will take non-financial factors into account.

Trustee toolkit online learning

The module 'An introduction to investment' contains a tutorial called 'Investment in a pension scheme'. You must log in or sign up to use the Trustee toolkit.

Go to the Trustee toolkit

Footnotes for this section

  • [9] Regulation 2(1) of the Investment Regulations.
  • [10] Regulation 2(2) of the Investment Regulations.
  • [11] Regulation 2(3) of the Investment Regulations.
  • [12] Regulation 2(3) of the Investment Regulations.
1. Overview
3. Investing to fund DB