Good governance: Investment governance
Governance is now the watch-word for trustees, and good governance is likely to produce better performing pensions too
Good governance
Trustees, having sole control over scheme investment matters, must exercise their investment powers prudently in line with the scheme’s trust deed, Statement of Investment Principles and the Pensions Acts.
Trustees must consider the suitability of investments, taking into consideration the strength of the employer covenant and the structure of the scheme’s liabilities. At the same time trustees must balance risk and return in the best interests of members, and monitor performance against appropriate benchmarks.
The level of investment governance deployed by a trustee board will depend on its collective capabilities, the investment it makes in training and development and the amount of time, skill and expertise devoted to the scheme’s investment strategy, asset allocation and risk management.
Research suggests that the pension funds that manage their investments the most successfully are the ones that have identified their governance budget – that is, the level of resources they have to oversee their investments – and have tailored their investment strategy accordingly.
The Myners Principles
Paul Myners’ review of investment decision-making among UK pension schemes, commissioned by the Treasury and published in 2002, became known as the ‘Myners Principles’. They provided a set of investment governance best practice principles that trustees are expected to implement. They are not mandatory, but if trustees choose not to implement them they need to show why. In March 2008, the principles were streamlined.
DC investment governance
Decisions relating to investment governance must be taken on what is described as a ‘fully informed basis’ and the processes must be sound. However, defined contribution scheme governance has not traditionally received the same level of trustee attention as that of defined benefit, although this is beginning to change.
In November 2010 the Investment Governance Group (IGG) published a framework of principles and best practice guidance to help those running DC schemes to improve their investment decision-making and scheme governance.
Stewardship Code
The Stewardship Code is a set of guidelines released in 2010 by the Financial Reporting Council directed at institutional investors such as pension funds which hold voting rights in UK companies. Its principal aim is to make shareholders, who manage other people’s money, be active and engage in corporate governance in the interests of their beneficiaries.
The Code adopts the same “comply or explain” approach used in the UK Corporate Governance Code. This means, it does not require compliance with principles.
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