Reviewing DC investment options: how often is regular?

Helen Powell

Trustees of defined contribution pension schemes must regularly monitor and review their chosen investment strategy and options offered[1]: but how frequent is ‘regular’? Does it mean every meeting? Every year? Every decade?

DC trustees are responsible for choosing the range of investment options to be offered to members and for monitoring performance and removing funds which aren’t performing well. Jonathan Goodwin posted recently about the importance of passing investment information on to members in order to allow them to make informed decisions about their investment choices: you can read his post here.

What should that monitoring and review process look like? We don’t yet know what the final version of the DC Code of Practice will say, but we have some clear indicators. Trustees should:

*  ensure that investment objectives for each investment option are identified and documented; and

*  regularly assess the take-up and performance of each investment option, including the default, against the stated investment objectives.

Back to our question: how often is regular? The Regulator is proposing that DC trustees should undertake a three-yearly strategic value for money review which will include looking at the performance of investment options (including the default option), using the outcomes of the regular monitoring and reviews of investment options. The whole investment strategy, as embodied in the statement of investment principles, must also be reviewed at least every three years. That implies an absolute minimum frequency for reviewing even unused or hardly-used investment options. However, many funds – particularly default funds – will need much more frequent attention than that. The Regulator’s draft Code says that investment monitoring should be a standing item on the agenda of every trustee meeting: annual or more frequent checks are likely to be appropriate. Bear in mind that in the Regulator’s recent governance survey, 59% of schemes reported that 81-100% of their members invest in default funds, so monitoring the ongoing suitability of the default strategy is crucial to good member outcomes.

It’s also important to bear in mind that the frequency of reviews will be influenced by the type of fund and by external factors. A common example is the departure of a stellar fund manager which is likely to adversely affect performance. Corporate or market events (a change in scheme demographics, or catastrophic market conditions) might trigger a review; and trustees should ‘pay particular and more frequent attention to funds holding significant proportions of members’ assets’. There’s also a paternalistic aspect: if trustees discover that a high-risk fund, offered as a minor option for just a few, is being used by many members as their main investment choice, they may need to review their arrangements[2]. Good advice is crucial: your contract with your investment advisers should require them to notify you immediately if there is any significant development which would change their recommendation of a particular fund. Check that your scheme rules give you the power to withdraw options, or even transfer funds (including acting without consulting members if the situation is urgent). Failure to monitor in line with the Code and guidance could expose you to the risk of member complaints and, potentially, regulatory action.

The level and frequency of attention required may also affect the number of options trustees provide for members to choose from. The benefits and risks of every fund offered should be clearly communicated to members; the number of investment options ‘should enable members to make meaningful choices’[3], but it should also enable the trustees to undertake meaningful reviews, at appropriate – and regular – intervals.

 Helen Powell is a senior professional support lawyer at Allen & Overy LLP.


 

[1] Section 36 of the Pensions Act 1995.

[2] See paragraphs 115–117 of the draft Code of Practice.

[3] See paragraph 91 of the draft Code of Practice and the Investment Governance Group’s principles for investment governance of work-based DC pension schemes.

 

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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