Rod Goodyer, Partner at Barnett Waddingham, said; “The new investment guidance is a useful resource for trustees and should be applicable to schemes of all sizes.
“We have shared the guidance’s focus on long-term objectives being at the heart of a successful strategy for some time. The Regulator has suggested concentrating governance time on areas where most value can potentially be added by trustees and makes clear what issues should be at the forefront when reviewing strategy – principally around risk, return, investment beliefs and long-term planning. The issue of cashflow management is recognised as an increasingly important issue as schemes mature.
“We would also agree with the guidance provided around the importance of monitoring investment in terms of the importance of understanding how a strategy as a whole is performing and why – this is key to successful strategies rather than simply spending governance time largely on manager performance. This can be particularly important where services have been delegated to third parties such as fiduciary managers and with the Regulator stressing the importance of promoting the importance of independent assessment and monitoring of performance.
“The guidance references the Regulator’s recent guidance on Integrated Risk Management and encourages the use of tools pulling together key funding, investment and covenant metrics as an important element of a robust strategy which can adapt to changing conditions.”
Commenting on the guidance issued by the Pensions Regulator today for trustees setting and monitoring investment strategies, Calum Cooper, Head of Trustee at Hymans Robertson, said: “The heightened focus on managing asset cashflows to meet liability cashflows is very welcome. However, trustees may be surprised to find out that the models used to measure and manage risk and return typically don’t allow for the primary reason schemes hold assets: i.e. for income to pay the pensions promised. Given this, how confident can trustees be in model driven asset recommendations?
“This is one of the reasons DB pension funds hold more growth asset risk than required. It boils down to a lack of clarity on risk, and crucially not modelling all the key risks. This is putting £250bn of members benefits on the line. Model misbehaviour matters. Cashflows matter. The models used by schemes should reflect both asset and liability cashflows to improve the chances of paying members’ pensions in full.”
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