Pension Trustee Responsibilities Series Article 3: Investments to be held within a company pension scheme

A pension trustee has overall control of the assets placed into a pension scheme. It must also ensure the scheme satisfies the legal and regulatory requirements of its operating jurisdiction and operates in compliance with the scheme’s trust deed and rules.

Where scenarios arise that are not specifically covered by the scheme’s Trust Deed and Rules, the pension trustee is required to exercise discretion.

This series of articles, co-authored by John Batty (Boal & Co Technical Manager), and Ben Hughes (pensions lawyer at Keystone Law), delves into the pension trustee’s world, exploring different scenarios and how they might be addressed by a pensions trustee exercising their discretionary power.

In this third scenario in the series, we discuss how the Trustee might review and widen the range of funds available to the members.

The Scenario

A new trustee has been appointed to a defined contribution company pension scheme, where members are all invested in the same fund. As the scheme has been going for some time, and some members have developed substantial sums in the scheme, the trustee would like to review and widen the range of funds available to the members.

What should the Trustee do?

The investment power under the scheme’s trust deed will determine the scope of the trustee’s powers in this scenario. However, we assume that, for the purposes of this example, the trustee provides a range of funds from which the members can then self-select (albeit with default funds available absent an active selection). We also assume that the scheme is an Isle of Man scheme (as legislation varies across jurisdictions).

When changing investments within a company pension scheme to which a statement of investment principles applies (noting that this requirement generally applies to occupational schemes as further detailed, for Isle of Man domestic schemes, under Regulation 15(1) of the Retirement Benefits Schemes (Domestic Schemes) (General Administration) Regulations 2004), the trustee will need to consider whether that change requires an amendment to the statement of investment principles as required under those Regulations. If so, the trustee will need to take appropriate investment advice (assuming the trustee is not qualified to give that advice itself).

What information should the trustees ensure they get?

Any external investment advice will require detailed instruction regarding the objectives of the trustee and type of investment universe it wishes to create for the scheme. This may require the trustee to seek input from the sponsoring employer.

The profile of the scheme’s membership will also be a key consideration for any investment adviser. For example: are the members relatively experienced or inexperienced; should the range of funds be limited (so as not to overwhelm the members); should there be default funds and, if so, what characteristics should they have; what is the ultimate range of funds; should they be weighted in any particular way given the preferences of the membership and/or the employer in terms of sustainable investment principles (often referred to as ‘ESG’ or environmental, social and governance criteria); what is the age and risk profile of the members; and, ultimately, what is the intended destination in terms of securing a benefit (i.e. is it lump sums for payment or a transfer to individual plans, the provision of a drawdown facility, or the securing of an annuity, or a mix)?

This list is not exhaustive, and the relevant considerations will turn on the nature of the scheme and its trust provisions.

What does the trustee need to do next?

Selection of investment advice is a key decision for a scheme and, for a company scheme, is often one that involves employer input. The trustee should ensure that a proper process is conducted in terms of selecting the correct investment adviser to complete the task. In some cases, the selection of the investment adviser may also entail a review of the scheme’s investment management (albeit this will depend upon the circumstances of the scheme). Either way, effecting a robust selection process and understanding how any investment advice is to be implemented will be a key focus for the trustee.

It may also be helpful to engage with members so that they can provide their own investment preferences and profiles etc. In any event, they should be informed of what is happening; why and when; and how it will affect their ability to manage their investments going forward.

Are there any other considerations / actions that should be taken?

Once a selection has been made (and any statutory notices given in that regard re changes of investment manager), the trustee considerations essentially revert to the monitoring of investments (to ensure the investment objectives are being met and performing to expectations), and ensuring members have what they need to manage their funds (including relevant information etc.). Again, this list is not exhaustive and will turn on the nature of the scheme.

This article has been written in general terms and does not constitute advice. Professional advice should always be sought for your specific scenario.

Read more in this series:
Article 1: Death of a member prior to retirement 

Article 2: Member diagnosed with serious ill health

About Ben Hughes - Pensions Lawyer, Keystone Law

Ben has advised on all aspects of Isle of Man pensions law for more than 20 years. His practice covers the majority of domestic and international schemes in the Isle of Man.