Legal issues in setting investment consultant objectives

From 1 October 2022, the Pensions Regulator (TPR) has assumed responsibility for oversight of the requirements for pension scheme trustees to set objectives for their investment consultants. Richard Jones discusses what this change means for trustees and highlights the key requirements contained in the amended Scheme Administration Regulations and accompanying guidance issued by TPR.

17 January 2023

Trustee investments are under increasing scrutiny. A key regulatory protection is the requirement for pension scheme trustees to set objectives for their investment consultants, and to review performance against these objectives.

From 1 October 2022, the Pensions Regulator (TPR) assumed responsibility for oversight of this area from the Competition and Markets Authority (CMA). These requirements are now contained in amended Scheme Administration Regulations and TPR has issued guidance to accompany the new regulations.

Trustees should ensure they understand their obligations under the new regime. This guide sets out everything trustees need to know to remain complaint.

What has changed?

Although the Scheme Administration Regulations largely replicate the previous CMA Order requirements, there are some key differences which trustees (of relevant schemes) need to be aware of:

  • Trustees will be required to review the performance of their investment consultants against their objectives at least every 12 months.
  • Trustees will be required to review and, if appropriate, revise the investment consultants’ objectives at least every three years and without delay after a significant change in investment policy.
  • The previous exemption for DC master trusts, where a firm that provides investment consultancy and fiduciary management services is the scheme strategist or scheme funder (or group company of either), no longer applies.
  • The requirements apply where the scheme’s principal or controlling employer (or a group company of, or partnership or joint venture with, the employer) is themselves a provider of investment consultancy services to the scheme.

Which advisers are covered?

The requirement for trustees to set (and review) objectives applies to any adviser providing “investment consultancy services” (as defined in the Scheme Administration Regulations), which could cover advisers who don’t consider themselves as investment consultants. TPR’s guidance cites advice from the scheme actuary on whether the scheme’s strategic asset allocation is appropriate for its liabilities as an example of this.

The guidance also confirms that “high-level commentary” from an actuary, in relation to an actuarial valuation, on the link between investment strategy and the statutory funding objective, is not to be treated as advice for the purposes of the scheme administration regulations. However, “investment advice” from the actuary would be unlikely to be exempt. Legal advice may be required where the position is not clear.

Timeline for compliance and review

Where an existing investment consultant has strategic objectives which were set before 1 October 2022, trustees must complete their first review of those objectives within three years from the date they were set under the CMA Order. Given the CMA Order came into force on 10 December 2019, this deadline may be imminent for some schemes.

When an investment consultant is appointed from 1 October 2022, trustees must set their objectives no later than the day on which the appointment takes effect. Trustees must have regard to the statement of investment principles (to the extent relevant to the services provided) when setting objectives for the investment consultant.

Trustees should ensure that the obligatory performance review of their investment consultants (against the set objectives) is carried out at least every 12 months, as part of the scheme’s effective system of governance. TPR’s guidance suggests that trustees may wish to incorporate the review of investment consultants’ performance with the effectiveness review of the trustee board.

The policy intention is that this process should help trustees achieve better outcomes for their schemes and better value for money. TPR expects that reviewing the investment consultants’ performance against their objectives will enable trustees to identify and manage areas of poor performance and should not be seen as a tick-box compliance exercise.

Reporting compliance

Trustees will be required to report compliance with the requirements to TPR, as part of the scheme return process, rather than to the CMA, as had previously been the case. The new regulations also provide powers for TPR to enforce compliance, by way of compliance notices and penalty notices, if necessary.

Our experience

Our pensions team has extensive experience advising trustees on their investment duties. To find out how we can help you, please contact Richard Jones or your usual Shepherd and Wedderburn pensions team contact.