Muse Advisory's Mark Hodgkinson sets out the advantage of a statement of investment principles for DC schemes, and what it might comprise, in the latest Technical View.

There is no requirement to produce a SIP for any contract-based DC plan and, consequently, the diligent governance committee at the drinks company appear to be well ahead of the curve.

SIP advantages

  • A documentary record to help future trustees and decision-makers

  • Transparency and assurance to members around their money

  • A governance audit trail showing trustee diligence in decisions

Trust-based DC plans have been required to maintain a SIP since the provisions of the Pensions Act 1995 came into force. Today’s curious trustee can discover just what a SIP is required to cover in the Pensions (Investment) Occupational Pension Scheme Regulations 2005.  

But as with so much of the governance requirements for trust-based plans, what seemed appropriate to defined benefit-oriented legislators twenty years ago is not necessarily ideal today, when the future of private sector workplace pensions is so clearly DC-oriented. 

So let us not confuse matters by using the term SIP. Let us think instead about a genuinely useful DC plan management tool.

Key ingredients

In the absence of any compliance requirements a suitable document might be described as a 'Document of our investment thinking and how and why we implemented it the way we have and how we intend to conduct the plan’s investment affairs in the future'.

Unfortunately my descriptive working title lacks a snappy acronym. For now, let me refer to it as the investment protocol. So would DC plans generally benefit from such a protocol? And, if the answer is 'yes', what might it comprise?

Two reasons come to mind why a protocol could prove valuable:

  • It would provide a document of record for successor decision-makers – whether they be trustees, company management or a pension committee – to rely on and take guidance from.

  • It could be made available to employees in the interests of transparency, and to provide assurance that the money set aside for their retirement is being responsibly managed.

If the latter purpose were to be adopted, those responsible for the document might want to establish whether the disclosure of management thinking to the plan’s members might create any unintended liability risks.

In lieu of any compliance requirements, the protocol can include just those elements that would be useful to those who may be called on to take decisions concerning the plan’s investment arrangements in the future.   

This should be wide-ranging and will need to include any plan-specific issues. But as a minimum it should include:

  • A clear and concise statement of the purpose of the investment protocol;

  • A simple explanation of roles and responsibilities for investment decision-making and where the authority to make decisions stems from;

  • A summary of the employer’s objectives in establishing the plan, eg to comply with legal responsibilities and nothing more, or to offer a flexible vehicle to enable employees to plan for retirement;

  • What regulatory guidance has been considered;

  • Which stakeholders have been consulted;

  • An analysis of the potential plan membership and any conclusions reached about the needs of members;

  • A high-level assessment of principal risks and how they are to be managed;

  • A summary of professional advice received, and from whom;

  • A breakdown of all costs involved in the management and operation of the DC plan and an analysis of how they impact on members’ accounts and expected benefits at retirement;

  • The fundamental beliefs that underpin decision-making around the investment arrangements;

  • A record of decisions taken and how have they been implemented;

  • How investment strategy and performance are to be monitored and reviewed.

Over time, the investment protocol could be developed to form a record of a plan’s investment governance as it inevitably develops.

As well as being an extremely useful tool in the management of DC investments and a positive aid to decision-making, such a log of diligent investment governance would form a valuable first defence in the event of later challenges by any members who are disappointed with their pension and looking for someone to blame. 

Of course, a protocol that revealed a history of rather patchy governance might prove to be a much less desirable document, perhaps even leading some to reach for their lawyer’s telephone number.

Mark Hodgkinson is a director at Muse Advisory

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