How to set up an investment subcommittee

It is not unusual for schemes, especially the larger ones, to establish an investment subcommittee to deal with investment matters. But what makes for an effective set-up?

The investment of pension scheme assets is one of the most challenging areas of decision-making facing trustees. 

The Myners principles in 2001 and again in 2008 recommended that it was good practice for trustee boards to have an investment subcommittee comprising trustees with the necessary skills to provide the appropriate focus on investment decision-making.

In addition, the Pensions Regulator’s 2013 DC code of practice states that trustees should consider establishing such a committee.

There may be logistical difficulties in convening the main board to meet up other than at the usual intervals. Depending on the scheme’s investment strategy, this may be an issue where a decision is needed outside the usual meeting cycle. 

Devolving investment matters to a subcommittee can allow fast, effective decision-making and take advantage of any special skills or knowledge of the trustees.

It is increasingly seen as good practice, especially for larger schemes or those with a complex investment strategy, to have an investment subcommittee.

It is important to note that trustees usually only deal with investment strategy and not day-to-day investment decisions. Most trustees are not authorised by the Financial Conduct Authority to take those day-to-day decisions.

Delegation and composition

Most scheme rules contain a delegation power. However, before establishing a subcommittee, the rules should be checked to ensure that investment powers and discretions may be delegated, and should state to whom.  

It is important to remember that liability... remains with the main trustee board

Where the rules are silent, the Pensions Act 1995 makes it clear the trustees may delegate their investment powers to a subcommittee of at least two trustees.

It is important to remember that liability in relation to any matters delegated to a subcommittee remains with the main trustee board.

The composition of the subcommittee should reflect any requirements in the rules. 

Members should have a sufficient level of knowledge and understanding of investment matters to fulfil the trustee knowledge and understanding requirements, but this does not mean it has to comprise only investment experts.

Where scheme rules allow, consideration should also be given as to whether or not to have a non-trustee with investment expertise on the subcommittee. 

It would be usual for the subcommittee to have a number of investment functions, including the following:

• Monitoring and setting the scheme's investment strategy and recommending changes.

• Reviewing the scheme's statement of investment principles.

• Liaising with all parties in the investment process.

• Monitoring the performance of investment managers and appointing replacement managers as necessary.

As a matter of good governance, the subcommittee should have formal terms of reference setting out the scope of its responsibilities. 

The terms of reference should cover such matters as its composition of members and term of office, quorum, frequency of meetings, the extent of delegated powers and oversight by the main trustee board.

The main trustee board should monitor the investment subcommittee’s work. This would usually be by way of a report setting out the actions and decisions or recommendations of the subcommittee. 

The contents of this report are important. Where the subcommittee is a decision-maker, the main trustee board need to understand the decisions made on its behalf. 

Equally, where the subcommittee makes recommendations to the main board, the report must contain sufficient detail for the board to be able to make an informed decision. In addition, the board should be happy that the subcommittee is operating as intended and in accordance with its terms of reference.

Ruth Bamforth is a barrister at law firm Gordons