Three models for constructing your investment committee

If such a committee already exists, trustees should periodically consider whether it remains fit for purpose by refreshing its terms of reference, membership and powers to ensure they remain fully aligned with the pension scheme’s investment objective.

The first step is for the trustees to step back and ask themselves three questions:

1. What are our investment objectives and have these been articulated clearly and unambiguously?

2. How effective is the current investment governance in achieving those objectives?

3. What changes to the existing investment governance model might be worth considering?

This could include changes to:

• the diversity and level of expertise for the chosen investment approach;

• the advisory arrangements, for example, type of adviser, quality, accountability, value for money, and so on;

• the investment decision-making process and its effectiveness; and

• the resources and time available for investment business and the allocation of time and resource to the decisions that matter most.

While the IC is the natural forum for evaluating – if not deciding – strategic direction, what decision-making powers might be delegated to the IC?

In reality, the answer will be influenced heavily by the wider investment governance model adopted by the trustees.

The traditional consultant advisory model

Delegation to the IC can be substantial under this approach and might cover most matters other than high-level strategy.

Trustees will usually retain responsibility for setting the balance between return-seeking and defensive assets and the extent of any liability-hedging programme, though the committee will generally be expected to do most of the legwork and make recommendations to the trustees.

Matters typically delegated include the following:

• Asset allocation within the return-seeking and defensive portfolios.

• Investigation into new asset class opportunities, even though the trustees may make the actual decision to invest.

• Investment performance monitoring at both scheme – including performance relative to liabilities or flight plan – and individual portfolio or manager level.

• Investment manager selection – hiring and firing, terms of appointment including contracts and fees, implementation, etc.

• The appointment and review of the investment adviser and other parties such as custodian and transition managers.

The fiduciary manager model

As typically much of the investment activity is already delegated to the fiduciary manager, the scope for delegation to an IC is more limited and should include the following:

• Monitoring the performance of the fiduciary manager and reporting back to the trustees, as the scheme should retain the power to appoint the fiduciary manager.

• Determining and implementing the advice requirements for monitoring the fiduciary manager.

• Monitoring and reviewing other parties such as the custodian.

Depending on the scope of the mandate, the IC may also be involved in consideration of new asset class opportunities.

The in-house investment team

It is difficult to generalise what trustees should delegate to an IC when there is an in-house team in place as so much depends on the team’s capacity and expertise.

In cases of large and expert teams, they will effectively be carrying out the full role of a fully delegated fiduciary management mandate and hence an IC may not serve any useful function.

At the other extreme, a small in-house investment resource may act as intermediary with external consultants, perhaps doing some of the investment manager monitoring internally. 

There is no single correct answer to this important question, as each trustee board’s unique circumstances will inform their choices.

What ultimately matters is that the committee must have clear and unambiguous terms of reference and delegated powers, and the mix of skills necessary to achieve the scheme’s investment objectives to best effect.

Second, the greater the level of delegation, the greater the risk that the trustee board becomes remote from issues of substance and hence the quality of reporting to the board becomes ever critical.

Should the board be at risk of becoming remote, an annual away day with advisers to enable the entire board to focus on the most important strategic investment matters, can ensure non-IC trustees continue to have adequate engagement to challenge the IC as and when appropriate.

Anne Kershaw is an associate director at Muse Advisory