Your investment governance responsibilities

Neil Davies, Head of Corporate Marketing at AEGON Scottish Equitable, talks about the importance of strong investment governance for DC schemes

With the recent economic uncertainty, the importance of selecting the right funds for your clients’ group pension schemes has never been clearer. As an adviser, you shoulder the responsibility, not only for choosing the right funds for your clients, but also for making sure they’re still meeting their objectives years down the line. This takes time and money and the consequences of getting it wrong can be costly. Employers need the reassurance of knowing they can clearly demonstrate that the range of funds available to their employees is appropriate. Strong investment governance can play a key role here.

While scheme governance is voluntary for contract-based schemes, the Pensions Regulator has clearly stated that it believes that it’s in members’ best interests if all employers with contractbased schemes review their scheme from time to time. Indeed, its research in 2008 found that approximately half of employers with a contract-based scheme already had some form of governance arrangement (Source: The Pensions Regulator DC research Data on the occupational DC landscape, January 2008). As a reminder, the three broad areas covered by DC governance are:

  • member concerns
  • employer issues
  • monitoring services

I want to focus specifically on monitoring services. This should naturally cover any administration issues, but perhaps the most important area to look at is investments.

There are a number of things to consider when looking at investments within a scheme governance framework. The most important of these is how appropriate the default scheme is to the membership. Next on the list is making sure there’s an appropriate choice of risk levels and clarity about how funds operate, which includes any lifestyling or other de-risking as retirement approaches. Investment performance is also important, as is the range of funds available.

This is a lot to consider – and a lot of responsibility – so many advisers choose to outsource investment governance to the chosen scheme provider, as they have the resource to dedicate to this task.

Having a robust investment governance process in place means that employers don’t have to keep as close an eye on how their scheme’s funds are performing. But governance is not just about quality control and making sure that a fund’s performance is in line with its objectives;
it’s about making sure that the funds provided live up to expectations.

At the heart of a good investment governance process lies expertise. Ideally you need a team of highly experienced people that can bring a depth of investment knowledge of the UK corporate pensions market. This group of experts should be responsible for:

  • fund selection
  • fund monitoring
  • fund removal
  • fund research

Active investment governance provides reassurance and peace of mind, making sure that the right funds are available at the right price to suit all members’ retirement aspirations.

Your clients will also demand transparency so that they’re kept informed of any changes in the range of funds available to their employees. Regular reporting is therefore essential. If your clients hold regular scheme governance meetings then they’ll expect updates on the performance of the funds their scheme members are invested and any issues relating to these funds.

Proper investment governance is likely to become increasingly important as part of an overall DC scheme governance framework as employers look to become more engaged in their scheme. By putting proper investment governance strategies in place, employers can demonstrate to their employees that they’re making a good quality scheme available to them, a benefit that employees value above all others.

And with the recent launch of the NAPF Quality Mark, employers now have the opportunity to have their scheme endorsed independently. Having some form of governance arrangement in place is a key qualifying requirement of the Quality Mark and reviewing investment options plays an important part in this.

All of this shows how important fund selection is in the framework of scheme governance, and how important your role in the process is.