Set objectives for your investment consultant

This guide helps trustees understand their legal duties and sets out approaches to setting objectives.

Last updated: August 2022

Purpose of this guidance

This guidance is for trustees of occupational pension schemes. It may also be of interest to providers of investment consultancy services (IC providers) and employers.

The law currently requires trustees to set strategic objectives for IC providers in accordance with part 7 of The Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the CMA order), which came into force on 10 December 2019.

The Department for Work and Pensions (DWP) brought these duties into pensions legislation on 1 October 2022 under The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (the scheme administration regulations). For the purposes of this guidance when referring to IC providers, this has the meaning as set out in the scheme administration regulations. Please also see terms used in this guidance.

The law requires trustees of a ’relevant trust scheme’ to set objectives for IC providers and review the provider’s performance against those objectives at least every 12 months. The objectives must be reviewed and (if appropriate) revised at least every three years and without delay after a significant change in investment policy.

The legal requirements are described further in the section: Understanding your legal duties.

Key differences to the CMA order

The CMA order prohibits pension scheme trustees from entering into a contract with an IC provider for the provision of investment consultancy services – or continuing to obtain investment consultancy services from such a provider – unless the trustees have set strategic objectives for them under part 7 of the CMA order.

The scheme administration regulations largely replicate the CMA order requirements, with some alterations owing to minor policy differences between the CMA and DWP. You should already be complying with the CMA order requirements, which have applied since 2019. The primary change is to transfer the regulation of the obligations under the order from the CMA (under the CMA order) to the TPR (under the scheme administration regulations), and trustees will be subject to TPR compliance and monitoring processes. In addition, unlike under the CMA order:

• the requirement to set investment consultant objectives under the scheme administration regulations will 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
  • the scheme is a defined contribution (DC) master trust, and its scheme strategist or scheme funder (or a group company of its scheme strategist or scheme funder) is a firm that offers both investment consultancy services and fiduciary management services to the trustees
• trustees of relevant trust schemes will be required to review the performance of their IC provider against the objectives at least every 12 months
• trustees of relevant trust schemes will be required to review and, if appropriate, revise the IC provider’s objectives at least every three years and without delay after a significant change in investment policy.

We recognise that the range of advice and services provided by investment consultants is broader than those subject to the legal requirements, and we would encourage trustees, as a matter of good governance, to set objectives even where the legal requirement may not apply. This guidance, therefore, aims to provide you with practical information and key matters to consider when:

• setting objectives for your provider of investment consultancy services
• deciding on the services you want to obtain from your investment consultant

We use phrases such as the ‘law requires’ and ‘you must’ to indicate legal duties. We use ‘you should’ to indicate good practice approaches to setting objectives for your provider of investment consultancy services.

Potential benefits of setting objectives

Setting objectives for advisers is an important part of an effective system of governance. We expect that, by putting objectives in place, trustees will be better positioned to assess the quality of the service they receive and to deliver better outcomes for their members.

The CMA’s 2018 investigation found that trustees had difficulty monitoring the quality of investment consultancy services due to the limited information available to them. By increasing trustee engagement in the adviser appointment process and by setting objectives and monitoring performance against those objectives, we expect trustees will achieve better outcomes for their schemes and better value for money. We also expect that monitoring the investment adviser’s performance against their objectives will enable trustees to better identify and manage areas of poor performance and to consider switching to an alternative service provider where appropriate.

We would expect trustees, as a matter of good practice, to consider setting objectives for all their providers of advisory services. For more information on working well with advisers, please visit our guide to scheme management skills. While that guidance is primarily intended for trustees of defined contribution (DC) schemes, it also contains information which will be useful for trustees of DB schemes.

Understanding your legal duties

Under the CMA order, unless the scheme is exempt, trustees must not:

• enter a new contract
• continue to obtain investment consultancy services

except where the trustees have set objectives relating to the services they are going to receive or are already receiving. This prohibition applied from 2019.

Under the scheme administration regulations, which are due to apply on and from 1 October 2022, trustees of a ‘relevant trust scheme’ must set objectives for each IC provider and review their performance against those objectives at least every 12 months.

You must also review and (if appropriate) revise an IC provider’s objectives at least every three years and without delay after a significant change in investment policy.

Where an existing IC provider has strategic objectives which were set before 1 October 2022, you must complete the first review of those objectives within three years from the date they were set under the CMA order.

Where an IC provider is appointed on or after 1 October 2022, you must set the objectives by the end of the day on which the appointment takes effect.

When setting objectives, you must have regard to the statement of investment principles so far as is relevant to the services provided (or to be provided) by the IC provider.

For the purposes of identifying if you need to set objectives, you will need to consider and/or take advice on whether you are or will be receiving investment consultancy services (as defined in the CMA order until 1 October 2022, or in the scheme administration regulations on and from 1 October 2022). You should be aware that other types of advisers, who may not identify themselves as investment consultants, could be providing you with investment consultancy services. For example, you might be receiving advice that amounts to ‘investment consultancy services’ from an independent financial adviser or wealth manager or advice from your scheme actuary on whether the scheme’s strategic asset allocation is appropriate for the scheme’s liabilities.

High-level commentary from an actuary in, or in relation to, an actuarial valuation on the link between the investment strategy and the pension scheme’s statutory funding objective is not to be treated as advice for the purposes of the scheme administration regulations. However, trustees should be aware that where the scheme actuary provides investment advice as part of their actuarial work (other than the abovementioned high-level commentary), that work is unlikely to be exempt in relation to that investment advice. You must therefore check whether you are receiving investment consultancy services from a provider that does not identify as an investment consultant, as you are still required by law to set objectives for that provider.

As trustees, you remain ultimately responsible for your scheme. You should:

• carry out checks that the provider is suitably qualified to provide these services (and has specific knowledge of the requirements that apply to trust-based occupational pension schemes)
• monitor the activities and performance of service providers to ensure they are operating in accordance with the trustees’ legal obligations and are helping to deliver good scheme and member outcomes

For more information on trustees’ responsibility for investment matters, see our DB investment guidance and our DC guide to investment governance.

It is possible that the trustee board has chosen to delegate investment decisions. Find out more about investment governance models in our guide choosing an investment governance model.

Please be aware that some advice elements of fiduciary management services may be subject to the requirement to set objectives, and you may wish to consider seeking professional advice as to whether this applies in light of the services you receive.

Documenting compliance

As a matter of good practice, you should document any key decisions and how they were made. Minutes of trustee meetings could be used to record key decisions or objectives set for investment consultancy services. It could also be helpful to have a standalone document setting out what the objectives are, how and when they will be measured, and when actions arising from any review will be addressed by.

Investment consultancy services

A wide range of investment consultancy services are available to trustees of occupational pension schemes. Depending on whether your scheme is DC or DB and the specific circumstances of your scheme, these service requirements will differ.

In order to set objectives for your adviser, you will first need to understand the services to which objectives relate. As outlined in the introduction, only those areas that come within the legal definition of investment consultancy services trigger the requirement for you to set objectives, but as a matter of good governance we would encourage you to consider setting objectives for any additional services you receive.

Below, we have listed some examples of investment consultancy services that trustees can receive for DB and DC schemes, together with a brief explanation of what these typically involve. Not all these examples fall within the definition of investment consultancy services to which obligations in the scheme administration regulations apply. These lists are not exhaustive, and the requirements for the level of service provided will vary due to scheme circumstances.

Defining investment beliefs

This often involves a review of the trustees’ investment preferences, informed by appropriate evidence and knowledge such as whether the trustees prefer active or passive fund management, liquid investments over illiquid investment etc, and using these findings to agree a set of core investment beliefs that represent the trustees’ preferences.

Investment strategy review

This involves a review of the nature and term structure of the pension scheme liabilities and advice on an appropriate asset allocation to adopt to best meet those liabilities, in light of objectives set by the trustees and considering the financial support that is available from the scheme’s employer(s).

Risk modelling

This can involve the analysis of risk using a range of different tools and metrics, for example asset liability modelling and scenario/sensitivity analysis. It is frequently included as part of the investment strategy review service but can be tendered for and provided separately. In large schemes, a risk review by an independent third party can be very useful.

Setting investment performance and risk targets

This involves taking the output from the investment strategy review and any associated risk modelling to set the performance and risk targets for the scheme.

Portfolio construction

This involves advice on how a portfolio of investments or investment funds could be constructed to best align with the proposed asset allocation strategy and the trustees’ investment beliefs, allowing for the investment performance and risk targets set.

Investment manager selection

This process would aim to identify a list of managers, based on research and due diligence completed, that might be appropriate to include within the portfolio , individually or in combination, to meet the performance and risk targets set for all or part of the portfolio. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending manager interviews (and site visits).

Appointment of investment manager

The degree of service required is likely to depend to an extent on the type and structure of investment fund offered and the degree of discretion allowed. However, the service could involve advice in relation to the investment elements of the structure and terms and conditions of the fund mandates. In addition, it could involve advice in relation to the level and structure of any investment fees, the design of any performance fee elements and advice on the mandate guidelines, tolerances and restrictions to be applied.

Transition management

This would involve advice on any portfolio reorganisation or changes to investment managers to help ensure that the assets can be moved efficiently, with minimum costs and to limit ‘out of market’ exposure. This service could include advice on the use of derivatives to optimise the transition process.

Risk mitigation and risk transfer

This would involve advice on how different risks the scheme is exposed to could be mitigated, managed and/or transferred to another party.

Investment risk and performance monitoring

This would often include preparation of regular reports and information in relation to the performance of the investment managers appointed by the scheme and the risk exposures arising. This would also include advice in relation to the ongoing suitability of the investment strategy and the individual investment management arrangements. This could also include periodic reviews of whether the fees being paid continue to be appropriate.

Fiduciary manager selection

This process aims to identify a list of fiduciary managers, based on research and due diligence completed, which might be appropriate to meet the trustees’ requirements for the management and governance of all or part of the scheme’s assets. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending fiduciary manager interviews (and fiduciary manager site visits).

Fiduciary management monitoring

This would involve providing oversight of the performance of any fiduciary manager appointed by the trustees and considering their ongoing suitability to meet the requirements of the scheme. This would also include advice on whether any changes in the fiduciary manager or the remit of their mandate were necessary.

Provision of regulated advice

This would include the provision of written advice in relation to investments (as required under s36 of the Pensions Act 1995) and the review and preparation of the scheme’s statement of investment principles (required under s35 of the Pensions Act 1995).

Governance structures

This would involve advice on the alternative ways in which investment and risk management might be governed and the terms of reference and delegated responsibilities that might apply to each element of the governance structure. This could include advice on the implications of using alternative capital models or alternative forms of consolidation to support improved member outcomes.

Support with regulatory requirements

This would involve the preparation of the scheme’s Implementation Statement and, for schemes in scope of the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, support with the preparation of the scheme’s Taskforce for Climate-related Financial Disclosures (TCFD) climate governance report.

Environmental, social and governance (ESG) and climate change and sustainability

This would include advice in relation to ESG, including climate change and wider sustainability-linked risks and opportunities and on how to implement them within the scheme’s investment and risk management arrangements. It would also include advice on emerging issues like biodiversity and Taskforce on Nature-related Financial Disclosures (TNFD). For schemes not in scope of the climate change regulations, it would include advice on how the best practices of larger schemes might improve outcomes for the scheme when applied proportionately.

Additional investment advice

This could be in relation to the selection and appointment of investment platform providers, custodians or sub-custodians or advice in relation to tactical asset allocation, structured equity or option strategies.

Trustee training

This could include basic investment training on investment duties and investment structures through to training on the implementation of complex derivative and risk management strategies.

Defining investment beliefs

This often involves a review of the trustee’s investment preferences informed by appropriate evidence and knowledge, such as whether the trustees prefer active or passive fund management, illiquid investments over liquid investments and using these findings to agree a set of core investment beliefs that represent the trustees’ preferences.

Scheme design and objectives

This involves advice on the design of the default fund(s) and the range of self-select funds that might be made available to meet members’ needs. This would also include consideration of how the investment management components could best be structured to allow for the trustees’ requirements around administration and communications.

Modelling tools

This could involve advice on the range of modelling tools that could be made available (and maintained) to help members assess the impact of different investment options (and contribution levels) on their expected future benefit outcome.

Investment manager selection

This process aims to identify a list of managers, based on research and due diligence completed, which might be appropriate to include within the portfolio , individually or in combination, to meet the performance and risk targets set for all or part of the portfolio. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending manager interviews (and site visits).

Appointment of investment manager

The degree of service required depends to an extent on the type and structure of investment fund offered and the degree of discretion allowed. However, the service could involve advice in relation to the investment elements of the structure and terms and conditions of the investment mandates. In addition, it could involve advice in relation to the level and structure of any investment fees, including on the design of any performance fee elements included and advice on the mandate guidelines, tolerances, and restrictions to be applied.

Member engagement

This could involve a range of activities from running engagement programmes with members to better understand their needs and requirements (to enable the default fund and range of options to be appropriately designed), to assisting with member communications (for example, following a change of fund manager or investment approach) to assisting with member investment education.

Performance monitoring

This involves preparing regular reports and information relating to the performance of the investment managers used. It would also include review of the performance of any investment platform provider.

Review of scheme’s investment arrangements

This is likely to include a triennial review, or more frequently following any significant change in membership profile, in relation to the ongoing suitability of the scheme arrangements, default arrangement, the self-select investment fund options and the investment management arrangements.

Transition management

This involves advice on any re-organisation of the scheme’s investment arrangements or changes to investment managers to help ensure that the assets can be moved efficiently, with minimum costs and to limit ‘out of market’ exposure. This service could include advice on the use of derivatives to optimise the transition process.

Fiduciary manager selection

This process would aims to identify a list of fiduciary managers, based on research and due diligence completed, which might be appropriate to meet the trustees’ requirements for the management and governance of all or part of the scheme’s assets. This work would also include preparation and submission of appropriate due diligence materials and could include assistance with the tender process, from drafting the invitation to tender, to reviewing the submissions made and attending fiduciary manager interviews (and fiduciary manager site visits).

Fiduciary management monitoring

This involves providing oversight of the performance of any fiduciary manager appointed by the trustees and considering their ongoing suitability to meet the requirements of the scheme. This would also include advice on whether any changes in the fiduciary manager or the remit of their mandate were necessary.

Chair’s statement

This involves analysis and providing investment advice relating to a range of inputs into the annual chair’s statement, such as the value for members assessment and the assessment of charges and transaction costs, including in relation to cumulative illustrations.

Provision of regulated advice

This involves providing written advice relating to investments (as required under s36 of the Pensions Act 1995) and reviewing and preparing the scheme’s statement of investment principles (required under s35 of the Pensions Act 1995).

Governance structures

This involves advice on the alternative ways in which investment and risk management might be governed and the terms of reference and delegated responsibilities that might apply to each element of those governance structures. This could also include advice on the implications of using alternative forms of consolidation to support improved member outcomes.

Support with regulatory requirements

This involves preparation of the scheme’s Implementation Statement and for schemes in scope of the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, support with the preparation of the scheme’s Taskforce for Climate-related Financial Disclosures (TCFD) aligned climate governance report.

Environmental, social and governance (ESG) and climate change and sustainability

This includes advice in relation to ESG, including climate change and wider sustainability-linked risks and opportunities and on implementation and integration within the scheme’s investment and risk management arrangements. It also includes advice on emerging issues like biodiversity and Taskforce on Nature-related Financial Disclosures (TNFD and for schemes not in scope of the climate change regulations, how best practices of larger schemes might improve outcomes for the scheme when applied proportionately.

Additional DC investment advice

This could be in relation to the selection and appointment of investment platform providers or in relation to the emergence of new investment or fund opportunities, including illiquid investment opportunities for DC schemes.

Trustee training

This could include a range of training from basic investment training on investment duties and investment structures to training on the design and implementation of default arrangements, the role of illiquid investments and performance-related fee structures, lifestyle strategies and decumulation options.

Objectives for investment consultancy services

Setting adviser objectives

When setting objectives for your IC provider, you should include how these will contribute to achieving the scheme’s overall investment objectives.

When you engage with more than one adviser in respect of investments, you must set objectives for each respective adviser. You are not limited in the number of objectives you may set. It will likely be proportionate to set multiple objectives for your adviser in accordance with the range of services you receive.

Where you retain a fiduciary manager, you should consider the extent of investment consultancy services you receive from them as part of the overall engagement. Trustees should also be aware of the extent to which investment objectives have been set and form part of the fiduciary management agreement entered into and consider whether it is appropriate to set any additional objectives for the investment consultancy services provided.

You may also wish to set a combination of short and long-term objectives, ensuring the objectives are appropriate and achievable for the given timeframe.

Adviser objectives can be quantitative and qualitative in their nature. For example, they could be set in relation to investment performance delivered relative to the liabilities, adviser performance against service level agreements, communication skills, value for money and performance against specific tasks, such as asset transitions, investment manager selection exercises, or in relation to climate change risk and opportunity reporting. Examples of the areas that objectives may cover are outlined in the DB and DC case studies later in this guidance.

You may also wish to consider the balance between behaviours that you are looking to encourage through setting specific objectives. In particular, consider whether there could be any unintended consequence of the emphasis you apply. For example, adviser objectives based mainly on the level of investment return could result in your adviser being focused solely on the level of investment return, which may be detrimental to other elements of the service you require to be provided, such as risk management.

In setting objectives for your investment adviser, you will want their input to ensure the objectives being set are consistent with the service being offered and are reasonably achievable by your adviser. In obtaining your adviser’s input, you should be aware of the potential for conflicts of interest, and you should be prepared to challenge their input. You should also consider whether to involve a third party to help you set those objectives.

We expect the objectives to be signed off in accordance with your existing governance framework once they have been agreed. Ensure all members of the trustee board have sight of and, if relevant, agree with the adviser objectives that have been set and the ongoing monitoring process of these. Trustees must review and, if appropriate, revise an IC provider’s objectives at least every three years and without delay after any significant change in investment policy.

Where an existing IC provider has strategic objectives which were set under the CMA order before 1 October 2022, the trustees must complete the first review of those objectives within three years of those objectives being set.

Where an IC provider is appointed on or after 1 October 2022, the objectives must be set by the end of the day on which the appointment takes effect.

Monitoring and assessing performance

When putting in place a set of performance objectives with your adviser, you should also consider the method and regularity for assessing your adviser’s performance against these objectives. From 1 October 2022, you must review the performance of each IC provider against the objectives set at least every 12 months. You should also complete a detailed assessment of performance at least every three years to ensure that this continues to meet your expectations.

You may wish to incorporate the review of your IC provider’s performance with the effectiveness review of your board.

From 1 October 2022, you must review and, if appropriate, revise the objectives to ensure these remain suitable at least every three years and without delay after any significant change to your scheme’s investment policy. Where you have set multiple objectives for your adviser and/or they are advising you on particular pieces of work, you may also wish to consider ad-hoc reviews as appropriate following, completion of any significant discrete pieces of work.

There are many ways to monitor and assess performance. Ultimately it is for you to decide how you want to set and monitor objectives for your IC provider. The approach you adopt will likely depend on the characteristics and circumstances of your scheme.

One approach that can be used is a balanced scorecard, which seeks to identify, in advance, a range of measures that are important to the delivery of the overall outcome or service and then, after a suitable period, can be used to assess the performance of your provider against those measures.

Measures may be quantitative or qualitative in nature. The number of measures and the importance attached to each of these will vary with your circumstances. Some may be much more important in driving the outcome desired than others and may change over time; for example, these may change:

• to reflect changes in circumstances
• to reflect changes in desired future outcomes or to reflect the refinement of existing measures
• to encourage the development of (or improvement in) specific behaviours

There is no ’one size fits all’ approach to performance assessment, and what may be effective for one scheme may not be appropriate for another, even if they are of a similar scale. Ultimately, the service you want to monitor and assess is the service that your scheme needs and your trustee board requires, and you should reflect the characteristics of that service in the objectives you set.

In the case studies that follow, we have illustrated a way of setting objectives using a balanced scorecard approach. You or your investment adviser may prefer to use an alternative approach or may choose to use a balanced scorecard approach which focuses on different drivers of performance. Such approaches may be equally valid. However, you should make sure that any approach and measures proposed by your investment adviser focuses on your service needs and does not unduly favour the service aspects that can be easily met by the adviser.

The purpose of the case studies is to illustrate how you could use this type of balanced scorecard approach. The ‘objective themes’ and the examples of the types of services that might fall under the sample ‘objective themes’ are only set out as an illustration.

In all cases, you should look to develop an appropriate approach for your scheme’s circumstances, and you should look to attach greater emphasis to those services which are more important to your own trustee board and scheme. You may find the examples useful as you discuss and develop the appropriate performance monitoring and assessment frameworks for your IC provider.

In reviewing performance, you should also seek to understand whether any structural issues hinder the delivery of outcomes. For example, ‘good’ advice may not be acted on or may not be acted on in a timely fashion. Similarly, ‘good advice’ may not be delivered well or may not be delivered at an appropriate level to meet the needs of the trustees as decision-makers. In assessing performance and in addressing future performance needs, you should be mindful of any ‘structural’ barriers which may be impeding performance and outcomes, and you should be prepared to make (or encourage) appropriate change.

Proportionality

The example balanced scorecards set out in the case studies are quite detailed. In developing a performance monitoring and assessment approach you should take a proportionate approach, appropriate for your scheme and the governance structure and investment arrangements that you have implemented.

You should ensure that the outputs from any performance monitoring and objective review sessions are documented, together with your review considerations and with a clear statement of any decisions taken or actions arising, so that it may be referred to in future.

To find out more, see our scheme management skills guide.

Case studies

We have developed the following case studies to assist you in identifying the areas of investment consultancy services you should consider when setting objectives for your adviser.

The trustees of the XYZ DB pension scheme had retained ABC Investment Consultants as their investment advisers for many years. XYZ was a full service client of ABC and any investment-related issues the scheme had were dealt with by ABC. Fees were generally charged on a time-cost basis but the fees for more significant items, like manager selection exercises and asset-liability modelling, were based around an agreed fixed fee scale or agreed separately in advance.

The trustees acknowledged the following:

• Appropriate investment and risk management advice, in the absence of unlimited employer contributions, was the key driver in ensuring that members received their benefits in full and recognised that the service was of significant value to their scheme.
• The balance between an adviser providing advice and the trustee being the decision-maker added complexity to any assessment of “value added”.
• There was a risk that the “potential value” of good advice could be lost due to the trustees being unable to make effective decisions in a timely manner or being unwilling to make a decision to the full extent of the advice provided.
• It was important to distinguish between the difference made by process driven improvements (arising, for example, from the impact on the funding level from employer deficit repair contributions) and value add driven improvements (arising, for example, from recommendation of investment managers that out-performed).
• It was difficult to define an appropriate period to measure and attribute performance given the potential for investment market volatility and general market noise to distort.
• It would be challenging to develop a robust framework that could work in all environments.
• They would also need to consider how the trustees’ governance and decision-making structures contributed to (investment) outcomes.
• Changes to their current governance arrangements should also be considered (for example, appointment of a professional trustee, creation of an investment committee or increasing the number and frequency of trustee meetings).

The trustees agreed to adopt a balanced scorecard approach, where performance against a number of clear objectives set for their investment consultant would be assessed using a combination of quantitative and qualitative measures.

The trustees looked at the services outlined as part of ABC’s response to the invitation to tender they had submitted a number of years previously and decided to group them into six key objective themes to monitor:

1. Demonstration of value added.
2. Delivery of specialist processes.
3. Proactivity of advice.
4. Support with scheme management and compliance.
5. Relationship and service standards.
6. Support with additional matters arising.

The trustees acknowledged that short-term market movements and the trustees’ and employer’s business planning cycles could both distort and influence activity undertaken and agreed to monitor performance over both a one and three-year horizon, using different weights against each key objective.

The trustees were mindful that the investment activity required varied from time to time. They set out under each key objective the individual services they felt should be considered in forming a view on the investment adviser’s performance against the main objective. The trustees did not assign weightings to the individual services under each objective as they recognised that not all services were required within each monitoring period.

The trustees shared their proposed performance monitoring framework with their investment consultant and included a proposal that the effectiveness of the trustees’ governance and decision-making framework over the performance period, would also form part of the assessment. Following discussion and some revisions, the template set out in the table below was agreed.

The investment consultancy firm also outlined an offer to the trustees, whereby an element of their fees (10%) would not be paid if their service did not meet a particular level and that a “bonus” fee (5%) would be paid if their service exceeded a particular higher level. The trustees were interested in this concept but were concerned about their ability to apply a consistent approach when assessing objectives qualitatively.

The trustees asked their consultant to prepare a further version of their template against which they set out what they believed “good” and “bad” service looked like. Following further discussion and some revisions, the trustees agreed the template and the date at which the first assessment would take place.

As part of their ongoing annual assessment cycle, the trustees and the investment adviser also agreed to consider whether any changes to the template or their investment governance structure were necessary.

The trustees also provided a copy of their agreed monitoring framework with their investment consultant to the employer for information.

Example balanced scorecard for the XYZ pension scheme

Please note that the objectives and weightings in the table below are illustrative only. You will need to decide the appropriate objectives to set and the appropriate weightings to apply to your scheme, based on your requirements for the investment consultancy service you receive. We would expect you to take a proportionate approach in developing the scorecard for your scheme.

Objective theme	1 year	3 year
1. Demonstration of value added	30%	30%
Help the trustees to deliver an investment return of liabilities + x% per annum measured over rolling N- year periods. Help the trustees to stabilise and improve the scheme’s funding level over time. Help the trustees to increase the asset value of the scheme through their investment manager selection, research and recommendations and through their portfolio construction. Help the trustees to increase the asset value of the scheme through tactical and medium-term asset allocation. Enable the trustees to implement their scheme’s investments on a more competitive fee basis through negotiation on implementation and periodic benchmarking of fees. Help the trustees to transition any assets between investment managers on a cost-effective basis. Help the trustees to implement an investment strategy which adds value through the integration of ESG (including climate change), stewardship and wider sustainability considerations into their investment and risk management arrangements. Enable the trustees to access a wider range of opportunities and portfolios of assets (and/or build portfolios of assets). Help the trustees to manage their scheme cashflows needs in a more cost-effective manner.
Objective theme	1 year	3 year
2. Delivery of specialist services	20%	30%
Complete asset-liability modelling and scenario/sensitivity modelling using their in-house models (or proprietary modelling tools). Complete climate scenario analysis and modelling using their in-house models (or proprietary modelling tools). Help the trustees decide on an appropriate risk and performance objective for the scheme. Help the trustees develop and define their investment beliefs. Help the trustees review their investment governance arrangements and terms of reference for any sub-committees or delegated authorities and to integrate climate-related regulatory responsibilities within those arrangements where appropriate. Help the trustees meet their reporting requirements under the climate change governance and reporting regulations. Help the trustees develop and maintain an appropriate framework to track progress against strategic objectives.
Objective theme	1 year	3 year
3. Proactivity of advice	15%	5%
Advise the trustees on new investment opportunities (including climate, ESG or wider sustainability-related opportunities) or emerging risks (including climate, ESG or wider sustainability-related risks). Advise the trustees on market pricing opportunities to mitigate or transfer risk. Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to transfer risk. Advise on any changes in the investment governance arrangements or delegated authorities which are necessary to enable the trustees to best access the emerging opportunities.
Objective theme	1 year	3 year
4. Support with scheme management and compliance	20%	20%
On a regular (quarterly) basis, monitor the performance of the scheme’s investments relative to the liabilities and also the performance of the scheme’s investment managers and any investments directly held. Produce investment reports, briefing papers and investment advice in advance of trustee meetings and on a timely basis. Review and update as appropriate the scheme’s statement of investment principles. Produce the scheme’s implementation statement on an annual basis. Provide periodic written advice on direct investments held. Provide trustee training as required. Help the trustees to ensure compliance of the scheme’s investment arrangements with developments in regulation and all legislation in relation to investment matters.
Objective theme	1 year	3 year
5. Relationship and service standards	10%	10%
Agree any changes of (named) investment consultant(s) and meeting cover with the trustees in advance. Maintain fees in line with tender submission and inform trustees (in advance) of any significant variations that might arise due to changes in remit or strategy. Agree fee budget with trustees for any significant piece of work. Clear understanding of the scheme’s goals and objectives. Appropriate quality and quantity of resourcing to meet the needs and requirements of the scheme. Strong positive working relationship with the trustees. Work collaboratively with other advisers and provide effective support to trustees when engaging with other stakeholders. Appropriate management and mitigation of any conflicts of interest.
Objective theme	1 year	3 year
6. Support with additional matters arising	5%	5%
Provide advice and assistance to the trustees on any other issues arising (for example, following a corporate transaction or significant corporate event impacting the pension scheme).
Scheme’s governance and decision-making framework	Y/N	Y/N
Has the governance structure and the level of engagement by the trustees helped or hindered the delivery of improved investment and funding outcomes?

The trustees of the XYZ pension scheme had recently appointed an investment consultant to help them with their growing DC scheme and decided to put in place a formal objective and performance assessment structure for them. The trustees acknowledged the following:

• Appropriate investment and risk management advice was a key driver in delivering good outcomes for members.
• The balance between an adviser providing advice and the trustees being the decision-maker added complexity to any assessment of “value added”.
• There was a risk that the “value” of good advice could be lost due to the trustees being unable to make effective decisions in a timely manner or being unwilling to make a decision to the full extent of the advice provided.
• It was important to distinguish between services based around processes (for example, from running a tender exercise for an investment service provider) and services based around value add (arising, for example, from recommendation of active investment managers that out-performed).
• It was difficult to define an appropriate period to measure and attribute performance given the potential for investment market volatility and general market noise to distort.
• It was difficult to understand how the performance of the investment strategy contributed to outcomes for different segments/age groups of the membership.
• It would be challenging to develop a robust framework that could work in all environments.
• They would also need to consider how the trustees’ governance and decision-making structures contributed to investment outcomes for members.
• Changes to their current governance arrangements should also be considered (for example, appointment of a professional trustee, creation of an investment committee or increasing the number and frequency of trustee meetings).

The trustees agreed to adopt a balanced scorecard approach, where performance against a number of clear objectives set for their investment consultant would be assessed using a combination of quantitative and qualitative measures.

The trustees reviewed the range of services outlined as part of the investment consultant’s response to the invitation to tender and decided to group the range of services under seven key objective themes that they would base their monitoring on:

1. Demonstration of value added.
2. Delivery of specialist processes.
3. Proactivity of advice.
4. Support with member engagement and communication.
5. Support with scheme management and compliance.
6. Relationship and service standards.
7. Support with additional matters arising.

The trustees acknowledged that short-term market movements and the trustees’ and employer’s business planning cycles could both distort and influence activity undertaken and agreed to monitor performance over both a one and three-year horizon, using different weights against each key objective.

The trustees were mindful that the investment activity required varied from time to time. They set out under each key objective the individual services they felt should be considered in forming a view on the investment adviser’s performance against the main objective. The trustees did not assign weightings to the individual services under each objective as they recognised that not all services were required within each monitoring period.

The trustees shared their proposed performance monitoring framework with their investment consultant and included a proposal that the effectiveness of the trustees’ governance and decision-making framework over the performance period, would also form part of the assessment. Following discussion and some revisions, the template set out in the table below was agreed.

The trustees asked their consultant to prepare a further version of their template against which they set out what they believed “good” and “bad” service looked like. Following further discussion and some revisions, the trustees agreed the template and the date at which the first assessment would take place.

As part of their ongoing annual assessment cycle, the trustees and the investment adviser also agreed to consider whether any changes to the template or their investment governance structure were necessary.

Example balanced scorecard for the XYZ pension scheme

Please note that the objectives and weightings in the table below are illustrative only. You will need to decide the appropriate objectives to set and the appropriate weightings to apply to your scheme, based on your requirements for the investment consultancy service you receive. We would expect you to take a proportionate approach in developing the scorecard for your scheme. 

Objective theme	1 year	3 year
1. Demonstration of value added	15%	15%
Help the trustees to put in place an appropriate default arrangement and range of self-select funds that enable members’ needs to be met and improved outcomes to be delivered. Increase the value of the individual member funds through their investment manager selection, research and recommendations. Help the trustees to implement an investment strategy which adds value through the integration of ESG (including climate change), stewardship and wider sustainability considerations in their investment and risk management arrangements. Enable the trustees to implement their scheme’s investments on a more competitive fee basis. Help the trustees to transition any assets between investment managers on a cost-effective basis. Enable the trustees to access a wider range of opportunities, including illiquid investment opportunities and portfolios of assets (and/or build portfolios of assets).
Objective theme	1 year	3 year
2. Delivery of specialist services	20%	30%
Analyse/model the scheme’s membership profile and expected member outcomes and provide recommendations on the appropriate investment strategy and investment manager fund combinations to adopt. Complete climate scenario analysis and modelling using their in-house models or proprietary modelling tools. Help the trustees to decide on an appropriate risk and performance objective to set for their default arrangement(s) and the range of self-select funds to meet the needs of members. Help the trustees to develop and maintain an appropriate framework to track progress against expected member outcomes. Help the trustees, in consultation with key stakeholders, to decide on an appropriate range of decumulation options to enable members to take their benefits in the form they require. Help the trustees to develop and define their investment beliefs. Help the trustees to review their investment governance arrangements and terms of reference for any sub-committees or delegated authorities and integrate climate-related regulatory responsibilities within those arrangements where appropriate. Help the trustees meet their reporting requirements under the climate change governance and reporting regulations.
Objective theme	1 year	3 year
3. Proactivity of advice	15%	5%
Advise the trustees on new investment opportunities (including climate, ESG or wider sustainability-related opportunities) or emerging risks (including climate, ESG or wider sustainability-related risks). Advise the trustee on opportunities to access illiquid investments, including in relation to any attaching performance related fee structures. Advise the trustees on market pricing opportunities to mitigate or manage risk. Deliver training to enable the trustees to engage with new investment opportunities, emerging risks or opportunities to manage risk. Advise on any changes in the investment governance arrangements or delegated authorities which are necessary to enable the trustees to best access the emerging opportunities.
Objective theme	1 year	3 year
4. Support with member engagement and communication	15%	15%
Through the use of communication and behavioural techniques, help the trustees effectively engage with their membership to better understand their needs and assess how the default arrangement(s) and range of self-select funds meets their needs.
Objective theme	1 year	3 year
5. Support with scheme management and compliance	20%	20%
On a regular (quarterly) basis, monitor the performance of the scheme’s investment strategies and also the performance of the scheme’s investment managers. Produce investment reports, briefing papers and investment advice in advance of trustee meetings and on a timely basis. Review and update as appropriate the scheme’s statement of investment principles. Produce the scheme’s implementation statement on a timely, annual basis. Provide periodic written advice on any direct investments held. Provide trustee training as required. Provide support in the assessment of value for members and the impact of cost and charges in preparation of the chair’s statement. You may need more assistance here if your scheme is a DC ‘specified scheme’ with under £100M AUM, as you must carry out a more detailed annual assessment. For more information see the DWP guidance: Completing the annual value for members assessment and reporting of net investment returns. Help the trustees to ensure compliance of the scheme’s investment arrangements with developments in regulation and all legislation in relation to investment matters, including in relation to ESG, climate change and sustainability.
Objective theme	1 year	3 year
6. Relationship and service standards	10%	10%
Agree any changes of (named) investment consultant(s) and meeting covers with the trustees in advance. Maintain fees in line with tender submission and inform trustees (in advance) of any significant variations that might arise due to changes in remit or strategy. Agree fee budget with trustees for any significant piece of work. Clear understanding of the scheme’s goals and objectives. Appropriate quality and quantity of resourcing to meet the needs and requirements of the scheme. Strong positive working relationship with the trustees. Work collaboratively with other advisers and provide effective support to trustees when engaging with other stakeholders. Appropriate conflicts of interest or management and mitigation of any conflicts.
Objective theme	1 year	3 year
7. Support with additional matters arising	5%	5%
Provide advice and assistance to the trustees on any other issues arising (for example, following corporate events, a change in corporate pension policy, or developments relating to consolidation options).
Scheme’s governance and decision-making framework	Y/N	Y/N
Has the governance structure and the level of engagement by the trustees helped or hindered the delivery of improved investment and member outcomes?

Terms used in this guidance

Delegation

The transfer of responsibility for exercise of one or more of the trustees’ powers to a third party. For example, where trustees delegate day-to-day investment decisions to an investment manager or fiduciary manager but retain overall responsibility for the investment strategy. Pensions law permits delegation of investment decisions to fund managers on this basis, but you should note that you remain liable for defaults or acts of the manager unless you have taken all reasonable steps to satisfy yourselves that the manager has the appropriate knowledge and experience and is carrying out their work competently in compliance with relevant legislation.

Investment beliefs

An agreed and documented view in respect of investments, based on knowledge, understanding and experience.

IC provider

A person who or firm that provides investment consultancy services to the trustees and is not:

• a trustee of the scheme
• a trustee owned company

The CMA order did not apply to any provider (or a group company of the provider, or a partnership or joint venture with the provider) who was the principal employer or controlling employer. This exception has not been included in the scheme administration regulations. 

Investment consultancy services

This term is generally used (including in this guidance) to describe the provision of advice to the trustee board to support decisions on matters such as investment strategy, strategic asset allocation and manager selection. However, for the purposes of the legal requirement to set strategic objectives for an IC provider, the provision of investment consultancy services is defined in the scheme administration regulations as advice to trustees on one or more the following:

• the merits of:
  • the exercise of any of the trustees’ powers of investment, including the making or retaining of any investment
  • the appointment of a particular fund manager
  • strategic asset allocation
  • adopting a particular investment strategy
  • the preparation or revision of the statement of investment principles.

and where that advice is given otherwise than in the capacity as a legal adviser appointed by the trustees.

It does not matter whether the advice is given for the purposes of section 36 of the 1995 act (choosing investments) or otherwise, or in a recommendation, guidance or otherwise.

Any high-level commentary provided by the scheme actuary in, or in relation to, an actuarial valuation on the link between the investment strategy and the pension scheme’s statutory funding objective is not to be treated as advice for the purposes of the scheme administration regulations.

Relevant trust scheme

A relevant trust scheme is an occupational pension scheme established under trust that is not:

• a scheme which is not registrable under the Pensions Act 2004
• an executive pension scheme as defined in the scheme administration regulations
• a relevant small scheme as defined in the scheme administration regulations
• a scheme to which regulation 2(c) of the Occupational Pension Schemes (Trust and Retirement Benefits Exemption) Regulations 2005 applies

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