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6. Monitoring DB investments

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What you need to do

  • Focus on the key drivers of funding level change and investment performance, monitor them in a timely manner, and take appropriate action when necessary.
  • Identify the key information you require to do this, and ensure that this is presented clearly so that you can make effective well-informed decisions.
  • Monitor the investment strategy to help you assess whether investment returns and risk levels are within acceptable ranges and whether your objectives and any triggers remain appropriate.
  • Make arrangements to monitor and review your investment managers’ performance.

Monitoring principles

Monitoring your scheme investments is a key part of integrated risk management (IRM). You should monitor scheme investments in the context of monitoring the employer covenant and funding level, and consider the results together. Our IRM guidance provides practical help on a proportionate and integrated approach to risk management.

Monitoring is most effective when it is prioritised, timely and actionable.

Prioritised

Prioritise monitoring those things that matter most to your scheme’s investments and funding level.

You may find it helpful to refer to section 1: DB investment governance, which suggests a generic order of priority of investment decisions based on their likely impact on future outcomes.

Your scheme’s investment strategy is likely to have a far greater overall impact than the investment managers’ performance relative to their targets.

You should bear this in mind when allocating monitoring time and resources between investment strategy and investment managers. In this guidance, we have accordingly placed greater emphasis on monitoring investment strategy.

When deciding how closely to monitor specific risks you may find it helpful to consider how likely they are to occur, and their potential impact, so you can focus on more likely risks with significant impacts.

Timely

It’s important to monitor your scheme’s investments and funding level regularly and ensure monitoring information is prepared and considered in a timely manner.

How often you monitor will depend on your scheme’s circumstances. More frequent monitoring may be appropriate if your scheme is poorly funded, is close to breaching any triggers or where there is a high-risk investment strategy. Some risks may need more frequent monitoring than others.

Actionable

You need to actively consider whether to take action in response to your review. Some information might require action immediately. Other information may indicate a need for future action, for example at the next actuarial valuation or formal investment strategy review. Some information may form part of a contingency plan or trigger framework where the actions are pre-agreed.

Monitoring information

It’s important to identify what information you require to effectively monitor your scheme’s investments and funding level. Your advisers can help you prioritise the available information. You may also wish to receive help and training on how to interpret the information received, for example from your advisers or investment managers.

Your main sources of monitoring information are likely to be your scheme actuary (for reports on the scheme’s funding) and your investment adviser and investment managers (for reports on the scheme’s investments). Their reports need to contain enough data and commentary for you to understand developments since the previous report and over the long-term, as well as the reasons for this, any views expressed regarding future developments and any significant assumptions underlying the report. If any report is not clear enough, we encourage you to discuss this with the report provider and seek improvements.

Presenting information

Monitoring is easier if the information is presented in a digestible, visually appealing form. For example, graphs can be easier to understand than tables of numbers. ‘Traffic light’ graphics can quickly highlight when monitoring statistics are outside tolerances. The balance between summary and detail in monitoring reports should be appropriate for their intended readership and purpose.

You may find it helpful to put together a dashboard to help your monitoring. This is a short overview of key monitoring statistics. It should help you understand your scheme’s finances at a high level and highlight key potential risks. It can also help you identify areas where you need to review additional data and drill down into particular topics.

You could incorporate key elements of this dashboard into a higher-level IRM monitoring dashboard.

The content to include on your dashboard will depend on your scheme and the dashboard’s intended readership, and is likely to change as circumstances evolve.

Monitoring dashboard: management information and indicators

It’s important to keep your dashboard focused. When considering statistics to include, or remove, you might find it helpful to ask the following questions:

  • Does this information tell you something useful that the statistics already on the dashboard don’t? Will it be missed if you remove it?
  • What are you going to do with the information? If you cannot or will not act on it, is it worth monitoring?
  • If this statistic needs to be calculated just for the dashboard, is the cost justified, or can other already-available statistics be used instead?

Monitoring investment strategy

To monitor the investment strategy effectively, you need to have a clear understanding of the objectives it is seeking to deliver. You also need to understand the expected long-term performance, the timescale over which this is being measured, and the likely range of short-term performance in different market conditions.

Long-term performance

We encourage you to focus on the long-term when monitoring investment strategy.

If the investment strategy is failing to meet its long-term objectives or if you have investment triggers in place which are persistently not being met, you need to form a view on whether this is likely to persist and decide what action, if any, to take.

If you do have triggers in place you should consider whether the market expectations the triggers are based on remain realistic, and accordingly whether the strategy or the triggers need modifying to meet the long-term objectives. In both cases, you may also wish to review whether these original objectives for the investment strategy remain appropriate.

If developments in investment markets have been significant, you may wish to reconsider any investment beliefs you hold.

Where the investment strategy has delivered significantly above expectations, or triggers have been met more rapidly than expected, we would encourage you to undertake a similar review process. These may be indications that the investment strategy is taking more risk than necessary to meet objectives, or that triggers should be set at different levels.

Short-term performance

We encourage you not to be unduly distracted by short-term performance issues if you have concluded there is a good explanation and you still expect your objectives to be met. Where you have concerns over the short-term performance of your investment strategy, you should ask your investment adviser to explain how it compares to the expected range of short-term performance, the reasons for it and whether, when and how they expect performance to be recovered.

Where the investment strategy significantly out-performs in the short-term, we would encourage you to undertake a similar review to check that risk levels are appropriate.

As part of your approach to IRM, you should have mechanisms in place to alert you to significant changes to the employer’s covenant or the scheme’s liability profile. Changes in either of these may also prompt changes to the investment strategy.

Monitoring investment managers

To monitor the performance of your scheme’s investment managers, you need a clear understanding of their individual objectives, how they plan to meet them, and over what time period.

You may wish to focus on the scheme’s more risky mandates, including more complex or less transparent ones, and the larger ones. In this way, you can pay most attention to managers or funds that represent the greatest risk to scheme performance.

Form of review

Your review of each manager may take different forms, for example using manager or adviser reports, or meetings with the managers or advisers.

If you are relying solely on reports produced by your investment managers to monitor their own performance including, if used, fiduciary managers, you should consider whether you wish to seek independent advice to help interpret them.

Trustee toolkit online learning

Go to the Trustee toolkit The module 'Investment in a DB scheme' contains a tutorial called 'Reviewing the investment strategy'. The module 'An introduction to investment' contains a tutorial called 'Reviewing investments'. You must log in or sign up to use the Trustee toolkit.

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