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Key points

  • Produce and maintain a statement of investment principles that sets out your investment strategy.
  • Ensure your investment strategy is consistent with your scheme funding objectives and your assessment of the employer covenant.
  • Monitor the investment performance and strategy of your scheme to ensure they remain appropriate given employer and scheme circumstances.

Statement of investment principles

You must produce and maintain a statement of investment principles for your defined benefit (DB) scheme. It must include your policy on:

  • choosing investments
  • the kinds of investments to be held, and the balance between different kinds of investment
  • risk, including how risk is measured and managed
  • the expected return on investments
  • cashing in investments
  • the extent to which, if at all, you take account of social, environmental or ethical considerations when taking investment decisions
  • using the rights (including voting rights) attached to investments if you have them.

Deciding the investment strategy

You should work closely with the employer when deciding the investment strategy as it will influence the amount and timing of contributions they may need to pay to the scheme. For instance, a low-risk investment strategy might result in the need for higher employer contributions immediately while a high-risk investment strategy may lead to higher and potentially unexpected contribution requirements in the future.

Taking risk may bring rewards but you should understand the risks being run and manage them appropriately.

You should consider how different strategies may affect the scheme’s funding position, the employer’s plans for sustainable growth and the employer covenant.

You should ensure the investment strategy is consistent with:

  • your funding objectives
  • your risk appetite, based on the funding objectives and the level of employer covenant and tolerance to risk
  • the scheme’s liquidity needs
  • your assessment of the employer’s position and any plans they have for sustainable growth (including how these might strengthen their covenant).

Diversification in your investments is important, eg concentrating investments in a similar industry to the employer will increase the risk of underperforming if there’s a downturn in that industry.

You should have appropriate knowledge and understanding to oversee the investment strategy. You must obtain and consider advice when setting and reviewing your investment strategy – go to working with advisers.

Managing investment risks

When you assess investment risks you should consider the employer’s ability to support the likely adverse outcomes you identify. You should take an appropriate and proportionate approach to managing investment risks.

Asset-backed contributions (ABCs)

ABCs are arrangements that can help employers to meet their scheme obligations. They can sometimes improve scheme security by providing access to assets or cashflows previously out of reach.

ABCs are complex arrangements and you should carefully consider any arrangements proposed to ensure you fully understand the risks involved. For more information, read our regulatory guidance on asset-backed contributions.

Monitoring investment performance and strategy

You should monitor the investment performance and strategy of your scheme to ensure they remain appropriate in light of changes to employer covenant strength and scheme funding position. You should balance the cost of making changes against the expected benefits.

If the level of investment risk becomes excessive in relation to the strength of the employer covenant, you should consider options such as additional funding for the scheme, strengthening the employer covenant, changing investment strategy or (if appropriate) accepting a higher level of risk.

Trustee toolkit online learning

Go to the Trustee toolkit The modules 'An introduction to investment' and 'Investment in a DB scheme' contain information on setting investment strategy and managing investments. You must log in or sign up to use the Trustee toolkit.

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