Appointment of Investment Managers to Pension Schemes

butterbeansarmManagement

Nov 18, 2013 (3 years and 6 months ago)

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By


Patrick Collins


Appointment of Investment Managers to Pension Schemes


A Trustee’s Perspective


2

Introduction

3

Introduction





Investment performance since mid
-
2008





Decrease in fund values





Increased likelihood of complaints from members, and

referrals to the Pensions Ombudsman




Greater supervision of investment managers by trustees


4

Trustee’s Duty to Invest

5

Trustee’s Duty to Invest






Section

59
(
1
)(b)

of

the

Pensions

Act

imposes

a

duty

on

the


trustees

of

occupational

pension

schemes

to

provide

for

the


“proper

investment”

of

the

resources

of

the

scheme

in


accordance

with

[Occupational

Pension

Schemes

(Investment)


Regulations]

and,

subject

to

those

regulations,

in


accordance

with

the

rules

of

the

scheme
.






T
he

Pensions

Act

does

not

define

what

constitutes

“proper


investment”
.


6

Trustee’s Duty to Invest


Whether

investment

has

been

proper

or

improper

in

an

individual

case

will

ultimately

be

a

matter

for

the

court

but

it

is

likely

that

the

court

will

adopt

the

“prudent

man”

test
.




The

duty

of

the

Trustee

is

not

to

take

such

care

only

as

a

prudent

man

would

take

if

he

had

only

himself

to

consider
;

the

duty

rather

is

to

take

such

care

as

an

ordinary

prudent

man

would

take

if

he

were

minded

to

make

an

investment

for

the

benefit

of

other

people

for

whom

he

left

morally

bound

to

provide
.


[
Re

Whiteley,

Whiteley

v
.

Learoyd,

(
1886
)

33

Ch
.
D

347
]


7

Trustee’s Duty to Invest





The Occupational Pension Schemes (Investment) Regulations

2006 (as amended).






The

trustees

of

an

occupational

pension

scheme

(other

than

a


scheme

of

less

than

100

active

or

deferred

members

or

both)


are

required

to

adopt

a

written

statement

of

investment

policy


principles

(“SIPP”)
.






Review

the

SIPP

at

least

every

three

years

and

revise


the

SIPP

at

any

time

following

any

change

in

investment


policy

which

is

inconsistent

with

the

SIPP
.

8

Trustee’s Duty to Invest


The SIPP must be in writing and must include the following:




the investment objectives of the trustees;


the investment risk measurement methods;


the risk management process to be used; and


the strategic asset allocation with respect to the nature and
duration of pension liabilities.



9

Trustee’s Duty to Invest



Borrowing
:

the

trustees

of

a

scheme

may

borrow

money

but

only

for

liquidity

purposes

and

only

on

a

temporary

basis
.




Security
:

the

assets

of

the

scheme

must

be

invested

in

a

manner

designed

to

ensure

the

security,

quality,

liquidity

and

profitability

of

the

portfolio

as

a

whole

so

far

as

is

appropriate

having

regard

to

the

nature

and

duration

of

the

expected

liabilities

of

the

scheme
.



Regulated

markets
:

the

assets

of

the

scheme

must

be

invested

predominantly

on

regulated

markets
;

investment

in

assets

which

are

not

admitted

to

trading

on

a

regulated

market

must

in

any

event

be

kept

to

a

prudent

level

(note



rules

on

collective

investment

schemes

and

insurance

policies)



10

Trustee’s Duty to Invest


Diversification
:

The

assets

of

the

scheme

must

be

properly

diversified

in

such

a

way

as

to

avoid

excessive

reliance

on

any

particular

asset,

issuer

or

group

of

undertakings

and

so

as

to

avoid

accumulations

of

risk

in

the

portfolio

as

a

whole

(note



rules

on

collective

investment

schemes

and

insurance

policies)
.



Derivatives
:

investment

in

derivative

instruments

may

be

made

only

in

so

far

as

they
:




contribute to a reduction of investment risks, or


facilitate efficient portfolio management,



and

any

such

investment

must

be

made

so

as

to

avoid

excessive

risk

exposure

to

a

single

counterparty

and

to

other

derivative

operations
.

11

Investment Management Agreements

12

Investment Management Agreements









Trustees can appoint investment managers





Trustees must supervise investment managers





Trustees cannot sub
-
delegate their ‘duty to invest’

13

Investment Management Agreements






Investment Management Agreements


key clauses





Investment Objectives and Investment Restrictions





Ensure consistency with the SIPP





Include the SIPP as a schedule to the agreement





Allow for variation of Investment Objectives and

Investment Restrictions

14

Investment Management Agreements









Liability


liable for





Breach of duty to act with skill, care and diligence




Negligence, recklessness, bad faith, wilful default,

fraud




Breach of contract




Loss from insolvency of investment manager




Actions of agents and delegates





Indemnity


but not for any of the above

15

Investment Management Agreements








Valuations and Reporting (quarterly)





Sub Investment Managers / Advisers





Fees




16

Custody Agreements

17

Custody Agreements






Custody





Establishment of Accounts





Instructions from the investment manager





Sub
-
Custodians and Agents





Fees and Expenses




Liability and Indemnity


18

Performance Related Liability

19








Negligence





A duty of care owed by the investment manager to

the client (trustee);






The investment manager’s breach of duty of care;

and





Loss or damage to the investor as a result of that

breach.



Performance Related Liability


20





Breach of Fiduciary Duty





A fiduciary should not put himself in a position where

his own interests and those of his client conflict.


Boardman v Phipps
[1967] 2 A.C. 46





A fiduciary should not profit from his role at the

expense of his client.



Regal (Hastings) Ltd v Gulliver
[1942] 1 All E.R. 378





A fiduciary should not allow the duties he owes to one

client conflict with duties owed to another.


Hilton v Barker Booth & Eastwood

[2005] 1 W.L.R. 567





A fiduciary owes a duty of confidentiality concerning

information acquired in a fiduciary capacity.

Performance Related Liability


21





Breach of Contract





Express terms





Terms implied by common law





Terms implied by statute


Sale of Goods and Supply of

Service Act, 1980





Exclusion clause in the investment management

agreement


Performance Related Liability


22






MIFID Conduct of Business Rules


1.
Client

classification
:

there

are

three

categories

of

client

retail,

professional

and

eligible

counterparty,

with

different

degrees

of

protection

for

each

category,

i
.
e
.

retail

clients

are

afforded

the

greatest

degree

of

protection
.

Pension

schemes

are

usually

classified

as

professional

investors
.


2.
Investment

managers

are

required

to

notify

clients

of

the

new

categorisation

and

their

right

to

seek

a

different

category
.

This

should

take

the

form

of

a

written

notification

to

the

client
.



3.
Assessment

of

suitability

and

appropriateness
:

when

providing

advice

or

portfolio

management

services,

an

investment

manager

must

obtain

certain

information

from

the

client

before

recommending

a

service

or

product

as

suitable

for

the

client
.


Performance Related Liability


23





4.
Provision

of

information

to

clients
:

information

provided

must

be

clear

and

in

such

a

form

that

clients

are

reasonably

able

to

understand

the

risks

of

the

service

or

product

offered
.


5.
Best

execution

and

client

order

handling
:

when

executing

orders,

investment

managers

now

have

enhanced

duties

to

obtain

the

best

possible

result

for

their

clients,

taking

into

account

factors

such

as

price,

costs,

likelihood

of

execution

and

settlement
.


6.
Inducements
:

investment

managers

have

increased

disclosure

requirements

to

clients

in

relation

to

the

acceptance

of

fees,

commissions

and

non
-
monetary

benefits
.



Performance Related Liability


24





7.

Conflicts of interest: investment managers must monitor
conflicts of interests and report conflicts to the client.




Negligence
-


breach of MiFID conduct of business rules is




indicative of breach of duty of care.







Performance Related Liability


25






Any Questions?


Patrick Collins

Eversheds O’Donnell Sweeney

Telephone: 6644 328

Email:
pcollins@eversheds.ie