Critical Review Time for Irish Pension Schemes
The pensions landscape in Ireland has undergone seismic change over the past few years with the introduction of IORPS II and the related follow-on impact of the surge in the move, by own trust DC schemes, to master trusts arrangements.?And the changes are not yet complete. A new governance requirement for Defined Benefit and Defined Contribution schemes, as set out in the Pensions Authority Code of Practice, requires Trustees to undertake Critical Reviews for Administration and Investment Services employed by the scheme.
By focusing on the Critical Review for Investment Services, in this article we detail from our view, the key elements such a review should encompass along with the key considerations for Trustees.?
Critical Review for Investment Services
Most Trustee meetings nowadays are well structured with investment matters a main agenda item.?Many schemes are monitoring investment performance on a quarterly basis and conducting annual investment performance reviews evaluating investment performance against agreed objectives, benchmarks, risk metrics and so on.???
The Critical Review goes a step further, building on the investment monitoring and review processes already in place. This more detailed review requires Trustees to conduct an in-depth review of the ‘investment services’, conducted against the criteria that were first applied when appointing the investment manager. While the format of the Critical Review is not prescribed, it should be envisaged that the investment services review encompasses much more than just a review of the investment performance.
The outcome of the Critical Review will allow Trustees to better understand and evaluate what, if any, changes may be required as it pertains to the investment manager(s) in the scheme. Trustees will ultimately feel more empowered to reach a decision as to whether to retain the current investment manager(s) or consider their replacement(s).
What’s the best approach to undertaking a Critical Review?
Aon’s approach to Critical Reviews combines quantitative and qualitative factors, and covers five key pillars, as follows:
Further detail on each of these pillars is provided below;
1.?????Performance Review (Quantitative)
To conduct an in-depth review of investment managers in the scheme a thorough analysis of the investment manager experience, along with peers within the market if necessary.?The analysis will evaluate investment manager returns and experienced volatility against benchmarks and stated objectives.?A rigorous review of the investment management fees - whether these represent good value for money for your members, whether there are any additional expenses in addition to these fees and a comparison to fees charged by peers in the market completes this pillar of the Critical Review.?
2.????Investment Strategy & Objectives Review (Qualitative)
One of the crucial investment decisions for Trustees to get right in Defined Contribution pension schemes is the default investment option, as the majority of members will typically be invested in this strategy.?On the other hand, for members who choose to self-select their own strategy the fund range needs to be robust to cover the main investment risks and provide adequate choice for members.?A thorough Critical Review will analyse the role of each one of the investment options, whether these have met the objectives and requirements of the mandate, and whether there are any gaps identified in the fund range and suggested actions if issues are identified.
3.????Aon Global Investment Manager Research View (Qualitative)
Coupled with a quantitative review we also recommend a qualitative review of the investment manager, to try garner the manager’s ability to continue to perform as expected going forward and identify a manager’s edge and unique thinking.?Undertaking manager research to the level and standard necessary may be a time-consuming exercise. Aon’s Global Investment Manager Research team, however, has the depth of resource and capability to undertake this exercise, and will focus on the following aspects of an investment manager;
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4.????Environmental, Social & Governance (ESG) Policy Alignment
Trustees are required to consider ESG factors and criteria as it relates to the investment offerings in the scheme and as a result these factors cannot be considered in isolation. Accordingly, a key part of the Critical Review should evaluate whether, and how well, fund managers integrate financially material ESG risk factors into their investment decision-making process.?Stewardship, in the form of responsible engagement and voting activities, is an important element of this pillar.?An understanding of how the investment manager’s approach aligns with the Trustee’s views will be a useful outcome of this pillar of the review.
5.????Suitability of Offering & Latest DB / DC Trends
Lastly, we also recommend reviewing the scheme’s current investment offering versus the latest trends and best practice in the market.?A number of key areas of focus include the structure and suitability of the default investment option; the evolution of sustainable global practices related to supporting environmental, social responsibility and corporate governance issues consistent with local regulations; transparency of costs and charges, and a focus on the value to plan members.
Considerations for Trustees
There are a number of considerations for Trustees as they prepare to undertake the Critical Review for Investment Services.
If there is an investment consultant in situ providing consultancy services to the scheme, the Trustee may consider engaging with them on this matter to discuss who is best placed to conduct the review, be it the Trustee, existing consultant or an external third-party.?
Other considerations center on the scope, the timescale for completion and the integration of these reviews into the wider governance of the scheme.?As Critical Reviews are expected to be undertaken at least every three years (or sooner should circumstances arise), consideration should be given to incorporating the Critical Review into the triennial review of strategy for the scheme. ?For clearly defined reasons the Trustee may use their discretion to extend the Critical Review to every 5 years, with the rationale for this clearly documented.?
Summary
Trustees should look to discuss Critical Reviews at upcoming Trustee meetings during the second half of the year, as schemes are expected to complete their first Critical Review by April 2024. Trustees may wish to undertake the review themselves, or alternatively seek the advice and support of their investment consultant. Should you require advice or support in relation to undertaking such reviews please reach out to your Aon Investment Consultant or a member of the Aon Wealth team.