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20.0 Introduction

This section gives a brief explanation of the main classes of investment available to pension schemes.


Comment

Best financial interests

Trust law expects trustees to invest having regard to the best financial interests of members and to maximise the scheme’s investment returns within an acceptable degree of risk.

Statement of Investment Principles

Whatever the investment, it can only be appropriate if the trustees’ Statement of Investment Principles sanctions its use.

Trustees are expected to include in their Statement the extent, if any, to which they take account of ethical and social considerations in their investment strategy and also their policy on exercising voting rights attaching to shareholdings.

Any change to the Statement of Investment Principles will have to be drawn up in consultation with the employer and on the advice of the scheme’s investment adviser.

Socially responsible investment

Trustees are not obliged to adopt a socially responsible investment (SRI) policy [see 18.2.6(j) (Note)]. They are simply expected to say on their Statement of Investment Principles whether or not they have an SRI policy and, if they have, how they are taking environmental and/or ethical factors into account.

Voting rights

Trustees are not obliged to have a policy on exercising voting rights as shareholders but they have to state what their policy is [see 20.2.6].  They are strongly encouraged to vote the shares they own.

Asset classes are divided into two main types:

• 

real assets (equities, property and index-linked investments)

• 

monetary assets (cash and fixed interest).

Real assets have a direct link to real rates of return (i.e. investment return exceeding inflation). Monetary assets are expressed in monetary terms.

Investment returns

Long-term returns from equities are generally expected to exceed price inflation and also general salary growth. Long-term returns from fixed-interest investments (bonds) and cash are expected to be lower than returns from equities, but generally speaking, the former match the price of annuities. Cash funds provide protection against short-term changes in capital values.

Overall, for members of Defined Contribution schemes and those paying additional voluntary contributions the trustees’ policy should be to provide suitable information so that they can make appropriate investment decisions.

Complex investment strategies

‘Trustees need to understand the characteristics of complex investment instruments and investment strategies. They should put arrangements in place to ensure that members are suitably safeguarded against loss or misappropriation of assets. They should also consider such things as counterparty risk and the creditworthiness of institutions which hold the scheme’s or a particular investment fund’s cash position.’













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