Pensions Management Institute

Retirement Provision Certificate
Learning Materials

The Pensions Industry

The study manual is broken down into sections.  This section, the Pensions Industry, and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

In this section we give you an overview of pensions. We look at the:

1. Origins of and Overview of Pensions
2. The Employment Package
3. Parties involved in Pensions
4. We also reference the Current Pensions' scene by directing you to the Resources Page and reviewing current legislation.

Each section has four different types of learning activity:

• References (the relevant parts of the Study Manual for you to revise and learn)
• Think About it  (a current topic for you to revise and learn about)
• Fact Finding  (factual questions with checkable answers)
• Test (multiple choice questions with answers)

The Employment Package

The main element of an employee's benefits package comes in the form of an agreed rate of salary (which can include variable elements such as bonuses).  However an employer often offers other benefits, including some form of retirement provision and sometimes benefits in kind. 

The amount of salary an employee will receive is determined by the contract of employment, as amended from time to time. European law defines pay  as salary, wages or other consideration, whether in cash or benefits in kind which the worker receives directly or indirectly in respect of his employment with an employer. When comparing remuneration, benefits in kind, including retirement provision, must be considered. Any other benefit which is a payment of money or capable of being turned into money is also subject to tax. Remuneration from employment is subject to tax. Certain other payments such as statutory maternity pay and statutory sick pay are also subject to tax. The definition is very broad and the list of what can be taxed is very long.

National Insurance (NI) contributions are also payable on remuneration. Employees do not have to pay NI on certain benefits in kind, while employers have to pay on almost all benefits, for example company cars.

 1. References

This section of study, The Employment Package can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Think about the organisation for which you currently work, or a previous employer. What types of benefits in kind do they offer?

You will be surprised at the similarities - but more so in some cases at the breadth of differences.

3. Fact Finding

Statutory Sick Pay

Let's find out exactly what Statutory Sick Pay (SSP) entails, so that when you consider disability benefits you are aware of the basic entitlements.

STEP 1 - Visit the GOV.UK website by clicking the logo here: 

STEP 2  - Follow the menu link for 'Working, jobs & pensions' to view the 'holidays, time off, sick leave...' 

STEP 3  - Now click on 'Statutory Sick Pay', then follow the links contained in the text for further information to try and answer the following questions: 

1. How long is SSP paid for?
2. How much is SSP?
3. Who pays SSP?

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

The Employment Package Test

Employment Package Test Answers

The Current Pensions Scene

How to provide for retirement is a very important financial decision for everybody and needs regular review.

The State Pension is unlikely to provide a level of benefits that can be considered sufficient to live on in old age.

There are two main factors driving the change in pensions, these are financial considerations and social changes. 

Pensions provide a means of survival, sustenance and shelter for those who are no longer able to earn. This can mean those who are sick and disabled as well as those who have had a full working life and have retired.

The Government has confirmed that its objective is to make people more self-sufficient.

Its aim is for more people to have another income, on top of the State Pension, when they come to retire. This is why it introduced automatic enrolment in October 2012. Stakeholder pensions were introduced back in 2001 with the aim of providing cost effective benefits targeted at the lower paid. But from October 2012, the Government started the phasing in of automatic enrolment, in an attempt to increase the level of self-sufficient pension provision. It also wanted to give protection to those who for various reasons cannot work and encourage those who do work to save.

Changes to State Pension provision have also been made so that the State Pension will be fairer and available to more people. The State Pension is a foundation for retirement, but most people will want to or will need to build up their own savings on top of this. This is why the Government started to introduce workplace pension reforms from 2012 to encourage more people to save in a private pension.

Retirement benefits are a long term commitment. They are built up over 40 years or so while at work and, with increasing longevity, need to provide for a long period in retirement. The earlier someone starts to save, the better chance they have of building up sufficient financial resources for a comfortable retirement.

Retirement provision includes a number of elements, the major one being a formal pension (probably from a combination of company and personal arrangements). It also includes income from other savings and from the State. This is why we cover all of these elements in the syllabus for this certificate.

Financial considerations
People are living much longer than they used to and this means that financial provision needs to be carefully planned to take account of their longer lifespan. The Government has been making changes to pension provision in order to encourage individuals to provide for themselves rather than relying on the State to provide for them.   For example automatic enrolment schemes have been introduced in recent years and recently changes have been made to defined contribution arrangements to make them more attractive to individuals giving them greater access to their money.

Changes have also been made to State provision to increase the age at which benefits can be taken to reflect the fact that people are living longer. The age of mortality has been steadily increasing and so it was increasingly unaffordable for the State Pension Age to remain static.

The ‘financial crisis’ of the past few years has also driven change as schemes and the Government try to reduce the cost of providing pensions. The Government has been changing taxation regulations to reduce the thresholds for benefits that can be taken without paying any tax. The introduction of the new flexibilities is also a way of raising taxes as only part of the funds can be taken tax-free.  The Government has also been reducing costs by abolishing contracting out and raising the State Pension Age.

The Pensions Act 2004 introduced sweeping changes to the structure of pension schemes. This was known as simplification and the driver behind this was a reduction in costs for both Government and Schemes.

Employers and Trustees have also been trying to reduce the costs of their pension schemes. Many schemes have been carrying out liability reduction exercises such as:

• Pension increase exchanges (PIE) – where members are offered a higher pension in exchange for no further increases in the future.
• Enhanced transfer value exercises (ETV) – where members are encouraged to transfer their benefits out of the scheme by giving them an increased transfer value for a limited period.
• Trivial commutation exercises – with increases to the threshold for trivial commutation many schemes have undertaken exercises to offer members the option of trivially commuting their benefits.

Social considerations

There have been many changes to legislation in recent years to reflect the changes that have been taking place in Society. The legislation ensures that there is equality and that there is no discrimination in many different areas such as:

• age
• sex
• gender (transsexuals)
• civil partners/same sex partners
• maternity/paternity

All of the above considerations affect the type of legislation necessary to fund pensions.

 1. References

This section of study relates to the Current Pensions Scene and the Legislation Changes over time.  Information can be found by using the Resources Page of this website.  

2.Think about it

Future of pensions - It is generally regarded that the best possible protection for members of Defined Benefit schemes is a strong profitable employer.  In regard of the COVID 19 situation, is it possible a pension scheme can push an employer into insolvency?

Write your answers down to structure your revision practice.

3. Fact Finding

Let's find out exactly what the State Pension entails. 

STEP 1 - Visit the GOV.UK website by clicking the logo here: 

STEP 2  - 

Follow the link above and it will take you to the Basic State Pension.

Then in the search box to the right hand side type 'New State Pension'.

STEP 3  - Now click on 'the new State Pension', then read the text to try and answer the following questions: 

1. Who can claim the new State Pension?
2. What are the rules on National Insurance?
3. What happens if someone continues to work after retirement age?

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Current Pensions Scene Test

Current Pensions Scheme Test Answers

The Role of Government in Pensions

The role of Government is to set the rules and legal framework within which the various methods of making retirement provision are to operate, and to supervise and monitor these arrangements.

The Government sets the system for the social security system and makes decisions about the level of State Benefits that it pays.

The Government also decides the minimum level of income that every pensioner should have. 

1. References

This section relates to the The Role of Government in Pensions and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Fred is a member of his employer's DB scheme. He retires at his normal retirement date on 31 August 2016 on a salary of £60,000 having completed 40 years' pensionable service. The scheme provides pension using a 60^ths accrual basis.

How much is Fred's retirement pension?

What is the value of Fred's pension for testing against the Lifetime Allowance?

Has Fred exceeded his Lifetime Allowance?

Answers

3. Fact Finding

HM Revenue & Customs

HM Revenue & Customs' website offers a lot of useful information and advice on pensions. Visit their website here

See the Pensions Tax Manual here and see if you can use that area to find the answers to the following questions:

1. Including the Glossary how many sections make up the Pensions Tax Manual?
2. What is the PTM page reference number which provides details of the contents information on the Annual Allowance?
3. What does PTM071000 refer to and what Act of Parliament an schedules does it reference

Check your answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

The Role of Government Test

The Role of Government Test Answers

Regulation and Policing

In this section we look at how the pensions industry is regulated and who regulates it. We outline the roles of the regulatory organisations TPR (the Pensions Regulator), the FCA (Financial Conduct Authority), and the PRA (Prudential Regulation Authority) and look at how financial advice should be given. 

1. References

This section relates to Regulation and Policing of Pensions Schemes and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Independent advice

Imagine you are a financial adviser. Think about what information you may need from your customer in order to provide 'independent advice'. Make a notes to structure your revision practice.

3. Fact Finding

Statutory Sick Pay

Let's find out exactly what Statutory Sick Pay (SSP) entails, so that when you consider disability benefits you are aware of the basic entitlements.

STEP 1 - Visit TPR's website using the logo link below: 

STEP 2  - On the tab marked 'Our approach to regulating'. What are the three key powers listed here? 

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Regulation and Policing Test

Regulation and Policing Test Answers

Introduction to Occupational Schemes

Here we look at occupational schemes as work related benefits. Most employed people will have the opportunity to join an employer sponsored occupational pension scheme at some point or another during their working lives. Indeed the introduction of automatic enrolment from 1 October 2012 means that the majority of employees will be automatically enrolled into a workplace pension. These schemes provide benefits on retirement and may also provide benefits for occurrences like death in service or ill health.

Employers are responsible for choosing the level of benefit and the format of the scheme and then offering it to their employees but if the scheme is to be used for automatic enrolment, there is a prescribed level of contributions that have to be paid to the scheme, in the case of a defined contribution (DC) scheme, or a prescribed level of benefit, where the scheme is a defined benefit (DB) scheme.

There is a choice of scheme structures and schemes that can be offered by individual employers, or by a group of similar employers, these are known as centralised schemes. Public sector schemes are those set up by the Government to cover public sector employees such as civil servants, teachers and the police. These schemes may be statutory (i.e. set up under an Act of Parliament) and can either be funded, as in the case of the Local Authority Pension Scheme, or unfunded and paid for out of general taxation revenue.

1. References

This section relates to Workplace Pension Schemes and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Retirement Benefits

James Roberts has worked for Makepiece Ltd for 30 years.  He is 65 in 3 months time, which is the normal retirement age within the company.

He has approached you to talk about the implications of taking late retirement because he is hoping to carry on working until his 68th birthday.

He explains that he has been a member of Makepiece's final salary occupational scheme for 25 years, then asks what the implications of late retirement might be on his retirement benefits.

What options might Julius have with a pension of this structure? 

Write your comments down as part of your revision structure/practice.

3. Fact Finding

CPI and RPI

In occupational schemes early leavers are often entitled by law to benefits at retirement. With DB schemes these benefits relate back to the length of their service and their final salary at leaving. Benefits are now often revalued with reference to the Consumer Prices Index (CPI).

STEP 1 - To find out more about the CPI and RPI visit the Government's statistics website using this logo link: 

STEP 2  - Click on 'Economy' at the top of the page to visit a summary table of economic factors 

STEP 3  - Follow the link ‘Inflation and price indices’ and then follow the link on the left hand side of the page to the 'On this page' section. Try to answer the following questions:

1. What methodology is used to calculate Consumer Price Inflation?
2. Who are the users and what are the uses of the CPI?

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Introduction to Occupational Schemes Test

Introduction to Occupational Schemes Test Answers

Trusteeship

In this section we examine trusteeship. We explain what trusts and trustees are, how trusts are set up, and outline the advantages of setting up a pension scheme under trust. We also look at the responsibilities and duties of the trustees.

A trust is defined as an equitable obligation binding a person to deal with assets over which he has control, for the benefit of persons of whom he himself may be one. Put more simply, it is a way of creating a sense of trust between the parties.

There are three parties involved in a trust: the settlor who establishes the trust, the trustees who administer the trust, and the beneficiaries who will benefit from the trust. In the case of a pension scheme, the employer (the settlor) establishes the trust and the trustees hold the pension fund assets for the beneficiaries.

Subject to the scheme's rules, the beneficiaries may include a variety of people. Please click the link from the Government website to get a better understanding of who these are:

There are also circumstances in which the employer can be classed as a beneficiary in the wider context. In a final salary scheme funded on a balance of cost basis, the employer can benefit from good investment performance by paying lower (or no) contributions. The employer may also be entitled under the rules to any surplus on winding up.

An irrevocable trust is one where the trust assets cannot revert to the settlor except in narrowly defined circumstances, for example in a pension scheme where there are surplus funds after all the benefits are secured and the trust documents permit a refund to the employer.

Trust law has existed for several centuries. There is no one statute which lays down what a trustee must or must not do; the principles have been laid down by the courts at various times. There are several Acts of Parliament that have affected trust law. The effects of the various acts are:

• To set down minimum standards and rules for the operation of trusts
• To establish powers to invest in specified investments if a pension fund's documentation gives no broader powers of investment
• To set down the maximum term for a private trust to continue in operation (but pension funds are exempt under other legislation)
• To introduce a requirement for member nominated trustees and an expansion of trustee functions for occupational pension schemes
• To introduce a general statutory duty of care owed by trustees in respect of all of their duties (except in relation to investment) - this operates by default unless a different standard is contained in the scheme's documentation
• To comply with the Trustee Knowledge and Understanding requirements

Master Trusts

A master trust is an occupational trust based pension scheme set up for multiple employers who are not connected. Each employer has its own division within the master arrangement but there is one legal trust and therefore one trustee board. Employers are deemed to be ‘connected’ if they are part of the same group of companies (including partially owned subsidiaries and joint ventures).

The trustee retains decision making independence for each employer division on things such as investment funds and service providers under a trust-wide governance structure whereas decisions over benefit and contribution levels typically reside with the employer.

Master trusts may appeal to employers who wish to sponsor a trust based occupational pension scheme, benefit from the good governance which accompanies this, but only with minimal involvement with running the scheme. They may also appeal to employers with existing trust-based defined contribution arrangements who no longer feel able to bear the cost burden alone.

Many of the master trusts which have been set up are sponsored by insurance or investment companies. They are also useful for employers in the same industry such as plumbing and the railways, and for automatic enrolment NEST is a well known master trust.

The voluntary master trust assurance framework has been developed by the Institute of Chartered Accountants of England and Wales (ICAEW) in association with the Pensions Regulator (TPR) to enable auditors to provide independent assurance on scheme quality.

TPR expects those running a master trust to obtain independent master trust assurance to help demonstrate that they have standards of governance and administration that meet TPR’s Code of Practice and regulatory guidance for DC schemes.

The Pension Schemes Act 2017 (PA 2017) includes new requirements for master trusts which will require them to meet higher operating criteria.  This will include a new approval regime for master trusts and will give TPR new powers to intervene where schemes are at risk of failing.  TPR will also have the power to authorise and de-authorise master trusts according to strict authorisation criteria.

PA 2017 received Royal Assent on 27 April 2017 and its primary aim is to provide for the greater regulation of master trusts.  Among other things, the Act will:

• introduce an authorisation regime for master trusts which provide DC benefits
• require master trusts to demonstrate to the Pensions Regulator (TPR) that they meet certain key criteria on establishment (or, for existing master trusts, when the relevant provisions are brought into force)
• give TPR new supervisory powers to authorise and de-authorise master trusts according to strict criteria, ensuring that master trusts continue to meet the required standards throughout their existence
• introduce specific trustee requirements on wind-up or closure of master trusts
• make provision for Regulations to be published containing further detail

A draft of the Occupational Pension Schemes (Master Trusts) Regulations 2018 was laid before Parliament, in May 2018 following the Government’s response in March 2018 to a consultation launched in November 2017.  The Regulations, when finalized, will implement the new authorisation and supervisory regime for master trust schemes under the provisions of PA 2017 and deal with such things as:

• the conditions that must be met by master trusts seeking authorisation, and the matters TPR must take into account in its assessments of schemes
• the authorisation fees payable by new and existing master trusts
• the scope of exemptions from the regime
• information and notification requirements.

The regulations are due to come into force generally on 1 October 2018.

The Pension Schemes Act 2017 (Commencement No. 1) Regulations 2018 have now been published and these bring into force from 1 February 2018 the part of PA 2017 that relates to TPR’s Code of Practice on master trusts.  The Code of Practice will include:

• the process for applying for authorisation of a master trust scheme, and
• the matters that TPR will take into account in deciding whether it is satisfied that a master trust scheme meets the authorisation criteria.

Code of Practice no.15, ‘Authorisation and supervision of master trusts’ was laid before Parliament in July 2018 (http://www.thepensionsregulator.gov.uk/doc-library/master-trust-code-consultation-2018.aspx.)  Separate guidance will also be published by TPR to accompany the code and the authorization and supervision scheme.

Guidance on the authorisation of master trusts is given in TPR’s website at http://www.thepensionsregulator.gov.uk/trustees/master-trust-authorisation.aspx

1. References

This section relates to Trusteeship and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Duties and responsibilities

Trustees are the legal owners of the trust assets and they have some important obligations to fulfil. They must act in the best interests of the trust beneficiaries and use their legal ownership of the trust assets for the beneficiaries' benefit.

Can you think of five specific duties or obligations that a trustee is bound to perform?

Write down your answers to structure your understanding/revision.

3. Fact Finding

The trustees appointed to a scheme can be individuals, corporations or a combination of both. However, there are restrictions on who can and cannot be a trustee. Take a look at the table below and decide if they could become a trustee, then check your answer to see if you are correct: 

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Trusteeship Test

Trusteeship Test Answers

Individual Provision

In this section we look at individual provision, explaining how employment packages work and what different types of packages are available. We also look at other types of individual retirement provision, outlining the different types of individual pension which are available and what sort of personal savings or investments someone might have.

This section relates to Individual Pension Provision and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

In this section we give you an overview of pensions. We look at the:

1. Individual Pensions
2. Personal Savings

Each section has four different types of learning activity:

• References (the relevant parts of the Study Manual for you to revise and learn)
• Think About it  (a current topic for you to revise and learn about)
• Fact Finding  (factual questions with checkable answers)
• Test (multiple choice questions with answers)

Personal Savings

We can now look at the different types of personal savings which a person can use to provide for their retirement, from savings accounts to even wine collections.

There are three categories of personal savings:

1. Personal Investments
2. Alternative Investments
3. Insurance

Personal pensions, stakeholder pensions and retirement annuities are the types of non-occupational pension schemes that are available to individuals.  Originally, Retirement Annuity Contracts (RACs) were available for self-employed individuals who could not join an occupational pension scheme or employees whose employer did not provide one although it has not been possible to take out a new RAC since 1 July 1988 when personal pensions were introduced.

The introduction of personal and stakeholder pensions made it easier for people to save for retirement outside the traditional occupational pensions route.

Stakeholder pensions were made available from 6 April 2001 as part of the Government’s intention to simplify and reduce the cost of pension planning for the consumer.

Whilst an individual can take out a personal pension or stakeholder pension, a group arrangement can be set up by an employer, much like an occupational pension scheme. It does, however, operate slightly differently from an occupational pension scheme and there is generally less involvement required from the employer although the employer may well pay contributions through its payroll to such an arrangement.  There could also be other occupational pension-type characteristics such as a group life assurance scheme involved.

A stakeholder pension scheme is a type of personal pension scheme which is subject to some additional requirements. 

Before April 2006 there were restrictions on paying into a personal pension scheme at the same time as being an active member of an occupational pension scheme. These were removed from 6 April 2006.

From a pension’s tax perspective, each of the above types of arrangement is now treated as a registered pension scheme and must comply with the requirements of the new pension tax regime from 6 April 2006, so the same requirements apply as to contribution limits and the types of benefit allowable. However, each arrangement still has its own scheme rules and/or contract terms to determine exactly what types of benefit it provides etc. within the overall general framework (personal pensions, stakeholder pensions and retirement annuities).

From a non-pension’s tax perspective, there are still clear differences between how these types of arrangement work under general pensions legislation (for which the Department for Work and Pensions (DWP) is responsible rather than HMRC). For example, RACs are exempt from some of the DWP requirements, such as the provision of information requirements. Stakeholder pension schemes are subject to special requirements which do not apply to other personal pension schemes and personal pension schemes are treated differently from occupational pension schemes.

Also, personal pension schemes (including stakeholder schemes) are contract-based, i.e. there is a contract between each individual member and the product provider while occupational pension schemes are trust-based and the scheme trustees have a duty to act in the best interests of the scheme membership although personal pension schemes and stakeholder pensions schemes can still be set up under trust.

The Financial Conduct Authority (FCA) is responsible for dealing with contract-based schemes, and makes rules which firms which provide these schemes must comply with the rules made by the FCA (under the authority given to them by financial services legislation). Trust-based schemes on the other hand are the responsibility of the Pensions Regulator (TPR), and scheme trustees and managers must comply with rules made by TPR under the authority given to it by DWP legislation. TPR also looks after all workplace pension schemes (including contract-based schemes) in terms of how they are administered.

A self-invested personal pension (SIPP) is a special type of personal pension, allowing more scope for how pension contributions are invested. This is covered in more detail in another section and in the resource material. In addition there are other types of arrangement that are in fact occupational pension scheme-type arrangements but they can be set for an individual or allow individual pension planning and can be considered to be an individual pension in that respect.

• Small self-administered schemes (SSASs)
• Executive pension plans (EPPs)
• Buy-outs
• Additional voluntary contributions (AVCs)
• Free-standing additional voluntary contributions (FSAVCs)

1. References

This section relates to Personal Savings and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Your friend Alex has asked you for some advice on his ideas about his retirement provision. His current thoughts are: 

"I have decided to invest all of my money in a wine collection as a provision for when I retire in 10 years time"

What would your advice be?

Write your comments down as part of your revision structure/practice.

3. Fact Finding

Like most financial areas, personal investment has its fair share of acronyms and abbreviations. Do you know what the following initials stand for?

1. AIM
2. ISA
3. SAYE
4. OEIC

Personal Savings Fact Finding Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Personal Savings Test

Personal Savings Test Answers

Investment Considerations

The factors that the trustees of a scheme will need to take into account when determining the investment strategy of their scheme will depend on whether it is a defined benefit (DB) or defined contribution (DC) scheme, though there will be some common factors. 

When considering the way in which the investment portfolio is constructed the provider of the product, or in the case of a pension scheme the trustees, will be concerned about the:

• Diversity of the portfolio (diversity reduces the risk associated with holding a small number of stocks, which may perform badly)
• Level of income
• Price variability of the asset (volatility)
• Marketability of the asset
• ‘Opportunity cost’ of investing in one type of asset when better returns may be available elsewhere

Diversification in investments is important, e.g. concentrating investments in a similar industry to the employer will increase the risk of underperforming if there is a downturn in that industrial sector.

Before constructing a portfolio of assets to meet particular objectives, e.g. to invest for capital growth, or to invest for income, or to invest for a specified level of total return, you need to consider certain issues.

The most important of these are:

• the level of risk the investor is prepared to take
• whether to use active management or passive/index tracking
• matching assets to liabilities
• measuring performance
• for trustees only, the interests of the employer and the member

Active investment management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio.  Active managers rely on analytical research, forecasts and their own judgment and experience in making investment decisions on what to buy, hold and sell.

Passive investment management (also referred to as index tracking) is an investing strategy that tracks a specified index or portfolio, often a market-weighted index.  The most popular method is to mimic the performance of an externally specified index by buying an index fund.  By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and low management fees.  With low fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

For example, if an investment is to be made in UK equities, then it could be made in a fund that tracks the FTSE All Share Index.  This will give a broad spread of investments across the whole of the UK stock market (over 800 shares).  If a manager actively seeks to outperform the index then they will select fewer stocks, which they hope will outperform the index.

Further help with the investment term definitions in bold above and other investment terminology used throughout this document are available using the Pensions Terminology .

For defined benefit (DB) schemes, the investment strategy aims to ensure a scheme’s assets are sufficient to cover its liabilities as they become due.  The trustees will need to take into account the amount of the existing assets, the contribution levels, and the employer’s and their own attitude to risk.

The trustees will work closely with the employer to come up with an appropriate investment strategy.  This is because the investment strategy will influence the amount and timing of contributions the employer 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.

The trustees should consider how different strategies may affect the scheme’s funding position, the employer’s plans for sustainable growth and the employer covenant.  The investment strategy should be consistent with:

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

In the case of defined contribution (DC) schemes it is the members themselves who have the power to shape their own investment plan.  However, employers and trustees should offer clear information about investment options to help members understand investment strategy and the interaction between risk and return in order to help individuals make informed choices.

Where a workplace has a diverse employee profile - especially in terms of age - employers and trustees may want to ensure the scheme offers a suitable number of funds to fit different risk profiles and requirements of members.  Where a scheme has a default fund for those members who choose not to take an active investment decision, employers and trustees should ensure that the default investment funds are appropriate and that risk is reduced as the member approaches retirement.

If a member decides to invest in any default fund or lifestyle fund offered by an arrangement it is important they make sure its aims match their own.  Even where members decide it is right for them, they should review their choice from time to time to make sure its aims continue to match their own.

Informed choice is at the heart of effective decision making - monitoring and communicating investment performance can help members find the right investment strategy for their circumstances and thereby to hopefully get better returns.

With the changes introduced from April 2015 trustees will need to review their default options because now that members do not need to buy an annuity and can drawdown from their DC pot the underlying investments may well need to change.

All occupational schemes must have a Statement of Investment Principles (SIP).  This sets out an appropriate investment strategy and investment objectives.

For DB schemes the SIP must include the trustees’ 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
• the realisation of 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
• fee structures

Additionally, in this case the SIP should cover: the investment governance structure, investment beliefs (if any have been developed) and investment objectives, risk capacity and appetite, the long-term journey plan (if one has been developed) and short-term milestones, the strategic asset allocation, any strategic liability hedge ratios, cashflow management plans, details of fee structures and details of how the investments will be monitored.

For trust-based DC schemes an appropriate investment strategy and investment objectives for all investment options, including the default strategy should be set.  The SIP would set out information such as the investment objectives and how investment decisions are made.  The employer would also be consulted and decisions taken would be reviewed regularly.

1. References

This section relates to Investment Considerations and can be found in the relevant pages of the Retirement Provision Certificate Study Manual 2023

2.Think about it

Investment decisions

Danny (aged 22) and his father Martin (aged 56) both have personal investments. Click on each of them to see what sort of investment they have chosen.

Danny - "I am just starting to invest and have decided to go for equities"

Martin - "I have invested in equities in the past, but over the past few years I have been moving my money into bonds"

What do you think the reasons are behind the different investment choices that Danny and Martin have made?

Write your comments down as part of your revision structure/practice.

3. Fact Finding

Track it down

If an investment is to be made in UK equities, then it could be made in a 'tracker fund', so here we are going to find out more about tracker funds.

Visit the Motley Fool website (investing basics) to learn more about Tracker Funds, by clicking onto the link below:

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Investment Considerations Test

Investment Considerations Test Answers

This page provides toy with the extra resources necessary to help you with you revision process.

Manuals

Retirement Provision Certificate Study Manual 2023

Pensions Terminology (Glossary of Terms) can be accessed here, by use of your PMI Membership number.

Examiners Report

RPC - Spring 2023 Examiners' Report

RPC - Autumn 2022 Examiners' Report.pdf

RPC - Spring 2022 Examiners' Report

RPC - Autumn 2021 Examiners' Report

RPC - Spring 2021 Examiners' Report

Legislation Overview

• Finance Act 2011(Finance Bill 2011 Explanatory Notes) 
• Pensions Act 2011 (Pensions Act 2011 Summary of Impacts)
• Civil Partnership Act 2004 
  
• Marriage Same Sex Couples Act) 2013
• Finance Act 2013(Finance Act 2013 Explanatory Notes)
• Pensions Act 2014 (Pensions Act 2014 Summary)
• Finance Act 2014(Finance Act 2014 Explanatory Notes)
• Taxation of Pensions Act 2014(Taxation of Pensions Act 2014 Explanatory Notes)
• Pensions Schemes Act 2015
• Finance Act 2015
• Finance (No. 2) Act 2015
• Pension Schemes Act 2017
• Finance Act 2017
• Finance (No. 2) Act 2017
• Data Protection Act 2018 (including General Data Protection Regulation)
• Finance Act 2018
• Financial Guidance and Claims Act 2018
• Workplace Pension Reform and Auto Enrolment 
• The Pensions Increase (Review) Order 2020
• The Pensions Schemes Bill 2020 
• The Pensions Schemes Act 2021

Retirement Provision Certificate Information

Pensions Management Institute website

Retirement Provision Certificate webpages