Independent trustee Ian Maybury describes some current investment governance challenges to Maggie Williams


I’ve seen two consistent themes emerging when it comes to investment governance. An increasing number of DB schemes are becoming cashflow negative, which requires a change in trustees’ investment thinking. Secondly, schemes’ perceptions of responsible investment are evolving in terms of risk management and fiduciary duty, and we need to rethink how we respond to this.


Schemes which are closed to new members and future accrual are starting to mature. Inevitably, the amount of money flowing out of them in pension payments will eventually surpass the scheme’s income from investments and contributions. At that point, the scheme becomes cashflow negative. In effect it is becoming more like an annuity, paying out liabilities but without further contributions coming in.

This requires a change of investment mindset, but not all trustees and advisers have yet embraced that. Over time, the scheme will need to develop a clear path of returns to make up benefits payments. It will need to sell assets gradually to meet those liabilities, which brings sequencing risk to the forefront of investment governance. This should focus trustees’ minds on how to model that risk and manage it dynamically, as well as assessing how much should be delegated to managers and advisers.

It also means moving away from a total return mindset. That has implications both for the structure of funds and the types of assets that negative cash flow schemes will invest in. Traditionally, pooled funds re-invest returns but that may no longer meet these schemes’ needs. Trustees need to assess which components of their portfolio are driven by total return principles, versus parts that are driven by capital appreciation return and income-seeking assets. It also means assessing how risk budgets are set.

”There is now increased recognition that ESG themes are part of trustees’ duty to act in members’ best interests”

There are challenges for advisers and asset managers as well. Advisers must introduce new ideas about how portfolios and investment strategies are modelled, and communicate their approach clearly to trustees. From an asset management perspective, the design of the funds on offer to trustees must to take account of these changes.

Another key theme that frequently challenges the trustee boards that I work with is how to manage responsible investment or environmental, social and governance (ESG) factors. This is equally applicable to DB and to defined contribution schemes. There is now increased recognition that ESG themes are part of trustees’ duty to act in members’ best interests, and to achieve returns with the right amount of risk. Some fiduciary responsibilities are increasingly being outsourced, but trustees still need to make sure that their asset managers are taking account of this.

Many boards have become comfortable with the idea of engaging with the companies in which they invest, and understand that this is a form of risk management. However, deciding whether to exclude certain categories of investment, and how this relates to acting in members’ best financial interests, can be a more difficult exercise. Factor-based investing can help with this, enabling portfolios to be tilted to take account of exclusions without sacrificing returns.

The overall message is that many more trustees need to actively consider responsible investment and ESG factors. However, this isn’t just about how to engage with companies, it’s also about where you place boundaries in terms of types of companies you choose to exclude. In my view, it is a risk judgement as well as a question of moral and fiduciary duty.