Statement of Investment Principles
The Pensions Act 1995 brought in a requirement for UK occupational pension schemes to prepare and maintain a written Statement of Investment Principles (SIP). Subsequent legislation has evolved the requirements:
- Almost every UK occupational pension scheme is required to have one (both defined benefits and defined contribution). The main exception is where a scheme has less than 100 members (including pensioners and deferred members).
- It has to be regularly updated.
- You need to take written advice from a suitably qualified consultant prior to preparing the SIP.
- You need to consult with the sponsoring employer (although there is no requirement to follow their wishes).
Content of your SIP
Your SIP has to contain at least your policies on:
- Choosing investments (particularly their diversification and suitability).
- The types of investments to be held.
- The balance between different types of investments.
- Risks, including the ways in which risks are to be measured and managed.
- The expected return on your scheme’s investments.
- The realisation of investments.
- The extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.
- The exercise of the rights (including voting rights) attaching to your scheme’s investments.
In our view, there has been a huge amount of unnecessary and counterproductive legislation aimed at pension schemes. However, we do not count the requirement to have a SIP as one of these. We believe that trustees should view SIPs positively.
No matter what investment strategy you follow, there will always be uncertainty and therefore the risk (however small) of a problem occurring with your scheme’s investments. If you have fully documented not only your investment decisions, but your investment decision making process and also the rationale for the strategy, then this ought to offer you some protection in the event of you being challenged as a trustee.
However, for your SIP to offer you some protection, we believe that it is vital that it reflects your actual policies rather than an idealised version. For small schemes in particular it is often sensible to cut some corners. There will be things that in theory should be done, but in practice the costs will outweigh the potential benefits. This is fine and justifiable; you just need to make sure your SIP explains this properly.
We recommend that the SIP should be comprehensive and go beyond the legally required minimum content. For example we recommend that you document your adherence (or otherwise) with the Myners Principles within your SIP.
We also recommend that SIPs be written in plain English and be made available to members on request.