Trustees should take advantage of available support and guidance to increase their skills in relation to investment decisions, The Pensions Regulator (TPR) executive director of policy, analysis and advice, David Fairs, has said.

In a blog post, Fairs argued that defined contribution (DC) pension scheme trustees should take action to enable pension savers access to the investment opportunities that best support good outcomes.

Fairs suggested that while DC trustees are at a fork in the road on their DC journey, “the direction of travel is clear: trustees need to either upskill or up sticks”, stressing the need to take advantage of the available guidance.

The blog pointed to the recent guidance from the Productive Finance Working Group (PFWG) as “very helpful” for trustees, for instance, although Fairs cautioned that the days of "small, subscale DC schemes offering some benefits, but not much value to members, are over".

He continued: "Climate change and wider sustainability issues have the potential to generate material systemic risks, however, they also have the potential to generate tremendous opportunities for investment.

"The scientific evidence is clear: the transition has to happen and has to be financed.

"Trustees therefore need to think about whether companies and investee entities have taken this into account when making their investment decisions. Investment stewardship and engagement for pension scheme trustees are also becoming increasingly important.

"Trustees need to consider whether their governance structures are fit for the future investment environment, and if they are not able meet the challenge, they need to think again."

More generally, Fairs suggested that even where trustees believe their scheme offers value for members, they should consider whether their members might be better served by consolidation with larger scale providers if they believe these have the potential for better member outcomes.

The blog was posted in response to new guidance from the PFWG, which TPR highlighted as “timely”, explaining that consolidation in the DC market has already created opportunities through asset and organisational scale.

However, Fairs noted that whilst research has shown that better governance leads to better outcomes, the governance budget of many smaller DC schemes is often limited and constrained, emphasising that “in the absence of effective scheme sponsor support… something needs to change”.

Fairs highlighted new regulations introduced in 2021, which require trustees of most DC schemes with total assets of less than £100m to carry out TPR’s value for members (VFM) assessment every year, confirming that around 1,100 DC schemes, with around 400 linked with DB arrangements, are expected to produce a VfM assessment this year.

Although Fairs suggested that this assessment process will drive “significant change”, he acknowledged that such DC schemes will only impact around 15 per cent of assets invested by DC schemes and a “negligible” amount of the assets invested by DC master trusts.

He pointed out however, that larger schemes will have to continue to assess the extent to which member-borne costs and charges represent good value for their pension scheme members, suggesting that the recent proposals on the DC charge cap “also have the potential to drive change”.

Fairs' blog also address concerns around the valuation of some illiquids, explaining that while the valuation of some illiquids can be challenging, and prompt VFM concerns, trustees need practical solutions to invest in a wider range of investment opportunities, that could have the potential to lead to improved outcomes for members.

"Ultimately, these challenges should not be a barrier to investing but they should give rise to a ‘pause for thought’ for trustees when they are considering opportunities and doing due diligence," he stated.

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