What are the Myners Investment Principles?

First produced in 2001 by Paul (now Lord) Myners, there are two sets ofinvestment principles, one for defined benefit (DB) and one for defined contribution (DC) pension schemes. The original principles have since been modified. They are now known as the (2008) Myners Investment Principles for DB schemes and the Investment Governance Group Principles for DC schemes, each comprising six principles. They are designed to improve the overall level of UK institutional pension scheme governance, in particular with respect to investment decision making.

What are the risks of choosing to run-on?

Key risks of run-on include: Covenant: Conditions may change meaning the scheme sponsor becomes unable to support the scheme. Longevity: Pension scheme members may live longer than expected leading to an increase in pension payments. Investment: Asset returns may be lower than anticipated. Regulatory: New policy and legal decisions could impact how schemes need to be run.

What does an administrator of an investment fund do?

The administrator of an investment fund is responsible for carrying out day to day administration. This includes activities such as calculating the fund’s Net Asset Value and preparing its accounts and maintaining its financial records.

What does duration mean in investing?

This is the measure of the sensitivity of the value of an asset (such as a bond) or a liability (such as a pension scheme cash flow) to changes in interest rates. For example, an asset or liability with a duration of 10 is expected to rise (fall) in value by 10% following a 1% fall (rise) in interest rates. Pension schemes can reduce the sensitivity of their funding level (the value of assets held relative to the target value of assets) to changes in interest rates by purchasing assets of similar duration to the liabilities, a technique that underlies Liability Driven Investment (LDI).

What does 'hedge' or 'hedging' mean?

This is an attempt to manage the risk of the fall in the value of one asset ('Asset A') by purchasing another offsetting asset ('Asset B'). The aim is for the value of Asset B to respond in an equal and opposite manner to Asset A to a given set of factors. For example, you could try to hedge the risk of wet weather if you own equity in an ice-cream company by buying equity in an umbrella company. For a pension scheme, hedging is also used to refer to investment in assets which behave in the same or a similar way to liability cashflows in response to a range of economic factors – eg changes in interest rates and inflation – with the objective being to reduce both the likelihood and size of any divergence between the value of the scheme’s assets and its funding target.

What does lifestyle mean in investing?

Often offered as an option (and very often the default option) for defined contribution (DC) arrangements, lifestyle is a term-to-retirement dependent investment strategy. While retirement remains in the distant future, a member’s contributions are invested normally in a range of assets (eg equities) expected to deliver “real” returns (ie above inflation). In the run up to retirement, the member’s contributions are moved gradually into an appropriate mix of assets whose final allocation depends upon whether the member has chosen a drawdown, cash or annuity option.

Pension scheme trustees may choose to “buy-in” some of their scheme’s expected future benefit payments by purchasing a bulk (ie one covering many individuals) annuity contract with an insurance company. This allows the trustees to reduce their scheme’s risk by acquiring an asset (the annuity contract) whose cash flows are designed to meet ie “match” a specified set of benefit payments under the pension scheme. The contract is held by the trustees and responsibility for the benefit payments remains with the trustees. Common uses of buy-in arrangements have been to cover the payments associated with current pensioners or a subset of those members. Contracts to meet payments to members who are yet to become pensioners can also be purchased.

A pension buy-in is an investment where a pension scheme purchases an insurance policy to cover the benefits payable to some or all of its members. This means that the insurer takes on the responsibility for paying the pensions of those members to the scheme, effectively transferring the risk from the pension scheme to the insurer. The scheme retains the legal responsibility for paying the pensions, but the insurer is responsible for funding the scheme so the payments can be made. The scheme transfers assets to the insurer to the meet the buy-in price.

Pension scheme trustees may choose to “buy-out” some or all of their scheme’s expected future benefit payments by purchasing a bulk (ie one covering many individuals) annuity contract from an insurance company. The insurer then becomes responsible for meeting pension benefits due to scheme members (effected ultimately by allocating an individual annuity contract to each scheme member). Following a full buy-out, (ie one covering all scheme members) and having discharged all of the trustees’ liabilities, the pension scheme would normally be wound up.

A pension buy-out involves a pension scheme assigning an insurance policy into the names of the members or other beneficiaries of the scheme. A buy-in is a necessary first step before a buy-out. The buy-out transfers legal responsibility for paying the members from the pension scheme to the insurer. Pensions are then paid directly to members by the insurer rather than by the scheme, and the buy-in ceases to be an asset of the scheme. This process is used to transfer all or part of the liabilities of a scheme to an insurer and is often associated with the winding up of the scheme. It is not normally necessary to make any additional payment to the insurer to move to buy-out.

What is a cash option?

In a defined contribution (DC) arrangement, a form of lifestyle in which, in the run up to the point at which a member starts to take their benefits, assets are gradually moved fully or mostly into cash. The member will then typically take their pension pot as a single cash lump sum or small number of cash lump sums.

What is a default option?

Often used in relation to defined contribution (DC) arrangements, the default option is the fund or mix of funds in which contributions in respect of a member will be invested in the absence of any explicit fund choice(s) by that member. The three broad options members have at retirement are cash, annuity purchase or drawdown.

Pensions and benefits

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: First produced in 2001 by Paul (now Lord) Myners, there are two sets of
investment principles, one for defined benefit (DB) and one for defined contribution (DC) pension schemes. The original principles have since been modified. They are now known as the (2008) Myners Investment Principles for DB schemes and the Investment Governance Group Principles for DC schemes, each comprising six principles. They are designed to improve the overall level of UK institutional pension scheme governance, in particular with respect to investment decision making.

Key risks of run-on include:

Covenant: Conditions may change meaning the scheme sponsor becomes unable to support the scheme.
Longevity: Pension scheme members may live longer than expected leading to an increase in pension payments.
Investment: Asset returns may be lower than anticipated.
Regulatory: New policy and legal decisions could impact how schemes need to be run.

: The administrator of an investment fund is responsible for carrying out day to day administration. This includes activities such as calculating the fund’s Net Asset Value and preparing its accounts and maintaining its financial records.

: This is the measure of the sensitivity of the value of an asset (such as a bond) or a liability (such as a pension scheme cash flow) to changes in interest rates. For example, an asset or liability with a duration of 10 is expected to rise (fall) in value by 10% following a 1% fall (rise) in interest rates. Pension schemes can reduce the sensitivity of their funding level (the value of assets held relative to the target value of assets) to changes in interest rates by purchasing assets of similar duration to the liabilities, a technique that underlies Liability Driven Investment (LDI).

: This is an attempt to manage the risk of the fall in the value of one asset ('Asset A') by purchasing another offsetting asset ('Asset B'). The aim is for the value of Asset B to respond in an equal and opposite manner to Asset A to a given set of factors. For example, you could try to hedge the risk of wet weather if you own equity in an ice-cream company by buying equity in an umbrella company.

For a pension scheme, hedging is also used to refer to investment in assets which behave in the same or a similar way to liability cashflows in response to a range of economic factors – eg changes in interest rates and inflation – with the objective being to reduce both the likelihood and size of any divergence between the value of the scheme’s assets and its funding target.

: Often offered as an option (and very often the default option) for defined contribution (DC) arrangements, lifestyle is a term-to-retirement dependent investment strategy. While retirement remains in the distant future, a member’s contributions are invested normally in a range of assets (eg equities) expected to deliver “real” returns (ie above inflation). In the run up to retirement, the member’s contributions are moved gradually into an appropriate mix of assets whose final allocation depends upon whether the member has chosen a drawdown, cash or annuity option.

: Pension scheme trustees may choose to “buy-in” some of their scheme’s expected future benefit payments by purchasing a bulk (ie one covering many individuals) annuity contract with an insurance company. This allows the trustees to reduce their scheme’s risk by acquiring an asset (the annuity contract) whose cash flows are designed to meet ie “match” a specified set of benefit payments under the pension scheme. The contract is held by the trustees and responsibility for the benefit payments remains with the trustees. Common uses of buy-in arrangements have been to cover the payments associated with current pensioners or a subset of those members. Contracts to meet payments to members who are yet to become pensioners can also be purchased.

: A pension buy-in is an investment where a pension scheme purchases an insurance policy to cover the benefits payable to some or all of its members. This means that the insurer takes on the responsibility for paying the pensions of those members to the scheme, effectively transferring the risk from the pension scheme to the insurer. The scheme retains the legal responsibility for paying the pensions, but the insurer is responsible for funding the scheme so the payments can be made. The scheme transfers assets to the insurer to the meet the buy-in price.

: Pension scheme trustees may choose to “buy-out” some or all of their scheme’s expected future benefit payments by purchasing a bulk (ie one covering many individuals) annuity contract from an insurance company. The insurer then becomes responsible for meeting pension benefits due to scheme members (effected ultimately by allocating an individual annuity contract to each scheme member). Following a full buy-out, (ie one covering all scheme members) and having discharged all of the trustees’ liabilities, the pension scheme would normally be wound up.

: A pension buy-out involves a pension scheme assigning an insurance policy into the names of the members or other beneficiaries of the scheme. A buy-in is a necessary first step before a buy-out. The buy-out transfers legal responsibility for paying the members from the pension scheme to the insurer. Pensions are then paid directly to members by the insurer rather than by the scheme, and the buy-in ceases to be an asset of the scheme. This process is used to transfer all or part of the liabilities of a scheme to an insurer and is often associated with the winding up of the scheme. It is not normally necessary to make any additional payment to the insurer to move to buy-out.

: In a defined contribution (DC) arrangement, a form of lifestyle in which, in the run up to the point at which a member starts to take their benefits, assets are gradually moved fully or mostly into cash. The member will then typically take their pension pot as a single cash lump sum or small number of cash lump sums.

: Often used in relation to defined contribution (DC) arrangements, the default option is the fund or mix of funds in which contributions in respect of a member will be invested in the absence of any explicit fund choice(s) by that member. The three broad options members have at retirement are cash, annuity purchase or drawdown.