By Patrick Collins

1. Appointment of Investment Managers to Pension SchemesA Trustee’s Perspective By Patrick Collins

2. Introduction

3. Investment performance since mid-2008 Decrease in fund values Increased likelihood of complaints from members, and referrals to the Pensions Ombudsman Greater supervision of investment managers by trustees Introduction

4. Trustee’s Duty to Invest

5. Section 59(1)(b) of the Pensions Act imposes a duty on the trustees of occupational pension schemes to provide for the “proper investment” of the resources of the scheme in accordance with [Occupational Pension Schemes (Investment) Regulations] and, subject to those regulations, in accordance with the rules of the scheme. The Pensions Act does not define what constitutes “proper investment”. Trustee’s Duty to Invest

6. Whether investment has been proper or improper in an individual case will ultimately be a matter for the court but it is likely that the court will adopt the “prudent man” test. “The duty of the Trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he left morally bound to provide.” [Re Whiteley, Whiteley v. Learoyd, (1886) 33 Ch.D 347] Trustee’s Duty to Invest

7. The Occupational Pension Schemes (Investment) Regulations 2006 (as amended). The trustees of an occupational pension scheme (other than a scheme of less than 100 active or deferred members or both) are required to adopt a written statement of investment policy principles (“SIPP”). Review the SIPP at least every three years and revise the SIPP at any time following any change in investment policy which is inconsistent with the SIPP. Trustee’s Duty to Invest

8. The SIPP must be in writing and must include the following: the investment objectives of the trustees; the investment risk measurement methods; the risk management process to be used; and the strategic asset allocation with respect to the nature and duration of pension liabilities. Trustee’s Duty to Invest

9. Borrowing: the trustees of a scheme may borrow money but only for liquidity purposes and only on a temporary basis. Security: the assets of the scheme must be invested in a manner designed to ensure the security, quality, liquidity and profitability of the portfolio as a whole so far as is appropriate having regard to the nature and duration of the expected liabilities of the scheme. Regulated markets: the assets of the scheme must be invested predominantly on regulated markets; investment in assets which are not admitted to trading on a regulated market must in any event be kept to a prudent level (note – rules on collective investment schemes and insurance policies) Trustee’s Duty to Invest

10. Diversification: The assets of the scheme must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and so as to avoid accumulations of risk in the portfolio as a whole (note – rules on collective investment schemes and insurance policies). Derivatives: investment in derivative instruments may be made only in so far as they: contribute to a reduction of investment risks, or facilitate efficient portfolio management, and any such investment must be made so as to avoid excessive risk exposure to a single counterparty and to other derivative operations. Trustee’s Duty to Invest

11. Investment Management Agreements

12. Investment Management Agreements • Trustees can appoint investment managers • Trustees must supervise investment managers • Trustees cannot sub-delegate their ‘duty to invest’

13. Investment Management Agreements Investment Management Agreements – key clauses • Investment Objectives and Investment Restrictions • Ensure consistency with the SIPP • Include the SIPP as a schedule to the agreement • Allow for variation of Investment Objectives and Investment Restrictions

14. Investment Management Agreements • Liability – liable for • Breach of duty to act with skill, care and diligence • Negligence, recklessness, bad faith, wilful default, fraud • Breach of contract • Loss from insolvency of investment manager • Actions of agents and delegates • Indemnity – but not for any of the above

15. Investment Management Agreements • Valuations and Reporting (quarterly) • Sub Investment Managers / Advisers • Fees

16. Custody Agreements

17. Custody Agreements Custody • Establishment of Accounts • Instructions from the investment manager • Sub-Custodians and Agents • Fees and Expenses • Liability and Indemnity

18. Performance Related Liability

19. Performance Related Liability • Negligence • A duty of care owed by the investment manager to the client (trustee); • The investment manager’s breach of duty of care; and • Loss or damage to the investor as a result of that breach.

20. Performance Related Liability Breach of Fiduciary Duty • A fiduciary should not put himself in a position where his own interests and those of his client conflict. Boardman v Phipps [1967] 2 A.C. 46 • A fiduciary should not profit from his role at the expense of his client. • Regal (Hastings) Ltd v Gulliver [1942] 1 All E.R. 378 • A fiduciary should not allow the duties he owes to one client conflict with duties owed to another. • Hilton v Barker Booth & Eastwood [2005] 1 W.L.R. 567 • A fiduciary owes a duty of confidentiality concerning information acquired in a fiduciary capacity.

21. Performance Related Liability Breach of Contract • Express terms • Terms implied by common law • Terms implied by statute – Sale of Goods and Supply of Service Act, 1980 • Exclusion clause in the investment management agreement

22. Performance Related Liability • MIFID Conduct of Business Rules • Client classification: there are three categories of client—retail, professional and eligible counterparty, with different degrees of protection for each category, i.e. retail clients are afforded the greatest degree of protection. Pension schemes are usually classified as professional investors. • Investment managers are required to notify clients of the new categorisation and their right to seek a different category. This should take the form of a written notification to the client. • Assessment of suitability and appropriateness: when providing advice or portfolio management services, an investment manager must obtain certain information from the client before recommending a service or product as suitable for the client.

23. Performance Related Liability • Provision of information to clients: information provided must be clear and in such a form that clients are reasonably able to understand the risks of the service or product offered. • Best execution and client order handling: when executing orders, investment managers now have enhanced duties to obtain the best possible result for their clients, taking into account factors such as price, costs, likelihood of execution and settlement. • Inducements: investment managers have increased disclosure requirements to clients in relation to the acceptance of fees, commissions and non-monetary benefits.

24. Performance Related Liability 7. Conflicts of interest: investment managers must monitor conflicts of interests and report conflicts to the client. Negligence - breach of MiFID conduct of business rules is indicative of breach of duty of care.

25. Any Questions?

26. Patrick Collins Eversheds O’Donnell Sweeney Telephone: 6644 328 Email: pcollins@eversheds.ie