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Mapped to the published PMI Award in Pension Trusteeship syllabus across 22 units and 91 topics

APT·ModuleINVESTMENT

Module 3: Investment for DB and DC Schemes

Module 3 covers what trustees need to understand about investing a pension scheme. It begins with the capital market and the major asset classes, overseas investment, specialised asset classes and methods, with-profit arrangements, and alternative assets and financial instruments. It then moves to strategy: asset allocation, the specialised techniques used in defined benefit schemes, the structure of portfolios, and how investment mandates are set and evaluated. From there it covers appointing and monitoring fund managers, fee structures, the charges that apply in defined contribution arrangements, performance measurement and custody, followed by responsible investment, stewardship and the Myners principles. The module ends with the Statement of Investment Principles, which ties the rest together. The APT tests understanding rather than the technical modelling an investment professional would carry out, and the syllabus marks some criteria DB only or DC only.

Questions
1,035
Units
5
Topics
25

What’s in it.

5 units

Sample questions

3 of many

A few questions from this module, with the answer and a full explanation. The complete bank is available when you start practising.

  1. A manager with a high portfolio turnover strategy discloses a low AMC but does not report bid-offer spread or market impact figures. A rival manager with lower turnover discloses a higher AMC but full transaction-cost data. Which manager's total cost is easier to assess accurately, and why?

    • Both are equally easy to assess, because implicit costs are negligible regardless of turnover
    • The high-turnover manager, because a low AMC is a reliable proxy for low total cost
    • The rival manager, because its higher AMC already includes all transaction costs by definition
    • The rival manager, because full transaction-cost disclosure allows implicit costs to be added to the explicit AMC for a complete picture
      Correct answer
    Explanation

    Because implicit transaction costs are real but not separately invoiced, a manager that discloses them, alongside its explicit AMC, gives trustees a genuine total-cost picture, whereas a manager silent on transaction costs, particularly one with high turnover where such costs tend to be larger, leaves a material unknown. A low AMC is not a reliable proxy for low total cost, undisclosed costs cannot be assumed to be zero, implicit costs are not negligible, they can be estimated via methodologies such as slippage cost, and an AMC does not by definition include transaction costs. Key takeaway: full disclosure, not a lower headline fee, is what allows an accurate total-cost comparison.

  2. What is the essential difference between a reversionary bonus and a terminal bonus?

    • A reversionary bonus is added periodically and generally locked in, while a terminal bonus is discretionary and paid only on exit
      Correct answer
    • A reversionary bonus applies only to DC arrangements, while a terminal bonus applies only to DB scheme AVCs
    • A reversionary bonus is always higher in value than a terminal bonus
    • A reversionary bonus is paid only on exit, while a terminal bonus is added periodically and locked in
    Explanation

    A reversionary bonus is added periodically and generally locked in, while a terminal bonus is discretionary and paid only on exit. Key takeaway: timing and certainty are the two dimensions on which the bonus types differ.

  3. A modern trustee cites Cowan v Scargill to argue that non-financial factors can never be taken into account under any circumstances. Why is this an overstatement of the case's effect on current trustee duties?

    • Because the case has since been overturned and no longer applies to pension trustees
    • Because subsequent guidance built on the case's principle by permitting non-financial factors where a two-limb test is satisfied, rather than prohibiting them absolutely
      Correct answer
    • Because the case has been replaced entirely by the UK Stewardship Code
    • Because the case only applied to trustees of coal industry pension schemes
    Explanation

    Cowan v Scargill remains good authority for the primacy of beneficiaries' financial interests, but current guidance clarifies that non-financial factors may be considered within the two-limb test (good reason to think members share the concern, and no risk of significant financial detriment). Treating the case as an absolute bar overstates its modern effect. Key takeaway: the case sets a starting presumption, refined rather than reversed by later guidance.

Frequently asked questions

4 questions
What is a Statement of Investment Principles?

The SIP is the written statement trustees prepare setting out the principles governing their investment decisions. It covers the kinds of investment held, the balance between them, risk and how it is measured and managed, expected return, the realisation of investments, and the trustees’ policies on financially material considerations, including environmental, social and governance factors and stewardship.

How often do trustees have to review the SIP?

Trustees review the statement at least every three years, and without delay after any significant change in investment policy. They take written advice from a suitably qualified person and consult the sponsoring employer, though the decision itself remains theirs.

What are the Myners principles?

They are principles for the governance of pension scheme investment decision-making that came out of the Myners review of institutional investment. They cover effective decision-making, clear objectives, an understanding of risk and liabilities, performance assessment, responsible ownership, and transparency and reporting. They are good practice rather than statutory rules.

How does DB investment differ from DC investment?

In a defined benefit scheme the trustees set a strategy for the assets as a whole, and the employer carries the investment risk against a promised benefit. In a defined contribution scheme the member carries the investment risk, so the trustees’ job is to select and monitor a fund range and a default arrangement suited to the membership.