When setting investment objectives for a pension plan, trustees face many important decisions: for example, deciding how to fund future benefits, stating investment beliefs, defining risk appetite and setting standards for responsible business practice and corporate governance.
The importance of the choice of benchmarks and indices for use in the pension plan’s asset allocation, investment strategies and ongoing performance measurement should not be overlooked. By following the principles set out in this guide, trustees should feel confident they are equipped to make this choice.
For their part, index providers should demonstrate experience, a solid organisational and governance framework, and a commitment to provide the research and information tools that investors need to achieve their goals.
Points of differentiation:
- There are some universal design standards that every market-leading benchmark should follow. The index should be comprehensive, transparent and objective, regularly rebalanced and maintained, and modular (benchmark users should be able to combine one benchmark with another without overlaps or gaps)
- Adhering to these standards is essential to a benchmark’s ability to represent a market or market segment
- When evaluating an index that is to be used as the basis of a passive investment strategy, investors should consider whether the index’s design makes it easy or difficult for the fund manager to replicate it, as well as whether the index is a comprehensive representation of its target market or market segment
