New guidance from the Pensions Regulator reflects recent legislative changes requiring trustees of occupational pension schemes to set out their policies on environmental, social and governance (ESG) issues which may influence their investment decisions.
The new law
From 1 October 2019, changes apply governing the way pension schemes prepare and revise their investment disclosure documents, including their Statement of Investment Principles (SIP). There are also new requirements for an Implementation Statement to be prepared and published.
Further changes were implemented in 2019 following the transposition into UK law of the Shareholders’ Rights Directive II which encourages a longer-term focus on trustees’ investment strategies, urges consideration of ESG factors and requires transparency on how trustees invest and engage as shareholders.
What has changed?
The requirements for DC schemes are:
- by 1 October 2019, publish the scheme’s SIP on a publicly available free to access website; and
- by 1 October 2020, publish an Implementation Statement (confirming the extent to which the SIP has been followed) on a free, public website.
The requirements for DB schemes which are required to publish a SIP are:
- by 1 October 2020, publish the scheme’s SIP on a free, public website;
- By 1 October 2021, publish an Implementation Statement on:
- the extent to which the trustees’ policy on the exercise of voting rights and stewardship (engagement and voting report) has been followed during the year; and
- the voting behaviour by trustees (including the most significant votes cast during the year) and any use of proxy voters.
The Regulator’s guidance
The revised guidance (to be read alongside the DC Code of Practice) details how the Regulator expects trustees to fulfil their duties regarding stewardship and on the scope of financially material considerations.
The Regulator is keen to emphasise that trustees should aim to produce for members an informative report. The Guidance provides practical tips on how to formulate trustee policy on materially financial considerations. It highlights, for example, how a relatively minor negative financial factor for the default fund may have an impact on a very high proportion of the scheme membership and may therefore be of material trustee concern.
It also explains factors which may be considered non-financial and gives as an example members’ potential ethical concerns about some individual investments held by the scheme.
Stewardship in the context of a pension scheme includes activities such as monitoring assets and service providers. Trustees are encouraged to become familiar with their managers’ stewardship policies.
Contents of the Implementation Statement
This is intended to illustrate to members how trustees have followed and acted upon the aims set out in their SIP, and should detail any divergence of decisions from those aims. The Regulator says an Implementation Statement should cover:
- the relevance of investment beliefs underpinning voting and engagement policies;
- details of any sub-committees dedicated to the process;
- lessons learned in engaging with specific assets on specific issues; and
- the relative effectiveness of those actions in achieving the SIP aims.
Actions for trustees
Trustees may wish to consider using the Regulator’s Guidance to help formulate policies on financially material and non-financial matters. They may also find it helpful to seek advice on how to formulate their policy on any rights attaching to investments. It is important to assess whether trustees are up to date in their investment skills training in accordance with the Regulator’s expectations and address any gaps in their knowledge. They may also wish to confirm with advisers when the overall investment performance was last reviewed, as well as ensuring that the scheme website is geared up to include the publication of the SIP and Implementation Statement by the required dates.