UK Pensions – New investment and disclosure obligations
Trustees of pension schemes have been grappling with the question of how they should take account of environmental, social and governance (ESG) factors in their investment decisions. Following a consultation earlier this year, the government has published a response
confirming that trustees will be subject to new requirements from 1 October 2019. They will be required to consider the impact on their investments of ESG factors, explain the extent to which they take account of members’ views and set out their policies on stewardship (described in the response as the activity of investors engaging with the managers of the underlying investments in order to promote the investments’ long term success). In addition, trustees of defined contribution (DC) schemes will be subject to new reporting and disclosure obligations.
The government’s aim is to dispel confusion about the extent to which trustees can take account of ESG factors, and give schemes the confidence (if they so choose) to begin or increase the allocation of capital to investment opportunities such as unlisted firms, green finance and social impact investment. We think the new requirements will support this aim, providing a clear framework for trustees to take account of financial and (if they wish) non-financial factors in their investment decisions. However, trustees will need to put more time and thought into preparing their statement of investment principles (SIP), and trustees of DC schemes will face more onerous reporting and disclosure obligations.
What are the new requirements?
Statement of investment principles
By 1 October 2019, trustees will be required to update their SIP to set out:
- how they take account of financially material considerations over the appropriate time horizon of the investments, including (but not limited to) ESG considerations, including climate change (this will replace the existing requirement to report their policy on the extent (if at all) to which social, environmental or ethical considerations are taken into account);
- the extent (if at all) to which members’ views on non-financial matters are taken into account, including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life; and
- their policies in relation to the stewardship of investments, including the exercise of rights (including voting rights) attaching to the investments and undertaking engagement activities in respect of the investments (this will replace the current requirement to report their policy (if any) in relation to the exercise of rights attaching to the investments).
DC schemes will need to update their default strategy to set out how they take account of financially material considerations as mentioned above, and the extent (if at all) to which members’ views on non-financial matters are taken into account. If the scheme has 100 or more members, the default strategy will also need to be updated to set out their policies on stewardship.
In relation to stewardship, the government recognises that smaller schemes will have less direct influence over firms in which they invest, but maintains that a stewardship policy is still viable, even if it is limited to the recruitment, monitoring and where necessary switching of investment managers.
Trustees will not be required to produce a separate statement on members’ views, as originally proposed, following concerns raised by respondents that trustees would need to survey their members and act on members’ views. The government has confirmed that this is not the intention.
From 1 October 2020, trustees of DC schemes will be required to produce an annual implementation statement setting out the extent to which the SIP has been followed during the scheme year and explaining any changes made to the SIP during that year.
From 1 October 2019 (or 1 October 2020 in relation to the implementation statement), trustees of DC schemes will be required to:
- publish the SIP and the implementation statement on a website which is publicly available and free of charge;
- and inform scheme members of their availability via the annual benefit statement.
The government has published updated statutory guidance, covering how trustees should meet the requirements to publish the SIP and the implementation statement.
What action should trustees be taking?
Trustees will need to update their SIP and their default strategy by 1 October 2019 to take account of the new requirements. The Pensions Regulator is expected to publish further guidance by the end of November 2018, so it would be worth waiting for this before starting work on updating the SIP.
Trustees of DC schemes will then need to publish the updated SIP online and inform members of its availability via the annual benefit statement. From 1 October 2020, they will also need to produce and publish an annual implementation statement.
For more information, please speak to your usual Linklaters contact.