Summary
The Government has consulted on amendments to trustees’ duties in relation to pension scheme investment. The consultation includes draft regulations that seek to introduce new requirements in relation to Statements of Investment Principles.
Background
The 2012 Review of UK Equity Markets and Long-Term Decision Making, carried out by John Kay, recommended that the Law Commission be asked to review the legal concept of fiduciary duty in relation to investment, to address uncertainties and misunderstandings on the part of trustees and their advisers.
The Law Commission reported in July 2014, explaining the nature of fiduciary and other duties to act in the best interests of savers, and concluded that trustees should take into account factors which are financially material to the performance of an investment, whatever their source. It carried out a subsequent review of social investment by pension funds, in 2016, and recommended some changes to legislation to remove perceived barriers to such investment.
The Law Commission made clear that trustees can take account of scheme members’ views, subject to two criteria being met:
- trustees should have good reason to think the scheme members hold the concern and
- the decision should not involve significant financial detriment.
They noted, however, that trustees are not obliged to take account of these non-financial factors.
Research that has been carried out since has suggested some confusion among trustees regarding Environmental, Social and Governance (“ESG”) issues. Many trustees see ESG as being a voluntary opportunity to “do some good” which might detract from their principal duty to seek financial returns on their investment. However, they do not consider the risks to future financial returns caused by, for instance, climate change.
New requirements
The Government proposes that, when preparing or revising their Statement of Investment Principles (“SIP”), trustees should:
- set out how they take account of financially material considerations, including (but not limited to) those arising from ESG considerations, including climate change,
- set out their policies in relation to the stewardship of the investments, including engagement with investee firms and the exercise of their voting rights, and
- prepare a separate “statement on members’ views”, explaining how they will take account of views they believe members to hold in relation to the matters covered in the SIP.
In relation to most schemes that offer money purchase benefits trustees should:
- publish their SIP on a publicly-available website – and inform scheme members in their annual benefit statement how they can access the SIP – and
- update their default investment strategy to set out how they take account of financially material considerations, including (but not limited to) those arising from ESG risks including climate change.
The draft regulations provide also that, a year later, trustees should publish a statement explaining how they have implemented the principles described in their SIP (schemes with money purchase benefits only) and taken account of members’ views (all schemes).
As at present, defined benefit schemes with fewer than 100 members will be exempt from the new requirements.
The consultation makes clear that Government is not seeking to direct trustees to invest in line with scheme members’ wishes, or in line with Government’s policy objectives, but respects trustees’ responsibility for their investment policy.
Timing
If the draft Regulations are laid in Autumn 2018, the Government proposes to bring the measures into force on 1 October 2019. However, it is possible that the regulations may not be laid until early 2019, in which case most provisions would come into force on 6 April 2020.