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IPE special report May 2018

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Industry urges caution as UK government mulls ESG rules for trustees

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Industry experts have broadly welcomed the move by the UK government to consult on the legal duties of trustees with regard to environmental, social and governance (ESG) risks, but warned any prospective rules or regulations must not be overly prescriptive.

In a written statement published on the Department for Work and Pensions’ (DWP) website on Tuesday, Guy Opperman, the UK pensions minister, confirmed the results of the consultation process would be published in June. 

He said its purpose was to “clarify the legal duty of trustees of occupational pension schemes to take account of environmental, social and governance risks, among others, wherever these are financially material”.

Tim Middleton, technical consultant at the Pensions Management Institute, which represents employee benefit and retirement savings professionals, said the move was “a very positive development”.

He added: “Considerations for ESG will result in better outcomes for members as the kind of companies that trustee boards [opt for] will be more soundly managed and more successful over the long term.

Guy Opperman MP

Credit: Chris McAndrew

Guy Opperman, undersecretary for pensions and financial inclusion

“From the outset there was scope for trustees to comment on the extent to which ethical issues would form part of the investment decisions.

“I would suggest that going forward we would see a more sophisticated approach to ESG.”

Tom McPhail, head of retirement policy at FTSE 100-listed broker Hargreaves Lansdown, argued that Opperman’s initiative showed that the role of trustees in delivering governance and good outcomes for pension scheme investors was “clearly at the forefront of DWP thinking at the moment”.

There were two main factors currently underpinning thinking around ESG issues, he said. “It is partly about the assessment of investment risk… and the other is that this is about good social policy. Should we be looking to the trustees of pension schemes to act as agents for social good, putting pressure on companies to improve their ESG performance?”

However, Alan Pickering, chairman of BESTrustees, an independent trustee firm, warned of “applying prescriptive rules on how trustees should fulfil their fiduciary duties”.

While he said he was positive about ESG, he added: “Prescription – even when it is benign prescription – has unintended consequences. Politicians should go with the flow and avoid legislating at a time when pension scheme governance is taking us in the right direction.”

DC schemes were to grow rapidly in the coming years and DB schemes were likely to either consolidate or transfer assets and liabilities to the insurance sector, Pickering said. 

“Trustees of large schemes are ideally placed to secure the right support needed to fulfil their ESG aspirations,” he said. “Political encouragement yes, prescriptive legislation no.”

ESG and ethical considerations have been part of occupational pension trustees’ obligations following the 1995 Pensions Act and further investment regulations implemented in 2005.

A statement of investment principles by the trustees must detail “the extent… to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments”, according to the 2005 Occupational Pension Schemes (Investment) Regulations Act.

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