Pension scheme trustees will have to set out the extent to which they take account of members’ views on non-financial matters in the development of their investment strategy under proposals put forward by the UK government today.

Non-financial matters would include – but not be limited to – matters of ethics, social impact and “present and future quality of life”.

Trustees would have to produce a statement explaining the extent to which these views would be taken into account when they prepare or revise the scheme’s statement of investment principles (SIP).

The proposed requirement was revealed as part of the launch of a keenly anticipated consultation from the Department for Work and Pensions (DWP) on trustees’ duties.

The government has also proposed amending the investment regulations for occupational pension schemes to require trustees to set out how they take account of financially material considerations, including those stemming from environmental, social and corporate governance (ESG) matters such as climate change.

The current investment regulations require trustees to report their policy on the extent to which, if at all, they take into account “social, environmental or ethical matters in relation to investments”. In 2014 the Law Commission said this wording was unhelpful and the government today said it had proven to be “confusing and misleading”.

Lawyers welcomed the government’s proposed rewording, saying it should help clear up any confusion in trustees’ minds – even though legally they were already obliged to take account of financially material ESG issues.

Esther McVey, Secretary of State for Work and Pensions

Esther McVey, Secretary of State for Work and Pensions

A more significant change, however, according to Stuart O’Brien, partner at Sackers, lay in the proposed requirement for trustees of defined contribution (DC) schemes to annually review and report on how they take account of financially material ESG factors. 

“This is really going to push this onto the agendas of DC trustees in a way that it perhaps hasn’t been to date,” he said.

‘Member view statement’ requirement raises concerns  

Lawyers expressed concern about the requirement for a statement on members’ views, however.

Rosalind Connor, partner at ARC Pensions Law, said the requirement would encourage people to think that trustees need to take into account members’ views as a matter of law.

“It is a great misunderstanding a lot of people have that trustees have to do what the members want them to do, and that isn’t the case under trust law,” she said.

Sackers’ O’Brien said the requirement to have a statement about members’ views was probably the least helpful of the regulatory changes the government had proposed.

“My concern is that this will be the bit everyone latches onto and there’ll be some rush to do member surveys on all sorts of things without thinking about what trustees are actually going to do on the back of it,” he said. “I think it could get really confusing.”

The government’s press release about the changes was misleading, O’Brien added.

In the release – headlined ‘Billions invested by pension schemes to be used for social good under new regulations’ – secretary of state for work and pensions Esther McVey said: “These new regulations will empower savers all over Britain, ensuring that their voices are heard when their savings are invested.”

Another change proposed by the government is that trustees should be obliged to set out their policies in relation to the stewardship of their investments, including engagement with investee firms.

Under the current regulations trustees are only required to report their policy, if they have one, on the exercise of voting rights.

The consultation runs until 16 July 2018. 

The main proposals 

Trustees must update or prepare their statement of investment principles (SIP) to set out:

  • how they take account of financially material considerations, including (but not limited to) those arising from environmental, social and corporate governance (ESG) considerations, including climate change;
  • policies in relation to the stewardship of the investments, including engagement with investee firms and the exercise of voting rights.

When trustees next prepare or update their SIP they must prepare a “statement on members’ views”, setting out the extent to which they will take account of the views which, in their opinion, members hold, in relation to the matters covered in the SIP.

From 2020, trustees of defined contribution schemes will have to produce an implementation report setting out how they acted on the principles set out in the SIP in the previous year.