The UK government has rowed back on a proposal that trustees of occupational pension schemes be required to set out the extent to which they take account of members’ views on non-financial matters when developing their investment strategy.
The Department for Work and Pensions (DWP) had proposed this requirement in a June consultation on changes to the investment regulations for occupational trust-based pension schemes, which had the overall aim of “clarifying and strengthening” trustees’ investment duties in relation to environmental, social and corporate governance (ESG) matters.
The proposed requirement for a separate statement on members’ views was controversial. The Pensions and Lifetime Savings Association (PLSA) opposed it, and the DWP in its consultation response today said most respondents had not supported it.
Writing in the foreword to the government’s consultation response, pensions minister Guy Opperman said the government had not wanted to give the impression that trustees were obliged to survey pension scheme members or act on their views about how their scheme is invested.
“Nevertheless,” he added, “in line with the conclusions reached by the Law Commission, I do believe it is possible and appropriate for trustees to take account of members’ views in certain circumstances.
“I therefore wish to offer clarity to trustees that they can do so; and offer clarity to members of the circumstances in which their view might be considered.”
In the final investment regulations, the requirement for a statement on members’ views has been replaced with what the government referred to as an “optional policy” on non-financial factors. These include members’ ethical concerns and their views on social and environmental impact matters and quality of life considerations. Trustees will be required to outline their policy on the extent – “if at all” – they such matters into account.
Stuart O’Brien, partner at law firm Sackers, said this was “a much more sensible position”.
“It allows trustees to focus on the financial reasons for adopting an ESG strategy and avoids the introduction of potentially confusing obligations on trustees to consider purely ethical considerations.”
Final rules welcomed
In most other aspects, the government has retained the rules it originally proposed.
Under the final investment regulations, which were laid before parliament today, trustees will need to have updated their statement of investment principles (SIP) by October 2019 with a policy on how they take account of financially material ESG considerations, including specifically climate change, “over the appropriate time horizon of the investments”.
They also need to outline policies in relation to engagement with investee companies and the exercise of voting rights. Similar disclosures will be required in respect of schemes’ default investment strategy.
“The regulations are a big step forward in shifting the culture and practice of the UK pensions sector”
Catherine Howarth, chief executive of ShareAction
From 2020 trustees of “relevant schemes” – broadly, defined contribution schemes, subject to a few exceptions – will have to produce an implementation report setting out how they acted on the principles set out in the SIP the previous year.
The new regulations were welcomed by the PLSA as “providing some much-needed clarity for pension schemes on ESG issues”.
“As long term investors, it’s important that pension schemes are considering ESG risks, such as climate change, and the new regulations should help trustees understand when an issue is a financial consideration or an ethical one,” said Nigel Peaple, director of policy and research at the pensions trade body.
The UK Sustainable Investment and Finance Association (UKSIF) said the rule change would be warmly welcome by the sustainable and responsible investment sector.
“UKSIF has been working hard for this result over the past few years so we couldn’t be more delighted,” said Simon Howard, the association’s chief executive.
“As UKSIF members already know ESG factors are often financially material and consideration helps to mitigate risk and enhance value – these new regulations will help bring those still unclear about the financial benefits of ESG up to speed and help to put mainstream financial services on a much more sustainable footing.”
At responsible investment campaign organisation ShareAction, chief executive Catherine Howarth hailed the regulations as “a big step forward in shifting the culture and practice of the UK pensions sector”.