The UK’s pension regulator (TPR) has released a revised code of practice, and supporting guides, for trustees of defined contribution (DC) pension schemes, with its guidance on the consideration of environmental, social and governance (ESG) factors one of the aspects welcomed.
The new code is effective as of today and is aimed at trustees of occupational trust-based schemes that offer some form of money purchase benefits.
There were around 36,000 in the UK as at March 2016, including hybrid schemes, TPR noted.
Andrew Warwick-Thompson, executive director for regulatory policy at the regulator, said: “Millions of people are being auto-enrolled into DC pensions, so it’s essential that schemes are being managed to a high standard.
“In revising the code, we have responded to calls from the pensions industry to shorten and simplify it, with an increased focus on legislative requirements.”
The release of the code comes after the regulator launched a wide-ranging consultation on trustee standards and governance, and suggested “sub-standard” pension funds should be forced to merge with others.
The code sets out the standards TPR expects trustees to meet when complying with the law, with accompanying guides providing information on how these can be met in practice.
The new code was put before Parliament in May after a consultation.
It updates the code from 2013 to reflect recent legislation, including 2015 regulations on charges and governance for occupational pension schemes, TPR’s experience in regulating DC schemes, and evolved market practice.
The code is set out in six sections, addressing areas such as scheme management skills, investment governance and “value for members”.
Responsible investment organisations welcomed TPR’s comments on how ESG factors should be taken into account as part of investment governance.
ESG campaign organisation ShareAction said the code and supporting guides improved guidance for trustees on ESG, while the UK Sustainable Investment and Finance Association (UKSIF) said TPR’s important clarification was a “huge boost for responsible investment in the UK”.
In the code itself, TPR states that, “when setting investment strategies, we expect trustee boards to take account of risks affecting the long-term financial sustainability of the investments”.
The accompanying guide elaborates on this and other aspects of investment governance, such as fiduciary management.
It summarises the Law Commission’s guidance on how trustees should consider financial and non-financial factors, and gives examples of risks that could affect DC schemes’ investments over the long term, such as those relating to climate change or “unsustainable” business practices.
In this guide, TPR states: “You should bear in mind that most investments in DC schemes are long term and are therefore exposed to the longer-term financial risks.”
UKSIF said the regulator’s guidance “represents the first time the Law Commission’s review has been reflected in regulation or legislation since it was published in 2014”.
In November last year, the UK government decided against changing the law on trustees’ fiduciary duties following the Law Commission’s suggestions the year before.
Rachel Howarth, policy officer at ShareAction, said TPR’s decision to include the guidance was “extremely encouraging”.
“The guidance for pension trustees is clear,” she added. “They have a mandate to consider all risks that could affect the financial performance of their funds, and this includes ESG risks.”
Care urged on fiduciary management
Other industry experts highlighted the importance the updated code places on investment governance and administration, or seeking legal advice, particularly in investment matters.
Rona Train, partner at Hyman Robertson, drew attention to the regulator’s guidance on fiduciary management, saying it suggested it was “keen to head off similar issues in the DC world to those we have seen in DB”, where many trustees have appointed their existing investment consultant as the fiduciary manager without considering other providers.
In its guide supporting the section in the code on investment governance, the regulator said: “Note that the skills a successful investment consultant needs are not exactly the same as those a successful fiduciary manager needs.”
It also flagged the potential for conflicts of interest of the various parties involved in choosing a fiduciary manager, including the existing investment consultant and third-party advisers.
Hymans Robertson commented on the regulator’s guidance on trustees’ legal requirement to assess “value for members”, arguing that wider industry comparisons were needed to help them do this effectively.
Train noted that TPR had called on large schemes to “use information-sharing through their consultants and professional trustees as one way of assessing value”.