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UK – New regulations and response to consultation clarifying and strengthening trustees’ investment duties published

United Kingdom
14.11.18
3
Written by
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Following consultation earlier this year, the UK Department for Work and Pensions (DWP) has now published regulations broadening occupational pension trustees’ responsibilities to include a duty to report how they take account of environmental, social and governance risk factors in making investment decisions.

Introduction

On 11 September 2018, the DWP published a response to the consultation on changes to the Occupational Pension Schemes (Investment) Regulations 2005 (the ‘2005 Regulations’) together with a final version of the regulations, now called the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018 (the ‘Regulations’).

Key points

From 1 October 2019, trustees will be required to set out, in their statement of investment principles (‘SIP’), how they take account of financially material considerations and stewardship.

The Regulations now make clear that the financially material considerations which trustees must consider when making their investment decisions include, but are not limited to, environmental, social and governance (‘ESG’) factors, including climate change.

Following consultation, the requirement to produce a separate statement on members views has been removed and replaced with an optional policy on non-financial matters, including not only members’ ethical concerns but also social and environmental impact matters and quality of life considerations.

‘Relevant schemes’ (broadly schemes offering defined contribution, or DC benefits) will be required to publish the SIP on a website and, on and from 1 October 2020, produce and publish an implementation statement setting out how they have implemented their investment policies and explaining and giving reasons for any change made to them.

Background

For the background to these changes, the current SIP requirements and details of the June 2018 consultation, please consult our previous update, ‘Consultation opened on strengthening occupational trustees’ investment duties’.

SIP – on and from 1 October 2019

Before 1 October 2019, trustees will have to update or prepare their SIP to set out their policies in relation to:

  • ‘Financially material considerations’ over the ‘appropriate time horizon’ of the investments including how those considerations are taken into account in the selection, retention and realisation of investments.
  • The extent (if at all) to which ‘non-financial matters’ are taken into account in the selection, retention and realisation of investments.
  • Undertaking engagement activities in respect of investments (stewardship). The new definition of ‘financially material considerations’ also clarifies that these include (but are not limited to) ESG considerations (including, but not limited to, climate change), ‘which trustees of the trust scheme consider financially material’.

 

Following industry response to the consultation, the DWP has amended the original proposal and introduced a requirement for schemes to have a policy in relation to financially material considerations over the ‘appropriate time horizon’. This is defined as the length of time that trustees consider is needed for the funding of future benefits by the investments of the scheme. The length of time is intended to refer to the scheme (and not the duration of individual investments) and to prompt schemes that are approaching buy-out or wind-up to consider financially material short-term risks, whilst encouraging other schemes to also look towards the longer term in a way which reflects the demographics of members and beneficiaries.

The new definition of ‘financially material considerations’ also clarifies that these include (but are not limited to) ESG considerations (including, but not limited to, climate change), ‘which trustees of the trust scheme consider financially material’. Trustees also have the option of including a policy on ‘non-financial matters’, including not only members’ ethical concerns but also social and environmental impact matters and quality of life considerations.

Disclosure requirements for relevant schemes

In addition to the SIP requirements above, before 1 October 2019, trustees of relevant schemes (broadly schemes offering DC benefits):

  • with 100 or more members are required to state a policy in relation to the stewardship of their scheme’s investments in their default investment strategy;
  • will be required to publish their SIP on a publicly available website and inform scheme members of its availability in their annual benefit statement.

 

The Regulations extend the stewardship requirement to now include trustees of relevant schemes with 100 or more members. The DWP explains the redrafting from the consultation proposal is to address any confusion over the expectation of stewardship in relation to investments which make up the default arrangements and close the loophole through which wholly-insured relevant schemes did not need to produce a stewardship policy.

From 1 October 2020, trustees of relevant schemes will be required to:

  • produce an implementation report setting out how they acted on the principles set out in the SIP;
  • publish that implementation report online in the same way as the SIP and inform members of its availability in their annual benefit statement.

 

The introduction of the requirement to produce and publish an implementation report is timed to ensure that trustees will not be required to report on the implementation of a SIP which has been produced under the current requirements.

The DWP has published related guidance for occupational pension scheme trustees and managers providing information on disclosure and administration regulations. The Pensions Regulator is due to produce high-level guidance on the key changes by the end of November 2018.

Next steps

We recommend trustees begin preparations in relation to the above requirements sooner rather than later to meet the first deadline of 1 October 2019.

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