Pension trustees: clarifying and strengthening investment duties


On 18 June 2018, the DWP published a consultation to seek views on changes to the Occupational Pension Schemes (Investment) Regulations 2005 (“the Investment Regulations”) which are aimed at “clarifying and strengthening” trustees’ investment duties.

Please note that we have not responded to all the questions in the consultation.

Question 1

We propose that the draft Regulations come into force approximately 1 year after laying, with the exception of the implementation report, which would come into force approximately 2 years after laying.

Do you agree with our proposals?

Yes, we agree.

Do you agree that the draft Regulations meet the policy intent?

Yes, we agree.

Question 2 – We propose to require all trustees of all schemes which are obliged to produce a SIP to state their policy in relation to financially material considerations including, but not limited to, those resulting from environmental, social and governance considerations, including climate change.

(a)      Do you agree with the policy proposal?

We agree that, despite the Pensions Regulator’s guidance, there is confusion among trustees as to when it is appropriate for them to take ESG considerations into account in relation to the scheme’s investments. We therefore agree that it is appropriate to amend the legislation to clarify the position.

Further, we appreciate the reasons for making specific reference to climate change and do not disagree with this.

(b)      Do the draft Regulations meet the policy intent?

We agree with the change in the wording from “social, environmental or ethical” to environmental, social and governance (“ESG”). Not only is ESG now a term of art which is widely understood without the need for definition, but also it does not include ethical considerations. The removal of “ethical” is helpful as such considerations, in contrast to ESG factors, are less likely to constitute a financial factor for trustees’ investment decisions.

Defining “financially material considerations” as including, but not being limited to, ESG considerations (including climate change) is unnecessary and may go too far. While ESG factors will often be financially material, this may not always be the case. The wording of the definition does not allow for this, rather it indicates that they should always be included. This could lead trustees to a new misconception that ESG factors will always be financially material.

Further, defining “financially material considerations” in this way may also lead to trustees fulfilling this new requirement by providing a long list of generic considerations that might affect the scheme’s investments.

In our view, the policy objective could be met by requiring trustees to state their policy in relation to ESG and how it is taken into account in the selection, retention and realisation of investments. This would prevent lists of, potentially immaterial, financial considerations being provided, ensure that ESG information is given and allow trustees to explain how it is factored into their particular investment discussions. Further, it would also meet the requirement in Article 30 of IORP II for IORPs to have a policy on ESG.

We also note that the Regulations already require trustees to consider “risks” more broadly at Regulation 3(b)(iii), so we do not think there is any need for a catch-all term here in circumstances where more directed language may have more impact.

Alternatively, we would suggest the drafting is amended to make clear that trustees must only take into account ESG factors which they consider to be financially material.

Question 3 – When trustees prepare or revise a SIP, we propose that they should be required to prepare a statement, setting out how they will take account of scheme members’ views.

(a)      Do you agree with the policy proposal?

We agree that trustees should engage appropriately with their members in relation to their investment policies but have several reservations with this proposal, particularly in relation to defined benefit (“DB”) schemes:

  • While we do not consider this to be the intention, this obligation could be interpreted as a requirement for trustees to seek members’ views (via surveys or forums) on non-financial matters. This would divert both trustees’ attention and resource.
  • Members may, albeit incorrectly, interpret this requirement as an indication that their views may, or even should, be taken into account by the trustees when devising their investment strategy. As, in most cases, this will not be appropriate (the threshold expounded by the Law Commission for taking into account non-financial matters is a high one) this could lead to much confusion and, ultimately, perhaps members disengaging.
  • Given the limited circumstances in which it will be appropriate for trustees to take members’ views into account and the limited time available to trustees generally to make their deliberations, we query whether this is a helpful addition to the process.

In relation to defined contribution (“DC”) schemes, trustees should ensure members are provided with an appropriate choice of self-select funds, meaning their views should already be a consideration. Member views are also an essential factor in any overall assessment of the scheme’s value to members. However, even in these instances member views will still not be determinative and, as noted above, we are concerned that requiring the proposed statement would indicate the opposite.

In addition, we note that the European Commission has decided not to take forward a proposal to take account of member views.

We would consider it preferable to use guidance to explore how DC schemes might best obtain the views of their members and take these into account when determining suitable self-select investment options and assessing value.

(a)      Do the draft Regulations meet the policy intent?

As explained above, we consider that the drafting goes beyond member engagement.

Question 4 – Do you agree with our proposal not to require trustees to state a policy in relation to social impact investment? If not, what change in legislation would you propose, and how would you address this risk of trustee confusion on this point?

We strongly agree with the proposal not to require trustees to state a policy in relation to social impact investment. Introducing such a requirement alongside the changes to the SIP would cause confusion.

For a detailed discussion of the barriers to social investment, please see our note (appended to our covering email).

Question 5 – We propose that trustees should be required to include their policy in relation to stewardship of the investments, (including monitoring, engagement and voting) in the SIP.

(a)      Do you agree with the policy proposal?

We generally agree with the policy proposal.

(b)      Do the draft Regulations meet the policy intent?

The relevant definitions in the draft Regulations include more detailed lists than other provisions in the Regulations. Is the intention here to prescribe a minimum list of issues that must be covered, or is it just intended to be a helpful illustrative list, in which case this would be better covered in regulatory guidance.

Question 6 – When trustees of relevant schemes produce their annual report, we proposed that they should be required to:

–       prepare a statement setting out how they have implemented the policies in the SIP, and explaining and giving reasons for any change made to the SIP and

–       include this implementation statement and the latest statement outlining how trustees will take account of members’ views in the annual report.

(a)      Do you agree with the policy proposal?

Yes, we agree with the proposal.

(b)      Do the draft Regulations meet the policy intent?

Yes the draft Regulations meet the policy intent.

Question 7 – We propose that trustees of relevant schemes should be required to publish the SIP, the implementation report and the statement setting out how they will take account of members’ views online and inform members of this in the annual benefits statement.

(a)      Do you agree with the policy proposal?

Yes, we agree with the policy proposal.

(b)      Do the draft Regulations meet the policy intent?

Yes, the draft Regulations meet the policy intent.

Question 11 – What evidence or views do you have of how well the other requirements in the SIP are working? What areas for further consideration and possible future change would you suggest?

It would be helpful if the SIP requirements for DB and DC schemes could be separated so that they can acknowledge the different approaches that are required.