The government has published its final response to the Law Commission’s report on pension funds and social investment, together with a consultation seeking views on draft regulations. Under the proposals, trustees will be required to consider the impact on their investments of environmental, social and governance (ESG) factors, set out their policies on stewardship and explain how they take account of members’ views. In addition, trustees of defined contribution (DC) schemes will be subject to new reporting and disclosure obligations. The government’s aim is to dispel trustee confusion, and give schemes the confidence (if they so choose) to begin or increase the allocation of capital to investment opportunities such as unlisted firms, green finance and social impact investment.

If the changes go ahead as proposed, trustees are likely to find that more time and thought will need to go in to preparing their statement of investment principles (SIP). Trustees of DC schemes will also face more onerous reporting and disclosure obligations.

What is being proposed?

The consultation includes the following proposals:

Statements of investment principles

By 1 October 2019, trustees will be required to update or prepare their SIP to set out:

  • how they take account of financially material considerations, including (but not limited to) those arising from ESG considerations, including climate change (this will replace the existing requirement to report their policy on the extent (if at all) to which social, environmental or ethical considerations are taken into account); and
  • their policies in relation to the stewardship of the investments, including engagement with investee firms and the exercise of the voting rights associated with the investments (this will replace the current requirement to report their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments).
  • For smaller DC schemes which are not required to produce a SIP, the default strategy will need to be prepared or updated to set out how they take account of financially material considerations, including (but not limited to) those arising from ESG risks, including climate change.

Statement on members’ views

From 1 October 2019, when trustees next prepare or update their SIP, they will be required to prepare a separate “statement on members’ views”. This will need to explain the extent to which the views which, in the reasonable opinion of the trustees, members hold will be taken into account in preparing or updating the SIP. This requirement will apply alongside the existing requirements to obtain written financial advice from a suitably qualified person and consult with the employer before preparing or updating the SIP.

Implementation report

From 1 October 2020, trustees of DC schemes will be required to produce an implementation report setting out the extent to which the SIP has been followed during the scheme year and an explanation of any changes made to the SIP during that year.

Disclosure requirements

From 1 October 2019 (or 1 October 2020 in relation to the implementation report), trustees of DC schemes will be required to:

  • publish the SIP, the implementation report and the statement on members’ views on a website which is publicly available and free of charge (in the same way as the new cost and charges disclosure requirements – see here for details); and
  • inform scheme members of their availability via the annual benefit statement.

The government has published draft revised statutory guidance, covering how trustees should meet the requirements to publish the SIP, the implementation statement and the statement on members’ views.

What happens next?

The consultation closes on 16 July 2018. Subject to the outcome of the consultation, the government plans to lay the proposed regulations as soon as the Parliamentary timetable allows. The proposed coming into force dates outlined above assume that the regulations will be laid in autumn 2018.

Several other developments are expected in this area:

Pensions Regulator guidance

The Regulator is intending to produce guidance on how trustees’ investment strategies can include assets with long-term investment horizons, such as venture capital, infrastructure and other illiquid assets. It is expecting to publish this guidance before the end of the year.

New requirements for Independent Governance Committees (IGCs)

The FCA has published a press release confirming that it intends to consult on rule changes in the first quarter of 2019 requiring IGCs to report on their firm’s policies on:

  • evaluating ESG considerations, including climate change;
  • taking account of members’ ethical concerns; and
  • stewardship.

The FCA also intends to consult on introducing related guidance for providers of workplace personal pension schemes on considering financial factors (such as ESG risks and climate change) and non-financial factors (such as responding to members’ ethical concerns) when making investment decisions.

Finally, the FCA is intending to progress work on its permitted links rules (which restrict the classes of assets that unit-linked funds may hold and which are relevant where a DC scheme is invested via a platform) in the second half of 2018.