Trustees of both defined benefit and defined contribution pension schemes should be aware of new requirements in relation to investment and disclosure. The requirements implement an EU Directive, known as the Shareholder Rights Directive (SRD II), as it applies to occupational pension schemes. SRD II aims to promote effective stewardship and long-term investment decision-making.
Trustees should note that these requirements apply in addition to the requirements announced last year – see our September 2018 client alert for details. Taken together, the new requirements represent a significant extension of what must be included in the statement of investment principles (SIP), as well as more onerous disclosure and reporting obligations.
What are the new requirements?
Statement of investment principles
By 1 October 2020, trustees will be required to update their SIP to include a policy on their arrangements with asset managers. This will need to set out (or explain the reasons why any of these matters are not set out):
- how the arrangements incentivise the asset managers to align their investment strategy and decisions with the trustees’ policies;
- how the arrangements incentivise the asset managers to make decisions based on assessments about medium to long-term financial and non-financial performance of an issuer of debt or equity, and to engage with issuers of debt or equity in order to improve their performance in the medium to long-term;
- how the method of (and time horizon for) evaluating the asset manager’s performance and the remuneration for asset management services are in line with the trustees’ policies;
- how the trustees monitor portfolio turnover costs incurred by the asset manager, and how they define and monitor targeted portfolio turnover or turnover range; and
- the duration of the arrangements with the asset managers.
From 1 October 2021, trustees will be required to produce an annual implementation statement. This will need to:
- set out the extent to which, in the opinion of the trustees, the policy on the trustees’ arrangements with their asset managers has been followed during the year; and
- describe the voting behaviour by, or on behalf of, trustees (including the most significant votes cast by trustees or on their behalf) during the year and state any use of the services of a proxy voter during that year.
By 1 October 2020, trustees will be required to make the SIP available free of charge on a website. By 1 October 2021, the implementation statement will also need to be made available free of charge on a website.
What action is required?
Trustees will need to update their SIP by 1 October 2020 to take account of the new requirements. They will then need to publish the updated SIP online. From 1 October 2021, trustees will also need to produce and publish an annual implementation statement.