The Financial Reporting Council (FRC) is consulting on a Stewardship Code. This Code is intended to encourage better engagement between institutional investors (such as pension schemes) and their agents and the UK listed companies in which they invest.

The FRC’s objective is for the Code to be “adopted as the standard which institutional investors practising active engagement, and their agents should aspire to follow, and against which they should report”.

The Code, which was initially produced by the Institutional Shareholders’ Committee (ISC), is voluntary and is intended to operate on a “comply or explain” basis. The ISC may list investors that comply with the Code on its website.

The Financial Services Authority has also said that after the FRC’s consultation closes on 16 April 2010, it will consider introducing a “comply or explain” requirement for relevant investment management firms. The FRC comments that this would introduce mandatory requirements for such institutions.

The National Association of Pension Funds (NAPF) has published a guide to help pension funds apply and understand their obligations under the Code. The NAPF acknowledges that the Code is still under consultation but “believes that pension funds should begin now to consider how they should adapt to its requirements, as a stronger corporate governance culture will help to protect and enhance the value of their investments”. Its recommendations include the following:

  • pension scheme’s “policy statements could include a description of how responsible investing policies are incorporated into the overall investment policy, its place in the investment process and reporting procedures” and schemes “should state where they have chosen not to apply the Code, and explain the reasons”;
  • pension schemes “should not be expected to duplicate the work of their investment managers, but it is the trustees’ responsibility to ensure that sufficient time is given to overseeing their managers’ compliance with the agreed policies.”  


Pensions legislation already contains a limited specific provision on trustees’ role in engaging with companies in which they invest. The Investment Regulations 2005 require trustees to maintain a Statement of Investment Principles (SIPs) which, among other things, must set out “their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments.” The Occupational Pension Schemes (Disclosure of Information) Regulations 1996 also require trustees (or fund managers) to disclose in their annual report their compliance with these principles, give reasons for failure to comply and explain “what action, if any, it is proposed to take or has already been taken to remedy the position”.

The ISC/FRC’s Code is intended to be voluntary, so it will be for trustees to decide whether they choose to adopt it in their SIPs. Pension schemes that are long-term shareholders of a particular company will probably be most enthusiastic. In such cases, the pension scheme has a long-term interest in the company’s performance, rather than just short-term dividends.

Trustees may also wish to include their investment manager’s engagement with corporate governance as one factor for judging the performance of investment managers, and whether they take long term views on investments rather than short-term. If this principle is enshrined in the SIPs, then trustees may also be eager to ensure that the managers have complied with this. Section 34 of the Pensions Act 1995 says that “trustees are not responsible for the act or default of any fund manager in the exercise of any discretion delegated to him…if they have taken all such steps as are reasonable to satisfy themselves or the person who made the delegation on their behalf has taken all such steps as are reasonable to satisfy himself…that he is carrying out his work competently and complying with section 36”. Section 36 says that “trustees, or the fund manager to whom any discretion has been delegated under section 34, must exercise their powers of investment with a view to giving effect to the principles contained in the statement [ie the SIP]”. There may also be a specific provisions on this in the Investment Management Agreement.