Trustees’ investment duties: Government consultation
- by Carol Storey
- in General
- posted June 24, 2018
Last week the Department for Work & Pensions (DWP) released their consultation on clarifying and strengthening trustees’ investment duties. It follows their final response to the Law Commission’s report on pension funds and social impact investing.
Why are the DWP consulting?
In the past, fiduciary duty has been seen by some trustees as a barrier to social impact investing or taking into account environmental, social and governance (ESG) factors in their investment decisions. However, the Law Commission found “that the law is flexible enough to allow some social investment by pension funds. The barriers to social investment by pension funds…were, in most cases, structural and behavioural rather than legal or regulatory”.
The Law Commission also advised that trustees could benefit from greater clarity in legislation around how to take relevant financially-material considerations into account, including ESG factors and stewardship responsibilities.
The DWP consultation addresses this second point rather than focusing specifically on social impact investing. Its worth noting that the consultation proposals do not require trustees to explicitly set out their policies in relation to social impact investment (which is addressed in question 4 of the consultation – see below).
What are the aims of the proposals?
The proposed regulations aim to ‘reassure’ trustees that they can (and should):
- take account of financially material risks, including those that stem from ‘broader’ risks
- engage in the full range of stewardship activities (not just voting) associated with holding investments in members’ best interests
- agree an approach to the extent members’ concerns are taken into account
- use the SIP as a “real, effective and regularly-reviewed guide to investment strategy and not as a generic ‘box-ticking’ document”.
What are the proposals not trying to do?
The consultation states that the Government is not seeking to direct trustees to invest in line with scheme members’ wishes or in line with Government’s policy objectives.
When is the consultation period?
The consultation period begins on 18 June 2018 and runs until 16 July 2018. The Government aims to publish its response to the consultation 12 weeks later (around October time).
Who is impacted by the proposals?
Trustees and (indirectly) members of pension schemes.
Note that the consultation applies to occupational pension schemes only – typically those that have been set up by the employer under a trust with a set of trustees. And there are a few exceptions e.g. very small schemes. The proposed regulations won’t apply to personal pension arrangements with insurers that may have been set up either by the employer or individual. (Note that policy changes for these types of schemes are being considered by the Financial Conduct Authority and they intend to consult next year.)
What are the proposals?
Short version below. See consultation for full details.
All occupational pension schemes (subject to a few exceptions)
By 1 October 2019, trustees required to update their Statement of Investment Principles (SIP) to set out:
- how financially-material considerations are taken into account (including ESG and climate change)
- their stewardship policies (e.g. engagement with firms the scheme is invested in, how they exercise voting rights, etc).
For the next revision of the SIP on or after 1 Oct 2019, trustees are required to:
- prepare a statement on how members’ views are taken into account.
Additional requirements for defined contribution (DC) schemes or those with a mix of DB and DC benefits (unless these are AVCs)
By 1 October 2019, trustees also required to:
- update the default strategy to take account of financially-material considerations (including ESG and climate change)
- publish SIP online.
By 1 October 2020, trustees required to:
- produce and publish implementation report online which sets out how they acted on principles in SIP.
What is being asked in the consultation?
If you’re interested, I’ve outlined the consultation questions below:
- 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. a) Do you agree with our proposals? b) Do you agree that the draft Regulations meet the policy intent?
- 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? b) Do the draft Regulations meet the policy intent?
- 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? b) Do the draft Regulations meet the policy intent?
- 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 thispoint?
- 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? b) Do the draft Regulations meet the policy intent?
- When trustees of relevant schemes produce their annual report, we propose 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? b) Do the draft Regulations meet the policy intent?
- 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? b) Do the draft Regulations meet the policy intent?
- Do you have any comments on the business burdens and benefits, and wider non-monetised impacts we have estimated in the draft impact assessment?
- Do you have any other comments on our policy proposals, or on the draft Regulations which seek to achieve them?
- Do you agree that the revised Statutory Guidance clearly explains what is expected of trustees in meeting their duty to publish the SIP, implementation statement, and statement of members’ views?
- 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?