Updates to investment regulation for pension schemes have come thick and fast in the last 12 months or so, and trustees could be forgiven for feeling a little punch drunk. No sooner has one policy been updated, than a further review and update is due.
Recent changes
By 1 October 2019 trustees of all occupation pension schemes (with very limited exceptions), were required to update their statements of investment principles (SIP), to include their policies on environmental, social and corporate governance (ESG) factors and stewardship. This requirement came pursuant to the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and
Disclosure) (Amendment and Modification) Regulations 2018 (the 2018 Regulations). The updates covered trustee policies on financially material considerations (including ESG and climate change), non-financial matters and stewardship.
DC trustees were also required to publish their SIP online.
Next in line – 1 October 2020
In the midst of reviewing and updating their SIPs for the 1 October 2019 deadline however, further regulations were introduced. The
Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations (the 2019 Regulations), were introduced in June 2019 to implement the Shareholder Rights Directive (SRDII) into UK law by the required deadline. The 2019 Regulations place additional disclosure and reporting obligations on DB and DC schemes. However, the cumulative effect of these when overlaid onto the 2018 Regulations is not straightforward, particularly in terms of working out what needs to be done by when. Trustees will need to take advice based on how their scheme year falls, and whether they have DB or DC benefits, or both.
The 2019 Regulations require both DB and DC schemes to provide additional information in their stewardship policy and set out their policy on arrangements with asset managers by 1 October 2020.
The aim of SRDII and the 2019 Regulations ultimately is to encourage investors, including occupational pension schemes, to adopt a more long-term focus in their investment strategies, and to adopt a greater role in holding companies in which they are invested to account on behalf of their beneficiaries. The 2019 Regulations recognise that for most trustees, engagement and voting activities will be undertaken on their behalf by the scheme’s appointed investment managers, and separately the Financial Conduct Authority (FCA) has introduced corresponding requirements on asset managers from 10 June 2019.
Annual reporting
The 2018 Regulations place further reporting and disclosure requirements on DC schemes, requiring them to produce and publish an implementation report setting out how they have acted on the principles set out in the SIP from 1 October 2020. This report, whilst not published until next year, will need to be based on data collected in the previous scheme year, so the clock may have already started ticking for some trustees.
The 2019 Regulations have extended both the requirement to publish their SIP online and an annual reporting requirement to DB trustees, although the scope of the implementation report will be more limited than for DC schemes.
Again, the timing will depend on the scheme year and the type of arrangement so trustees may need to start gathering data to report on sooner than they think.
Making an action plan
In our recent survey of over 100 pension scheme trustees and scheme managers, the overwhelming majority agreed that ESG and climate change issues are important to pension schemes however, over a third of respondents cited lack of time and resources to consider ESG fully as one of the main obstacles to achieving compliance. As ever, the most effective way to deal with a myriad of regulation within a relatively short time-frame is by careful planning and preparation.
Trustees should take the following three steps to prepare their schemes for compliance:
1. One size does not fit all - trustees are encouraged to speak with their advisers early to establish the timetable they will need to follow for their scheme and draw up an appropriate action plan.
2. Trustee education - the next 12 months will involve a fairly steep learning curve for trustees, who need to get to grips with new terminology and changes to the way they deal with asset managers. Reviewing investment strategy requires trustees to have a good understanding of investment-related matters to challenge their advisers. Reviewing investment strategy in the context of ESG, and the questions it requires to be asked of asset managers, necessitates specialist trustee knowledge and confidence in an area which has no easy answers.
3. Time is of the essence - boards will need to allocate sufficient time on their agendas to ensure they can address ESG compliance and meet regulatory deadlines, as well as move towards meaningful interactions with managers and reporting to members.
Stuart O’Brien
Partner, Sackers
