Hogan Lovells

Key Dates

Consultation response and final regulations issued on 11 September 2018.

A consultation paper with draft regulations were issued on 18 June 2018.

The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018/988 in force as detailed in each section of the summary above.


Summary

The DWP has issued final regulations and a response to consultation in relation to clarifying and strengthening trustees' investment duties. The regulations also concern the calculation of compensation from the Pension Protection Fund (PPF) where the member has pension attributable to a transfer in – please see the separate entry.

In relation to investment, the points to note include the following.

Statement of investment principles (SIP): policy in relation to financially material considerations

The requirements below will apply from 1 October 2019.

The SIP must cover the trustees' policy in relation to financially material considerations over the appropriate time horizon of the investments, including how those considerations are taken into account in the selection, retention and realisation of investments. This follows from the Law Commission's conclusions that, where environmental, social or governance risks or opportunities are financially material, trustees should take account of them.

The reference to the "appropriate time horizon of the investments" (defined as "the length of time that the trustees … consider is needed for the funding of future benefits by the investments of the scheme") was inserted following consultation. The DWP intends this to act as a prompt to schemes which are approaching buy-out or winding-up to consider short-term financially material risks, while schemes with a longer time horizon should consider financial considerations over the longer term, regardless of whether some of the portfolio is turned over more rapidly.

The reference to "financially material considerations" will replace the current requirement for the SIP to cover the extent (if at all) to which social, environmental or ethical considerations are taken into account.

"Financially material considerations" will include (but is not limited to) environmental, social and governance considerations (specifically including climate change), which the trustees consider financially material.

The consultation response explains that where concerns are not financially material, for example – concerns which are primarily ethical – trustees may only take the concerns into account where there is broad consensus. Where there are differing views around an investment issue, such as in relation to fossil fuels, trustees should focus exclusively on financially material risks and opportunities.

SIP: non-financial matters

The requirements below will come into force on 1 October 2019.

Following consultation, the proposed new requirement to prepare a separate "statement on members' views" when preparing or revising the SIP has been removed.

Instead, the SIP must cover the extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments. "Non-financial considerations" is defined as meaning the views of members and beneficiaries including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life.

The consultation response confirms that trustees are not required to invest in line with members' wishes, or in accordance with government policy objectives, nor are they required to survey members' views. Following the Law Commission's approach, the government considers that the ability to take account of non-financial factors such as members' wishes is permissive and may only be done when a two stage test is met:

SIP: stewardship and engagement

The requirements below come into force on 1 October 2019.

The SIP will have to cover the trustees' policy on undertaking engagement activities in respect of their investments, including how and when the trustees would monitor and engage with "relevant persons" about "relevant matters".

For this purpose, a "relevant person" includes an investee company, an investment manager, a shareholder of an investee company and, following consultation, an issuer or a holder of debt. "Relevant matters" will include the performance, strategy, risks, social and environmental impact and corporate governance of an investee company or issuer of debt.

The consultation response acknowledges that smaller schemes will have less direct influence over companies in which they invest, but it considers that a stewardship policy is still feasible, even if it is limited to the recruitment, retention or replacement of investment managers. It also comments that there does not seem to be any intrinsic or insurmountable reason preventing trustees from influencing or exercising votes in pooled funds.

Trustees of relevant schemes (broadly, money purchase schemes, with a few exceptions) will have to include their policy in relation to exercising rights and undertaking engagement activities in the SIP for their default arrangement.

Defined contribution schemes: implementation statement

This requirement will apply to the first annual report produced on or after 1 October 2020.

Where a scheme is a "relevant scheme" (broadly, a money purchase scheme, with limited exceptions), the trustees' annual report must include an implementation statement which:

Contents of annual report

Trustees of both defined benefit and defined contribution schemes will have to include the following in their annual report:

Defined contribution schemes: publication on a website and links in annual benefit statements

New provisions will require "relevant schemes" (broadly, money purchase schemes, with limited exceptions) to make the following publically available free of charge on a website:

In relation to hybrid schemes offering both defined benefit (DB) and money purchase (non-AVC) benefits, the consultation response confirms that the requirement to publish the SIP will apply in relation to both the DB and the money purchase benefits.

The consultation response explains that the requirement to include links in members' annual benefit statements may be satisfied by including a single link to a location where the SIP, the implementation statement and the costs and charges information may be found.

Social impact investing

In March 2018, the Prime Minister commissioned an industry-led taskforce to progress recommendations in the report "Growing a Culture of Social Impact Investing in the UK" issued in November 2017. The taskforce aims to generate a faster rate of innovation in the financial services industry to provide products which give savers and investors the opportunity to make a social impact.

In the consultation response, the government confirmed that it does not propose to require trustees to have a policy in relation to social impact investing.

Guidance

Alongside the consultation on draft regulations in June 2018, the DWP consulted on minor amendments to statutory guidance on reporting of costs, charges and other information, previously issued in February 2018. It has reissued the guidance, with some changes to make the policy intention clear and some minor corrections.

Respondents to consultation noted various areas on which further consultation would be welcome, including how to understand financial materiality and greater clarity of expectations for the implementation statement. The Pensions Regulator is expected to produce high level guidance on key changes by the end of November 2018.



Date Accessed: 03/12/2021