Following its consultation on changes to the Occupational Pension Schemes (Investment) Regulations, the Government has released its consultation response and laid new regulations clarifying and strengthening trustees' investment duties which will take effect from 1 October 2019.
As outlined in our previous article, the Government introduced the proposals in response to a 2017 report by the Law Commission. These proposals sought to relieve confusion and misapprehension surrounding trustees' responsibilities. They also sought to clarify the relevance of environmental, social and governance (ESG) risks to 'financial material considerations', which are factors that may have an impact on future investment.
New Requirements for Statements of Investment Principle (SIP)
The Government has changed the SIP reporting requirements.
To take effect on 1 October 2019:
- Trustees will be required to demonstrate how they take account of 'financially material considerations' in their SIPs. The Government has clarified that this includes taking account of ESG considerations such as climate change.
- Trustees of money purchase schemes with 100 members or more will also have to include policies on the stewardship of investments, including engagement with investee firms and voting rights in their SIP.
- Trustees of money purchase schemes will have to make their SIPs available to the public and include a link to the SIP in the members' annual benefits statements.
To take effect on 1 October 2020:
- Trustees of money purchase schemes will also have to publish an 'implementation report' indicating how they carried out the principles laid out in the SIP.
The government has dropped the requirement for trustees to prepare a separate statement on members' views. The consultation response reiterated the statement of the law from the Law Commission's original report that trustees may take account of members' views (but are not obliged to) where there is no direct financial consideration, provided that there is a broad consensus amongst the members.
Clyde & Co Comment
The requirement for money purchase schemes to publicise their SIPs is an interesting development given that these are related to private sector pension schemes. The intention is that the increased transparency, and the ability for trustees to learn from one another, will mean that scheme members can benefit from more effective competition and better outcomes. However, it may prove difficult to demonstrate the benefit that this increased transparency gives members.
It may also be harder for smaller schemes to comply with these additional requirements. This in turn may lead some smaller schemes to look to consolidation, which has increased with the growth in regulation for money purchase schemes in recent years. The Pensions Regulator believes that consolidation will provide better outcomes for members with larger money purchase schemes benefiting from increased economies of scale.
The final proposals are available here.
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