The Pensions Regulator (TPR) has updated its investment guidance for trustees of defined contribution (DC) schemes to reflect the new reporting regime coming into force later this year.
From October 2019, trustees of DC schemes will be required to make their statement of investment principles (SIP) publicly available, and to include a link to the SIP with scheme members' annual benefits statements. The SIP must set out, among other things, how the trustees take account of "financially material considerations" including environmental, social and governance (ESG) factors when making investment decisions.
Trustees will also be required to produce an 'implementation report', explaining how they have followed and acted on the investment policies outlined in the SIP, from the following year, by 1 October 2020.
The updated investment guidance (56-page / 212KB PDF) sets out TPR's expectations around the new requirements, and provides further clarity for trustees around what is meant by financially material considerations and stewardship. It also provides more information to trustees about preparing the implementation statement.
Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said that DC trustees "should already be well underway with their work on ESG, with a deadline for updating the SIP now looming".
"So far, we've seen a lot of updated SIP wording which falls some way short of the legal requirements for 1 October 2019," he said.
"The updated guidance will give DC trustees a much clearer idea of the regulator's expectations – in some respects, it's a case of sharpening up the wording so that it matches the legal requirements. More fundamentally, though, trustees may well need to go into the governance process and procedure around ESG in more depth before being able to finalise the SIP and to be comfortable that wider trustee duties around ESG are being satisfied," he said.
Trustees of trust-based occupational pension schemes with at least 100 members are required by law to prepare a SIP and to ensure it is reviewed at least every three years, and after any significant change in investment policy. A SIP is a document setting out the scheme's investment strategy, including the investment objectives and investment policies.
Once the new rules are in force, trustees will be required to disclose how they take account of ESG factors which may have a financially material effect on scheme members' savings over the lifetime of the investment. Financially material means factors which could affect an investment in the future - for example, climate change to the extent that it impacts on the value of shares held in fossil fuels.
Trustees will also be required to include in their published SIP policies in relation to the stewardship of the investments made by the scheme's default fund, such as how they engage with the firms that they invest in and how voting rights are exercised. They must also disclose the extent to which members' views are considered when planning investments, and details of arrangements with asset managers.
Pensions expert Carolyn Saunders of Pinsent Masons said that it was clear from the published guidance that aligning the SIP with the legal requirements would not be a simple "tick-box exercise" for trustees. Rather, what would matter to the regulator was "the substance behind the words in the SIP".
"To me, the guidance signals a direction of travel towards trustees needing to have a much more detailed understanding of how their assets are invested," she said.
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