Pension trustees to be required to disclose investment principles

The new rules, which will take effect on 1 October 2019, will require trustees to set out how they take account of "financially material considerations" as part of their statement of investment principles (SIP). The government has, however, clarified the proposals in its original consultation, to make it clearer that schemes must consider the risks and opportunities of ESG factors over the time period required to fund future benefits by the investments of the scheme.

From the same date, trustees of defined contribution (DC) schemes with 100 members or more will be required to include in their 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. From 1 October 2020, they will also be required to produce and publish an 'implementation report' setting out how they acted on the principles set out in the scheme SIP.

The government has dropped a proposal which would have required trustees to prepare a separate 'statement on members' views', following feedback to the consultation. Instead, trustees may choose to take members' perceived ethical views into account as part of a broader list of optional 'non-financial factors', along with social and environmental impact and quality of life considerations.

Trustees of defined contribution (DC) schemes will be required to make their SIPs publicly available, and to include a link to the SIP with scheme members' annual benefits statements. From 1 October 2020, they will also be required to produce and publish an 'implementation report' setting out how they acted on the principles set out in the scheme SIP.

The government said that it had no intention to "exhort or direct private sector schemes to invest in a particular way", or even to require trustees to survey scheme members or act on their views. Rather, it was updating the rules to make it clearer that trustees were able to take account of scheme members' views in certain circumstances.

Financially material considerations are factors which could affect an investment in the future. An example given by the government is climate change if, for example, the value of shares in fossil fuels drops dramatically as a result of a shift to renewable energy sources.

"This is about the hard-headed fact that - given the time horizons of pension saving - broader considerations are likely to present long-term financial risks and opportunities to the solvency of [defined benefit] schemes and the value of members' DC (and in time collective DC) pensions," said pensions minister Guy Opperman, in the government's response to its consultation on its proposals.

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that providing clarity over trustees' duties in this area was a "priority" for the government.

"It is helpful that the government has modified its original proposals on member views, which risked diluting the message that ESG and other broader considerations are about potential investment risk, rather than ethics. And it is helpful to see an acknowledgment in the government's response that stewardship activities are likely to be more limited in smaller schemes," she said.

"In short, these changes will make it clear that sustainability is a relevant consideration for all trustees, whatever their personal views and/or ability, in practice, to influence the businesses in which they invest," she said.