Changes introduced by the Amending Regulations
The following changes will take effect from October 1, 2019
Inclusion of policy in relation to “financially material considerations”
This change applies to all schemes which are required to prepare a SIP.
Regulation 2(3)(b)(vi) of the Occupational Pension Schemes (Investment) Regulations 2005 (the Investment Regulations) currently requires trustees to include in their SIP their policy in relation to “the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments”.
Under the Amending Regulations, this requirement will be replaced by a wider reference 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”.
“Financially material considerations” are defined as including (but not limited to) “environmental, social and governance considerations (including but not limited to climate change), which the trustees of the trust scheme consider financially material”.
The “appropriate time horizon” is defined as “the length of time that the trustees of a trust scheme consider is needed for the funding of future benefits by the investments of the scheme.”
The reference to the “appropriate time horizon” will allow trustees of schemes which, for example, are looking to buy-out benefits and wind-up in the foreseeable future, to take the relevant timings into account when setting out their policy on ESG considerations.
Inclusion of policy in relation to “non-financial matters”
This change applies to all schemes which are required to prepare a SIP.
Under the Amending Regulations, a new Regulation will be included in the Investment Regulations which provides trustees with the option to include in the SIP their policies in relation to “the extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments”.
“Non-financial matters” are defined as “the views of the 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 of the members and beneficiaries of the trust scheme”.
The Law Commission’s report included an “option for reform” that the Government should consider “whether pension schemes should be required to ask their members periodically for their views on social investment and non-financial factors.” The changes to the Investment Regulations under the Amending Regulations do not make this a requirement, but allow trustees the option to include in the SIP details of any such policy they have in place. However, given that this proposal was not popular among schemes and will not be easy to implement, it is unlikely that many schemes will opt to do this.
Inclusion of policy in relation to stewardship
This change applies to
- All schemes which are required to prepare a SIP
- Relevant schemes” with more than 100 members in relation to the default investment strategy
Regulation 2(3)(c) of the Investment Regulations will be amended to require trustees to include in the SIP their policy in relation to “stewardship”.
For the purposes of the Law Commission’s report, “stewardship” was considered to be “the activity of investors engaging with the underlying investment in order to promote its long-term success, through monitoring, engagement or voting, either directly or through their investment managers. In this context, an investment could be equities (shares in a company), but it could also be investment in an alternative asset class, for example in relation to an infrastructure project.1”
The Investment Regulations, as amended, will specifically require trustees to disclose in the SIP their policy in relation to
- The exercise of the rights (including voting rights) attaching to the investments
- Undertaking engagement activities in respect of the investments, including the methods by which trustees monitor and engage with others about relevant matters
For these purposes, “relevant matters” include (but are not limited to) “matters concerning an issuer of debt or equity, including their performance, strategy, risks, social and environmental impact and corporate governance.”
This requirement will also apply to “relevant schemes” (broadly schemes providing money purchase benefits) with 100 or more members, which must disclose in the default investment strategy their policy in relation to the stewardship.
Publishing the SIP
This change applies to “relevant schemes” which are required to prepare a SIP.
Trustees of “relevant schemes” (broadly, schemes providing money purchase benefits) which must prepare a SIP will be required to make publicly available free of charge the SIP on a website or, where appropriate, in hard copy form.
Trustees must also include details about the availability of the SIP in the annual benefit statements issued to members with money purchase benefits.
The following new requirements will take effect from October 1, 2020:
Inclusion of an implementation statement in annual report
This change applies to “relevant schemes” which are required to prepare a SIP.
Trustees of “relevant schemes” (broadly, schemes providing money purchase benefits) which must prepare a SIP will be required to include an “implementation statement” in the annual report. The implementation statement must
- Describe the extent to which the SIP has been followed during the scheme year
- Describe any review of the SIP during the scheme year
- Explain any changes made to the SIP during that year and the reasons for the change
- Where no review has been carried out, set out the date of the last review
Provision of the implementation statement to members
This change applies to “relevant schemes” which are required to prepare a SIP.
Trustees of “relevant schemes” (broadly, schemes providing money purchase benefits) which are required to prepare a SIP will be required to make publicly available free of charge the implementation statement on a website or, where appropriate, in hard copy form.
Trustees must also include details about the availability of the implementation statement in the annual benefit statements issued to members with money purchase benefits.