11 July 2018

By Leonardo Robinson

In their June 2017 report, the Law Commission identified structural and behavioural barriers to social investment by pension funds. The government’s consultation ‘Pension trustees: clarifying and strengthening investment duties’ follows up on the Law Commission’s recommendations to propose ways in which the law could be improved to reduce the impact of these barriers.

ESG factors

The consultation uses the term ESG to refer to environmental, social and governance considerations that affect returns on investment, whether positively or negatively. There are many other considerations that may materially affect investment returns, and ESG factors are not always themselves financially material.

The proposed changes seek to reassure trustees that they can take ESG factors into account. They also aim to make statements of investment principles (SIPs) into more effective documents. They operate by extending existing regulations and so building on the existing regime without altering the structure significantly.

The changes affect “relevant schemes”, using the same definition as for the governance requirements. These are occupational pension schemes which provide a DC main scheme benefit and which are required to prepare a SIP. Readers will be aware of the exemptions, which include executive pension schemes and relevant small schemes.

Provisionally, the intention is to make most of the requirements effective by 1 October 2019. The statement on how members’ views are taken into account would have to be published in the first revision of the SIP after 1 October 2019 and the implementation report would apply from 1 October 2020.

Accounting for financially material considerations and members’ views

The proposals would require trustees to state their policy on the evaluation of financially material considerations in the SIP. In order to keep the scope broad, the new regulations refer to ESG factors and climate change but make it clear that the considerations are not limited to them. However, the DWP are holding back from making any specific requirements in relation to social impact investment.

Before preparing or revising a SIP, trustees will be faced with the additional step of preparing a statement explaining how members’ views will be taken into account in writing the SIP. These views include not just financial matters but also non-financial matters such as ESG factors and factors that influence the current and future quality of members’ lives. The DWP hope that linking the requirement to the development of policies rather to the SIP, they will not give trustees any impression that investments should be made in line with members’ preferences.

Stewardship of the investments

The new regulations will require trustees to set out in their SIPs their policies relating to:

  • exercising rights attaching to their investments
  • undertaking monitoring and engagement activities with various persons about matters concerning investee companies.

Improving the quality of the SIP

Trustees will be required to report each year on how they have implemented SIP policies, explaining any change and the reason for that change.

For the first time, trustees who are already required to publish costs and charges online will be required to publish the SIP on a website, free of charge together with the scheme members' view statement and the implementation statement.

Replies to consultation

The DWP invites replies and consultation runs until 16 July. They emphasise that they are also looking for comments about how well the other components of the SIP are working.


The government is seeking to encourage schemes to take ESG factors into account in their investment policies and to clear up any doubt as to whether trustees are permitted to look further than the financial best interests of the members. Increased disclosure to members is to be welcomed. However, the exemption remains for schemes with fewer than 100 members so they will not be affected by any additional compliance burden. Small schemes will be relieved that the requirement to produce a SIP has not been extended to cover them. The disadvantage for them of course, is that they will not have the benefit of a statutory provision telling them that they are permitted to look beyond purely the “best financial interests” of the members.

The regulations build on existing requirements for the content of SIPs and the inclusion of ESG considerations is to be welcomed. However, if published SIPs will be read by few – if any – members, it raises the question of whether it will make a significant impact on the investment habits of trustees.

In those few cases where members do read their schemes’ SIPs, it is easy to see how members with differing moral or political views could take issue with their trustees and may even try to use dispute procedures to give their opinions priority. The government may unwittingly be opening an unwelcome Pandora's box and in the long run, trustee boards may just prefer to be forced by legislation to take specific ESG factors into account.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions Practice
  • Pensions Services
  • Pensions Legal Advice

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