Sixty Second Summary
New investment rules for DB & DC schemes
12 Jun 2019 - Estimated reading time: 1 minute
Trustees of private-sector occupational pension schemes will need to comply with new shareholder-engagement obligations, beginning in October 2020. They will have to update their statements of investment principles (SIPs) to incorporate information about asset-management agreements and engagement policies. Trustees of defined benefit schemes will join those that provide money purchase benefits by having to publish their SIPs online. Trustees of both types of scheme will have to make statements, annually, about their adherence to the engagement policies, giving details of voting behaviour, and make that material openly available.
The Department for Work and Pensions (DWP) has introduced new Amendment Regulations to comply with the re-cast EU Shareholder Rights Directive (known as ‘SRD II’). As a result of the extension of the ‘Article 50’ period for the UK’s withdrawal from the EU, the UK was obliged to transpose SRD II into its domestic legislation by the 10 June 2019 deadline. The DWP did not consult publicly on the necessary amendments, but it did seek input from some industry representatives. The changes will not affect public service pension schemes or those with fewer than 100 members.
Earlier legislation already requires that trustees set out their engagement policies within their SIPs, with effect from 1 October 2019. Schemes that provide money purchase benefits will, with some exceptions, be required to make those SIPs freely available, online, from the same date; they must then make annual statements about their practical implementation of the SIP, and publish them online, from 1 October 2020.
Changes to statements of investment principles
Trustees will have to revise their SIPs, on a ‘comply or explain’ basis, to include the following information about their policies on arrangements with asset managers:
• how they incentivise the manager to align its investment strategy with their own;
• how they incentivise the manager to assess investee companies’ medium-to-long-term financial and non-financial performance, and engage accordingly;
• how the method and time horizon for evaluating the manager’s performance, and the basis of its remuneration, are aligned with the trustees’ other investment policies;
• how turnover within the investment portfolio, and the associate costs, are defined and monitored; and
• the duration of the arrangement.
Trustees will also have to update their SIPs to explain their policies on how they monitor and engage with organisations (such as the companies in which they invest, investment managers, and other stakeholders) about investee companies’ capital structure, and how they manage of conflicts of interest.
These policies must be prepared by 1 October 2020.
Changes to disclosure requirements
The new policies from the SIPs must be included in trustees’ annual reports. The annual report will also have to contain a statement about how the trustees implemented their shareholder engagement policies during the year. This implementation statement will need to describe the trustees’ voting behaviour (or that of those voting on their behalf) over the same period. These requirements will apply from 1 October 2020.
Some information will have to be made freely available, online. The trustees of a DB scheme will have to publish their SIP online from 1 October 2020, but they will not have to publish their first implementation statement on the Web until 1 October 2021. For money purchase benefits, online publication of the first year’s information about capital structure and management of conflicts, and the statement about voting behaviour, will also be postponed until 1 October 2021.
These additional changes in regulation will bring the disclosure requirements for DB schemes in line with those that were already in place for money purchase benefits, whilst expanding the scope of the information that must be published. The prospect of public scrutiny of policies and implementation activities challenges decision makers to approach responsible investment as more than just a tick-box activity. When considered in conjunction with proposed changes to the UK Stewardship Code, which is likely to define standards of best practice, it pushes pension scheme trustees at all levels to improve their responsible investment behaviours.