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More updates needed to your scheme’s statement of investment principles

  • United Kingdom
  • Pensions


Unexpectedly, the Government has issued regulations which will require trustees to make further changes to their Statement of Investment Principles (SIP) from 1 October 2020. They will also require additional disclosures in relation to investment practices. These last minute regulations were introduced without consultation and were needed to implement requirements in the EU’s second Shareholder Rights Directive which had to be included in UK law by 10 June 2019.

Much of the new wording has been copied verbatim from the Directive and so the terminology is slightly at odds with that used elsewhere in pensions legislation.

Changes to the SIP from 1 October 2020

Most trustees should already be considering revisions to their SIP to deal with changes that come into force on 1 October this year which will require the SIP to set out the trustees’ policy both on how they take “financially material considerations” into account and in relation to the exercise of rights (including voting rights) and the undertaking of engagement activities in respect of their scheme’s investments. Financially material considerations for these purposes are defined to include environmental, social and governance issues (which, in turn, are defined to include climate change). Trustees are also required, from 1 October, to confirm the extent, if at all, to which they take “non-financially material considerations” into account.

The new Regulations (implementing the Shareholder Rights Directive) mean that, from 1 October 2020, the SIP will also need to set out trustees’ policy in relation to arrangements with asset managers. The term “asset manager” is not defined in the new legislation and sits oddly alongside other references in pensions investment legislation to “fund manager”. The term is defined in the Shareholder Rights Directive but the definition is not straightforward and trustees may need to consider carefully exactly which managers the new requirements relate to.

The new policy needs to include:

  • how arrangements incentivise managers to align investment strategy and decisions with the trustees’ investment policies set out in the SIP;
  • how arrangements incentivise managers to make decisions based on assessments of medium to long-term financial and non-financial performance and to engage with issuers of debt or equity to improve performance;
  • how evaluation of an asset manager’s performance and remuneration are in line with trustees’ investment policies;
  • how the trustees monitor portfolio turnover costs and how they define and monitor targeted portfolio turnover; and
  • the duration of the arrangement with each asset manager.

Where an issue is not dealt with, trustees should explain why.

There will also need to be some October 2020 changes to the trustees’ new October 2019 policy on their exercise of rights and engagement. In particular, the matters that trustees should consider engaging on and cover in the policy are extended to include the capital structure of an issuer of debt or equity and the management of actual or potential conflicts of interest. The requirements in relation to conflicts are expressed more clearly in the Shareholder Rights Directive which says that the engagement policy should set out how an institutional investor (in this case, the trustees) will “manage actual and potential conflicts of interests in relation to their engagement” activities.

The list of people that trustees should consider engaging with is also extended from October 2020 to include other “stakeholders” (such as persons with an interest in an issuer of debt or equity who are not other holders of that debt or equity).

Disclosing the SIP

Currently, the Disclosure Regulations provide that members, spouses, beneficiaries and recognised trade unions can request a copy of a scheme’s SIP and it must be provided within two months.

From 1 October 2019, trustees of “relevant schemes” (broadly, the majority of DC schemes but excluding those where the only DC benefits are AVCs) are already required to publish their SIP on a publicly available website. The DWP has issued guidance on the criteria that such a website should meet, in particular the information needs to be published in a manner which allows for the content to be indexed by search engines and people wishing to view the information should not be required to do so by either entering a specific user name and/or a specific password or providing any other personal information about themselves.

The new regulations will require trustees of other schemes (principally DB schemes) to publish their SIP on a publicly available website from 1 October 2020. This is the first requirement for DB scheme trustees to make information available via this kind of website and therefore they will need to ensure that they have an appropriate website which complies with the requirements set out above.

“Implementation statements”

Trustees of relevant schemes should already be aware that from 1 October 2020 they will need to prepare an annual statement (as part of their annual report) which sets out: how, and the extent to which, in the opinion of the trustees, the SIP has been followed, any review of the SIP (or, where no review has been undertaken, the date of the last review) and any changes made to the SIP and the reason for those changes. This information will also need to be published on a publicly available website.

The new Regulations (implementing the Shareholder Rights Directive) will require the trustees’ annual report to be updated to include details about the trustees’ voting behaviour over the year and updated, where necessary, to reflect any changes as a result of the new requirements in relation to engagement activities. This information will need to be published on a publicly available website by 1 October 2021.

In addition, DB trustees will also need to include details about their voting behaviour over the year and the extent to which the policies in their SIP relating to the exercise of voting rights and engagement activities have been followed during the scheme year in their annual report from 1 October 2020 and this information will need to be published on a publicly available website from 1 October 2021.

What next?

Trustees already need to be considering their ESG investment and engagement policies and incorporating details of them in their SIP by 1 October this year. As part of that exercise, they may want to consider the extent to which any of the new requirements from the Shareholder Rights Directive can be incorporated at the same time. They should also ensure that they have an appropriate website ready to publish their SIP and other relevant information over the next few years.

Finally, the Pensions Regulator has said that it intends to publish guidance on investment and ESG requirements soon, so trustees should look out for this.

If you want more detail about both the changes that need to be made this year and the changes introduced by the new Regulations, read our article: What do pension schemes need to say about ESG, climate change and stewardship?