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UK pensions speedbrief - Clarifying and strengthening trustees’ investment duties

  • United Kingdom
  • Pensions


The Government has announced draft regulations proposing a range of measures to increase trustee focus on long term issues such as climate change when exercising their investment powers.  There are also proposals which will require trustees to consider members’ views in relation to investment and to provide DC members with more information around these issues (reflecting the fact that they bear the investment risk). 

What is behind the changes?

As far back as 2012, in the Kay Review, the Government identified a concern that some trustees felt the need to maximise returns over the short-term at the expense of taking into account long-term factors which might impact on investment performance.  The Government asked the Law Commission to review what trustees’ fiduciary duties actually were in this area and whether there were any legal barriers to taking long-term considerations into account. 

The Law Commission concluded in 2014 that UK law permitted taking into account a range of financial factors – including long-term sustainability - where they were relevant to investment risk and projected returns.  However, factors with no financial implications can only be taken into account where the trustees have good reason to think that scheme members would share a particular social or environmental concern and it would not be significantly financially detrimental to the scheme.  

There are other factors which are driving the Government to increase the focus on environmental, social and governance (“ESG”) investment and related issues.  The Environmental Audit Committee has just issued a report on “embedding sustainability in financial decision making” and made a number of recommendations to encourage pension scheme trustees to take long-term issues such as climate change into account on the basis that such investments may be more sustainable. Whilst at a European level, the European Commission is - following recommendations by the High Level Expert Group on sustainable finance - planning to table legislative proposals to “clarify” investors’ duties with regard to sustainability.

The other relevant factor is the second European Pensions Directive (IORP II) which is due to come into force in January 2019.  The Directive contains a number of provisions which refer to ESG investment including a requirement for schemes to have a system of governance in place which includes “consideration of [ESG] factors related to investment assets in investment decisions” and a statement of investment principles which shows how investment policy takes such factors into account.


The Government is proposing two tranches of legislative changes.  The first is currently due to take place in October 2019 and will require trustees to:

Update the statement of investment principles (SIP) to set out policies in relation to “financially material considerations” (defined as including environmental, social and governance considerations, including climate change).  This will replace the current requirement to merely state the extent to which ESG factors are taken into account - if at all. 

The Government clearly envisages that most schemes will consider such factors in the future and says: “Our expectation is… that the range of instances where trustees conclude that there is no requirement for consideration of financially material risks, including those arising from ESG, including climate change, [is likely] to be limited and focused on very particular circumstances – for example imminent scheme wind-up”.

Trustees may need to discuss this with their fund managers and legal advisers to determine how far they can reasonably take such considerations into account.  

Update the SIP to set out policies in relation to exercising voting rights attaching to investments and undertaking “engagement activities”.  Engagement activities are not defined but include engagement with investment managers and investee companies about things such as performance, strategy, risks, social and environmental impact and corporate governance.    

According to the Law Commission, there is no legal duty on trustees or other investors to undertake stewardship activities.  The Government is not proposing to change this - there is no proposal to prohibit trustees from concluding that they intend to do nothing in relation to stewardship.  However, the Government says it would “generally expect that trustees… would wish to satisfy themselves that they were complying with their fiduciary duty” and this could well include considering stewardship because of the impact it could have on medium to long term returns. 

The Government does not anticipate that size will be a barrier to compliance (although schemes with fewer than 100 members do not need to prepare a SIP and so are exempt from this requirement).  It envisages that “even relatively small schemes can have some impact through the consideration of stewardship. For example, they will regularly need to make decisions about the appointment of asset managers and the selection of funds”.

Prepare a statement explaining how far members’ views will be taken into account in preparing or revising the SIP.  The draft legislation actually refers to the views, which in the reasonable opinion of the trustees, the members hold.  This falls somewhat short of actually canvassing the opinion of each member and examples of how these views could be ascertained include a representative member panel and inviting views from members at a scheme AGM. 

However, whilst it may be reasonable to take into account member preferences when designing DC investment options, it is more difficult to see how they are relevant in a DB context where the investment risk is underwritten by the employer and the members have no relationship with the scheme investments at all.

Fortunately, the Government is clear that “none of our proposals seek to direct pension scheme trustees to invest in line with scheme members’ wishes”.  This seems to suggest that having ascertained members’ views, trustees can reasonably decide to ignore them.

There are also some changes proposed which will only affect schemes that provide DC benefits (but not schemes where the only DC benefits are AVCs).  Trustees in these scheme will need to:

Put the SIP on a publicly available website so that it can be found and read by both members and the public.  Trustees should already have a platform available to do this for transaction costs and charges so it should not be too onerous.  They will also need to inform members of the availability of this information in their annual benefit statements.  

Update the SIP in relation to any default funds to set out how they propose to take account of financially material considerations, including those arising from ESG risks.

The second tranche of changes is intended to take effect from 1 October 2020, and also only applies to trustees of schemes with DC benefits.  They will be required to:

Produce a statement setting out how they acted on the principles set out their SIP which will include how they complied with any policies on financially material considerations and may need to set out how they take the views of members into account. 

Put this statement online. This will need to be on a publicly available website and members will need to be informed about the availability of the information in their annual benefit statements.

The Government is also consulting on draft statutory guidance setting out how trustees should meet the requirements to publish this new information.

What next?                                                                                     

The Government have not allowed very much time for the industry to reflect on these draft regulations.  The consultation closes on 16 July 2018.

Whilst some of the proposals seem fairly reasonable and in line with best practice, others will be much more difficult to comply with.

The general trust law duty in relation to investment is to act in the best financial interests of the beneficiaries.  This does not mean that trustees cannot take ESG factors into account but that, except in exceptional circumstances, they should only do so where they are financially material.

It is difficult to see how this can be reconciled with the idea of taking into account the views of a tranche of members where those views may have no financial implications at all.  Trustees will not be obliged to act in accordance with member preferences but they may encounter challenging issues if they ignore them altogether.

In addition, although members should be given clear information about their scheme, for many members too much information is already provided for them to digest.  It remains to be seen what, if anything, yet more disclosure requirements will actually achieve.

Finally, where trustees decide to have a more active stewardship policy and engage in consideration of ESG issues, there may well be cost implications for the scheme.