Responsible investment pressure group ShareAction has welcomed the UK government’s interim response to recommendations made by the Law Commission earlier this year which concluded that there were no legal or regulatory barriers to pension funds, whether defined contribution or defined benefit, making investments that support the wider social good.
In the joint response document, the Department for Work and Pensions and Department for Digital, Culture, Media and Sport said the government would consult on two of the recommendations with a view that they could become part of pension funds’ statement of investment principles (SIP).
The first recommendation was that pension regulations should be amended to require trustees to state their policies in relation to: evaluating risks to an investment in the long term, including risks relating to sustainability arising from corporate governance or from environmental or social impact; and considering and responding to members’ ethical and other concerns. The second recommendation was that SIPs should state trustees’ policy (if any) on stewardship. Stewardship would include the exercise of formal rights such as voting and more informal methods of engagement.
ShareAction said it warmly welcomed the consultation on requiring pension trustees to state their investment policies on ESG factors and members’ ethics, as well as their approach to stewardship. However, the pressure group was less impressed with the response from the Financial Conduct Authority (FCA), included in the government document. The FCA is the regulator responsible for workplace personal pension schemes, which are defined contribution, largely contract-based and typically provided by insurance firms.
The Law Commission recommended that the independent governance committees of these firms should have similar duties as pension fund trustees and be required to report on the firm’s policies in relation to evaluating risks to an investment in the long term, including risks relating to sustainability arising from corporate governance or environmental or social impact and considering and responding to members’ ethical and other concerns.
The FCA stated that it was already carrying out work looking at the role of IGCs which could lead to rule changes and it would also consider what form of rule changes may be appropriate to address the Law Commission’s proposals. In respect of reporting on stewardship the FCA noted that if the UK implemented the EU shareholder rights directive it would impose general requirements on life insurance firms to disclose publicly (or explain why they have not) their engagement policy, including how they monitor investee companies on (among other things) financial and non-financial performance and risk, social and environmental impact, and corporate governance.
The financial regulator also said that it would also consider if it needed to put additional guidance in its handbook for contract-based pension providers on financial and non-financial factors, to follow the guidance given by The Pensions Regulator in its Guide on investment governance, as recommended by the Law Commission.
Catherine Howarth, Chief Executive of ShareAction, said: “ShareAction has been campaigning for change in this area for years. The government’s decision to propose these reforms is a welcome breakthrough. The way pension schemes invest, and the policies they adopt, have major impacts on savers’ retirement outcomes but also on the wider world we live in. We urge pension savers in the UK who care about how their money is invested to let the Department for Work and Pensions know they fully support this much needed change in the law. As powerful investors, it is essential our pension funds focus on long-term risks and opportunities such as those connected with climate change and social inequality.
“The FCA, on the other hand, is still sitting on its hands. We’re disappointed they haven’t yet chosen to follow the DWP in adopting the recommendations made by the UK Law Commission. The legal regime and protections for pension savers should be equally strong in all parts of the UK pensions sector, and we will continue to campaign until that equality is achieved.”
The government’s response was also welcome by the environmental activist legal group, ClientEarth. Its pensions lawyer Natalie Shippen congratulated the government on the move. She said: “Even though the law is already clear, those in charge of our savings are overlooking one of the biggest risks out there. This had to be resolved and we are delighted DWP has stepped up to make expectations clear.
“Environmental, social and governance (ESG) factors are often financially material but many trustees understand these two concepts to be mutually exclusive. Explicit clarification in UK pensions law of trustees’ duty to assess ESG factors – where these are financially material – will sweep confusion over climate risk off the table.
“There is a mammoth sum of money tied up in pension funds and the way this is invested has a huge influence on how quickly we move to a low-carbon economy. This reform will empower trustees to consider climate risks and make investment decisions in line with the energy transition.”
The government and the FCA will provide a full response to the Law Commission’s recommendations in summer 2018.
Last Updated: 21 December 2017