DWP scraps plans for schemes to check members’ ethical views

However, schemes will be required to publish more detailed statements of investment principles from October next year. These will specifically address financially material environmental, social and governance risks, such as climate change, for both members and the public to scrutinise.

Trustees will also have to report on their stewardship policy, detailing their attitudes towards engagement with companies whose securities they own.

For defined contribution schemes, regulations taking force in October 2020 will require them to publish a further implementation report on the way they have put their SIPs into action, in a bid to make the content of the disclosures less generic.

Default investment strategies will also have to be considered and updated in the light of trustees’ beliefs on financially material concerns, according to the new regulations.

Guy Opperman, minister for pensions and financial inclusion, said in a statement: “Pension schemes have huge financial power. By ensuring that pension scheme members have more information about how their money is spent and pension trustees’ responsibilities are clarified, we can use this financial power to build a better future.”

Scheme time horizon matters

Most of the regulations were welcomed by the majority of respondents to a government consultation, and remain largely unchanged from their draft state.

However, a number of key changes did appear. For one, a new addition has clarified that “financially material considerations” can be assessed in relation to the time horizon of the scheme.

That distinction, experts said, would both arm DC schemes to tackle risks that might affect members far in the future, and DB schemes eyeing bulk annuity purchase in the near future to avoid an unnecessary ESG policy burden.

Crucially, the Department for Work and Pensions has also removed the requirement for trustees to prepare a separate “statement on members’ views”, in which they would set out how they take account of member opinions on the issues covered in the SIP.

The proposal had proved controversial among some pension commentators, who said it confused ethics and opinions with assessment of financial risk, and that it would be practically impossible to carry out.

“The legal position is that it’s actually very narrow circumstances in which trustees should be thinking about non-financial things at all,” said Stuart O’Brien, partner at law firm Sackers. “You can’t take them into account if it results in any financial detriment, so it was quite odd to have a requirement that trustees make statements on member views.”

“We know trustees have occasionally conflated ethical things with ESG,” he continued, arguing that the inclusion of the proposal would have only worsened this situation.

O’Brien welcomed the introduction of mandatory reports on SIP implementation.

“What is clear in the policy intent is that pension scheme SIPs need to be a lot less generic than perhaps they have been, particularly in the context of DC schemes. Members have a right to know how their money is invested,” he said, adding that future guidance from the Pensions Regulator may provide more detail.

Make members' views heard

The decision not to consult members has been met with less enthusiasm by campaign group ShareAction, which advocates for responsible investment.

Rachel Haworth, the group’s policy manager, said she hopes a similar measure might be reintroduced in the future.

“In terms of the recommendations made by the Law Commission [in 2017], in that context it certainly makes sense,” she said. “While trustees should retain primacy in terms of actually making the decision, we think there should be a mechanism for making members’ views heard.”

Haworth dismissed claims that members' views are too difficult to capture or too diverse to address in an investment policy. “When you look at surveys that ask people about their top 10 ethical subjects there’s usually a huge amount more agreement than disagreement,” she said.

However, if even one member responds to a survey explicitly disagreeing with a proposal for ethical investment, Haworth said that proposal is unlikely to be acceptable in the eyes of the Law Commission.

ShareAction will now be encouraging its supporters to scrutinise the disclosures made by their schemes in the coming years. Haworth pointed to a survey of DC members in the government’s policy research, showing broad support for action on ESG.

“They do want to find this information, it’s not just something that is being pushed by an NGO with an agenda,” she said.