Defined Contribution  

DWP clarifies pension funds investment duties

DWP clarifies pension funds investment duties

The government will force pension schemes that have more than a hundred members to consider the environmental, social and governance risks of the investments they make.

Existing investment regulations require that, in a scheme’s statement of investment principles, trustees must state the extent to which they take ‘social, environmental or ethical considerations’ into account.

The Department for Work & Pensions has now proposed that in future trustees will have to state their policy on taking account of “financially material” ESG factors.

The DWP's 28-page report stated trustees will be required to have a stated policy on stewardship (the exercise of voting rights and influence on the management of investments).

Henry Tapper, who runs pension consultancy First Acturial and founded Pension Playpen, said where there is clear evidence that poor environment, anti-social or weak governance is causing financial loss to members, the trustees will - in future - be required not just to state they will reduce the risk of loss but also to report on how they got on in implementation reports.

He said: "Much as I would like to impose my ethics on everyone else, I recognise that this is not my job nor the government's job for that matter.

"I think that the government has got this right and though I would like to see trustees responding to pressure from members to push boundaries on things like social impact, I don't think that ethical policies can be delivered top down without some fair criticism of trustees for paddling their own canoes.”

Stuart O’Brien, partner at law firm Sackers, said while the proposals may be eye-catching at first glance, the content of the proposed regulatory changes is somewhat more modest.

He said perhaps the most significant change will be in requiring trustees of defined contribution (DC) schemes to annually review how they have followed that policy over the last year.

Mr O'Brien said: "This is really going to push this onto the agendas of DC trustees in a way that it perhaps hasn’t been to date.

“Slightly less helpful is yet another focus on members’ ethical views. Here the proposed regulations would require trustees to publish a statement on the extent to which these are taken into account in setting a scheme’s investment strategy.

"Whilst the regulations may be permissive and do not require trustees to actively seek member views in all cases, we fear that this regulation could prompt a rash of ill-thought through member surveys that distract trustees from focusing on ESG issues from a financial point of view."

david.thorpe@ft.com