Trustee investment duties: all change or more of the same?

15 minute read
26 November 2018

In September, the Government published its response to the June consultation on "Clarifying and strengthening trustees' investment duties." There is also new legislation and revised guidance for Trustees - Reporting costs, charges and other information: guidance for trustees and managers of occupational pension schemes.

With the recent focus in the press on environmental, social and governance (ESG) driven investment and the continued activities of various environmental lobbying groups, what duties are trustees of pension schemes now under when it comes to investing their scheme's assets?

Whatever the answer to that question, and for more on that see below, trustees need to be thinking about the action they are going to take. The new regulations will impose additional requirements on most trustee bodies and the majority of these come into force in October 2019.

Key steps for trustees to take to ensure compliance with the new investment regulations

1. Review your Statement of Investment Principles (SIP)

Changes are likely to be required to set out the Trustees' policies on financially material considerations, stewardship and non-financial matters.

2. Formulate the policies referred to in the SIP

Speak to your investment advisers to formulate the policies referred to in the SIP in time for the October 2019 deadline.

3. Put processes in place to ensure compliance with new disclosure requirements

Schemes will have to provide their policies on financially material considerations, stewardship and non-financial matters on request in due course, so schemes need to prepare for those requests.

4. Further steps for Defined Contribution schemes

SIPs (and in due course, implementation statements) will need to be published on a freely available website and signposted via annual benefit statements for many DC schemes.

The story so far...

The new regulations and guidance comprise the latest instalment in the ongoing debate about the extent to which trustees should or could, even, take ESG factors and the ethical concerns of members into account when investing scheme assets.

The 2012 Kay Review of UK Equity Markets and Long-term Decision Making recommended, amongst other things, that the Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment. The Law Commission did so and its report was published in July 2014. It concluded that:

  • trustees should take into account factors material to the performance of an investment (whatever their source); and
  • trustees could make investment decisions based on members' views (subject to a two-stage test being met). That test is referred to below.

In 2014, the Law Commission suggested some clarificatory amendments to the Investment Regulations[1] as part of the review but the Government did not find a compelling case for legislation at that time.

In 2016, the Law Commission carried out a review of social investment by pension funds and again made similar recommendations which the Government was minded to accept and the June consultation was the result.

What do the new regulations mean for trustees?

The new regulations do not radically alter the fundamental duties of pension trustees when they are investing scheme assets. This must still be done in the best interests of the members and beneficiaries; and in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole; as well as in accordance with the other familiar provisions of regulation 4 of the Investment Regulations. What the new regulations do is clarify that where ESG factors (and other factors) are financially material, they should be taken into account in formulating the trustees' investment policy. To achieve this, the new regulations set out additional requirements for scheme SIPs and impose additional disclosure requirements.

The new regulations also strengthen stewardship obligations.

There are some exemptions which mean the requirements of the new regulations do not apply to some smaller schemes or funds.

The Statement of Investment Principles

The Pensions Act 1995 requires most pension scheme trustees to produce a SIP and revise it at least every three years (sooner if there is any significant change in investment policy). The Investment Regulations state what must be included in that SIP.

The new regulations make changes to what must be included in the SIP from 1 October 2019. The SIP (including SIPs for default arrangements) will have to include trustee policy on:

  • financially material considerations;
  • stewardship policies; and
  • non-financial matters.

Financially material considerations

In place of the existing requirement that the SIP states the trustees' policy on "the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments", from October 2019, the SIP must state the trustees' policy on "financially material considerations over the appropriate time horizon of the investments, including how those considerations are taken into account in the selection, retention and realisation of investments."

Financially material considerations include, but are not limited to, ESG considerations (including but not limited to, climate change) which the trustees consider financially material. There are two important points to note here.

  1. Firstly there is no longer the option to simply say the trustees have no such policy as there is under the current regulations.
  2. Secondly, this particular provision does not give trustees carte blanche to invest in accordance with their own (or their members') moral or ethical views.

Trustees are still required to view investment decisions through the spectrum of what is financially material but, of course, ESG factors, including climate change, will in the vast majority of  cases be financially material. To the extent that those factors are financially material, the law requires them to be taken into account already. So it could be said that the new regulations in this respect merely require trustees to expose their thinking (on a matter which they ought already to be considering) rather than to do anything substantially new. Nevertheless, that will still be an additional duty which trustees need to prepare for.

Stewardship Policies

Currently, a SIP must state the trustees' policy (if any) in relation to the exercise of rights (including voting rights) attaching to investments. From October 2019, the words "if any" are removed, meaning there must be a policy.

Additionally, the SIP must state the trustees' policy on "undertaking engagement activities in respect of the investments (including the methods by which and the circumstances under which trustees would monitor and engage with relevant persons about relevant matters)."

Relevant matters includes (but is not limited to) matters concerning an issuer of debt or equity, including their performance, strategy, risks, social and environmental impact and corporate governance.

The term "relevant persons" includes (but is not limited to) an issuer of debt or equity, an investment manager or another holder of debt or equity.

Again, shareholder voting rights are already an asset of the scheme, and so their exercise in members' financial interest is already a matter which trustees are required to consider where it is material. So the new law requires more openness rather than substantially different actions.

Non-financial matters

There is a new requirement that from October 2019, trustees must state the extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments.

Non-financial matters means the views of members and beneficiaries, including but not limited to, their ethical views and their views in relation to social and environmental impact and present and future quality of life for members and beneficiaries. Inclusion of the words "if at all" should mean it will be sufficient for the trustees' policy to be simply that they do not take any non-financial matters into account if that is the case. The regulations do not include any new law which increases the extent to which non-financial matters can properly be taken into account by trustees (and the existing law only allows that to a limited extent). Also, it is very difficult (if not impossible for most schemes) to isolate clear, agreed and consistent ethical views on any trustee board (let alone among any membership group).

The regulations do not impose any requirement for trustees to invest in line with scheme members' preferences but would permit trustees to take members' ethical and social views into account (and members' views on other relevant non-financial matters) if the trustees consider it appropriate to do so and relevant to their stewardship and investment decisions. Trustees may want to take into account the two-stage test referred to in the Law Commission's report and the recent consultation when considering their approach to this. The Law Commission's view was that non-financial matters may be taken into account if:

  • trustees have good reason to think that scheme members would share the concern; and
  • the decision does not involve a risk of signification detriment to the fund

However, since trustees are already obliged to take into account financially relevant issues, it is arguable that they must already have considered the second limb of that test in any case and the facts behind the first limb are notoriously difficult to establish in the case of most schemes. Understandably, therefore, a proposal in the June consultation that requires trustees to state in the SIP the extent to which member views (including on non-financial matters) would be taken into account has been dropped.

New Disclosure Obligations

The new regulations also amend the Disclosure Regulations[2].

From 1 October 2019, the policies on financially material considerations, stewardship and non-financial matters must be provided within two months of a request.

Some schemes (mostly defined contribution schemes) will also need to:

  • publish the SIP on a freely available website; and
  • signpost the information available on the website via annual benefit statements.

This is consistent with the requirements for the publication and signposting of statements on member-borne costs and charges (and other elements of the Chair's Statement).

1 October 2020 Changes - the implementation statement

From October 2020, there are further new requirements for some schemes (mostly defined contribution schemes). Trustees will also have to prepare an implementation statement setting out how the trustees have implemented the policies in their SIP, explaining any changes to it as well as the reason for the change and also the date of any review. TPR is to provide guidance on what an implementation statement should look like.

The Implementation statement will also need to be published on the freely available website and be signposted via the annual benefit statements.

Hybrid Schemes

For hybrid schemes providing both defined benefit and defined contribution benefits (although not defined benefit schemes that provide only defined contribution additional voluntary contributions), the published SIP should cover both sections of the scheme. The Government comments in the consultation response that a single SIP must cover both sections of the scheme and it would be inappropriate to permit trustees to remove the elements relating to the defined benefits as many members will have benefits in both sections.

What should trustees do now?

Immediate action

Trustees should discuss the new requirements with their investment managers and advisers to formulate their policies and ensure they will be in a position to meet the new requirements from 1 October next year.

The DWP has extended the existing guidance for trustees on costs and charges to include the new obligations regarding disclosure of the SIP and Implementation statement. The February 2018 guidance has been withdrawn and replaced by the new extended guidance. Trustees should ensure they are familiar with the new guidance.

Before 1 October 2019

Trustees should:

  • Review their scheme's SIP(s) and identify where changes are needed;
  • Amend SIP(s) to include the policies on financially material considerations, stewardship and non-financial matters;
  • Ensure procedures are in place to comply with the additional disclosure obligations, including , for Defined Contribution/Hybrid schemes, access to a freely available website

Before 1 October 2020

Defined Contribution/Hybrid schemes will need to prepare an implementation statement.


The direction of travel has been coming for some time. For schemes which already monitor ESG as part of their monitoring of financial materiality, the changes are probably quite subtle. However for schemes which have not yet given much thought to these issues, the focus on ESG and climate change might mean a more substantial overhaul of policy. Thinking in this area is likely to continue to evolve and so we would recommend monitoring developments.

If you wish to find out more, please contact us.


[1] SI 2005/3378
[2] SI 2013/2734

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Related   Pensions