Government Responds to Consultation on Clarifying and Strengthening Trustees’ Investment Duties
20th November 2018
Ruth Sharp, Associate Consultant, Western Pensions Solutions
Following consultation with key stakeholders, and a previous review by the Law Commission, the Government has decided to make changes to the Investment Regulations and Disclosure Regulations for pension schemes to give extra clarity on Trustees’ responsibilities in relation to investment and to promote good practice.
The updated regulations relate to pension schemes, not to other trusts, and the extent to which schemes are affected depends on the type and size of scheme.
What are the changes?
Under the new regulations, which come into force from 1 October 2019, trustees will be required to document how they take account of financially material considerations and stewardship in their Statement of Investment Principles (“SIP”), where they are required to produce one. Financially material considerations include Environmental, Social and Governance (“ESG”) factors, including climate change.
Trustees of schemes with a Defined Contribution (‘DC’) or ‘Money Purchase’ element will also be required to prepare or update their default investment strategy to set out how they take account of financially material considerations and any policy on non-financial matters. Schemes with more than 100 members will also need to include stewardship matters in their default strategy.
Many DC schemes (referred to as “relevant schemes”) will be required to publish the SIP on a website so that it can be accessed by members and interested parties. From 1 October 2020, relevant schemes will also need to publish a further implementation statement detailing how they have acted on their investment policies.
A key change to the Government’s proposals following consultation was to remove the requirement to prepare a “statement on member’s views” setting out how the trustees will take account of members’ views on the matters covered by the SIP. This has been replaced with an optional policy on non-financial matters (including members’ ethical concerns, social, environmental and quality of life considerations).
What does this mean for Family Business Pension Schemes?
Trustees will need to consider to what extent their scheme(s) fall within the scope of the new regulations, and prepare or update policies, strategies and statements as appropriate before the regulations come into force.
For family businesses, it is important for the trustees to have an effective investment strategy which aligns with the strategy, culture and values of the business. Shareholders and managers will need to consider what this means for the pension scheme in general, and specifically in this case in relation to ESG and the stewardship of investments. They can then engage with the trustees to implement the detail of this strategy in the context of their pension scheme.
What does it mean for external investment in Family Business?
For many family businesses, culture and values are key and this includes carefully thinking about the environment, the social aspect of business and how the business is governed. However, some aspects of the ESG concept are being defined in a rather tick box manner by the Financial Services industry without sufficient consideration of how family businesses operate. It is therefore important that family business plays a role in discussing and shaping these ideas, this is especially relevant for those who may wish to access the capital markets through equity or bond sales.
Strategies based on the heritage of the business can incorrectly be defined by institutional investors as inconsistent with their definition of ESG. A recent example of this was where companies were down-rated by an institution from an ESG perspective because certain shares had special voting rights and an ability to appoint board directors.
Western Pension Solutions was founded as part of Vestey Holdings Limited in January 2015 following the buy-out of the Western United Group Pension Scheme. Vestey Holdings are a family-owned food and farming business and we have been trading for over 125 years. Over the course of the last 40 years, our final salary scheme had grown to include members from more than 200 companies that had been part of our history and, as with many similar schemes, had developed a level of liabilities that outweighed the size of the company itself. As a result, we set out on a strategic path to secure all members’ benefits with a regulated insurance company and to find a solution that enabled the company to remove a significant risk from the company for the future.