The DWP is taking steps to address what it believes amounts to "confusion and misapprehension" among pension scheme trustees regarding the extent to which they can take environmental, social and governance (ESG) factors into account when making investment decisions. It is concerned that trustees may, incorrectly, believe that ESG risks are "irrelevant to, or run counter to, financially material concerns".


The Government has consulted on amendments to the investment and disclosure legislation to be made by the draft Occupational Pension Schemes (Investment and Disclosure)(Amendment) Regulations 2018 (the Regulations).

The Regulations are designed to give comfort to trustees of occupational pension schemes that they can, and indeed should, take account of all financially material risks, including those which arise from ESG factors. For example, if a company is associated with pollution, poor working conditions or poor governance in terms of executive pay and board diversity, these can amount to financial risks in investing in such a company over the long term.

The Government also proposed that trustees of occupational pension schemes should:

  • Fulfil their responsibilities associated with holding investments (whether directly or by others on their behalf), for example through exercising voting rights attached to shares and monitoring, and engaging with, investee companies
  • Have an agreed approach on the extent to which they will take members' views into account in setting their investment strategy. 

The consultation closed in July 2018 and on 11 September 2018 the Government published its response outlining what action it will take. The final regulations are intended to be laid before Parliament this month or next. 

All schemes: the SIP and the proposed statement on members' views

Under the final version of the Regulations, by 1 October 2019 all occupational pension schemes which are obliged to have a Statement of Investment Principles (SIP) must update their SIP to set out:

  • How they will take account of financially material considerations over the appropriate time horizon of the investments, including ESG factors (which include climate change), when selecting, retaining and realising investments
  • Their policies in relation to the stewardship of investments, including engagement with the companies they invest in and the exercise of voting rights. 

This replaces the current requirement to merely state the extent to which, if at all, ESG factors are taken into account. 

The consultation had proposed that trustees should prepare a separate statement setting out how they would take account of the views which, in their reasonable opinion, they believed members to hold in relation to the matters covered in the SIP. These views could relate to financially material considerations and non-financial matters including ethical, social impact and quality of life matters. This proved the most contentious proposal in the consultation and a majority of respondents did not support it. Indeed, the DWP felt that there was sufficient concern raised to warrant a clarification of the Government's view: 

"For the avoidance of doubt, as this caused a minority of respondents significant concerns, it is our policy – and will remain our policy – that trustees have primacy in investment decisions. Whilst they should not necessarily rule out the ability to take account of members’ views, they are never obliged to do so." 

As a result, the proposed requirement to prepare a separate statement of members' views has been removed and replaced with an optional policy on non-financial factors, including ethical concerns, social and environmental impact matters and quality of life considerations. 

Defined contribution schemes

In the case of "relevant schemes" (broadly those offering money purchase benefits other than where the only money purchase benefits are AVCs), from 1 October 2019 the SIP for the default investment strategy will have to set out how financially material considerations over the appropriate time horizon of the investments, including ESG factors, will be taken into account. Where the scheme has 100 or more members, the trustees must state their policy in respect of the stewardship of investments in the default investment strategy. 

Relevant schemes must also publish their SIP on a freely accessible, public website and inform members, via the annual benefit statement, how it can be accessed. The proposed requirement to publish the separate statement of members' views has been dropped. 

From 1 October 2020, trustees of relevant schemes will have to prepare an implementation statement (to be included in their annual report) detailing how they have acted on the SIP. This implementation statement must then be published on a publically available website and members informed, via the annual benefit statement, of its availability. The implementation statement will also describe any review of the SIP which has been carried out and the reason for any changes made.

Other developments

The DWP has no immediate intention to make other SIP-related changes but will continue to monitor the situation and reserves the right to make further changes if the current proposals do not work as intended. In its consultation response, the Government confirms that:

  • The FCA will consult in early 2019 on a package of changes designed to implement similar reforms for contract-based personal pension schemes
  • The Pensions Regulator will provide high level guidance on the key changes contained in the Regulations by the end of November 2018 to give trustees adequate time to prepare.

Our comment

The proposed changes could see the SIP become a more effective document in focussing trustees' minds on the importance of all financially material risk, including ESG factors, and non-financial considerations when making investment decisions. The clear inclusion of such factors (especially climate change) could see a fundamental shift to the investment decisions being made by trustees.

The requirement to add more information to a publicly available website should not be too onerous given the requirements which already exist around publishing costs and charge information. 

However, trustees may well be relieved that the requirement to have to prepare a statement of members' views has been dropped in the face of a range of concerns. Given the fine line that trustees often have to tread, we also welcome the Government's confirmation that: 

"It remains Government policy not to direct the investment decisions or strategies of trustees of pension schemes. We will never exhort or direct private sector schemes to invest in a particular way. Trustees have absolute primacy in this area….. it was not our intention to give the impression in our original consultation proposals that trustees must survey pension scheme members or must act on members’ views about how their scheme is invested." 

Due to the proposed implementation dates for these changes, trustees should start to consider what action they will need to take to make sure that they have appropriate investment policies in place, that these are reflected in their SIP and that members are provided with the information as required.