On 18 June 2018 the Government published its final response to the Law Commission's report on pension funds and social investment together with a consultation on changing the law in relation to statements of investment principles. Currently, the law requires a statement of investment principles to include details of the extent, if at all, to which social, environmental or ethical considerations are taken into account in the scheme's investment policy. The Law Commission report considered that this is confusing as the law conflates such factors being taken into account (a) because of their potential impact on financial performance, and (b) for non-financial reasons such as ethical concerns. The Law Commission recommended a change to the law to require the statement to address these two issues separately.
The Government is proposing that from 1 October 2019:
- schemes that are currently required to produce a statement of investment principles (SIP) will be required to update the SIP to set out:
- how they take account of financially material considerations, including those arising from environmental, social and governance (ESG) considerations, including climate change;
- their policies in relation to "stewardship" of the investments, including engagement with investee firms and the exercise of the voting rights associated with the investment;
- schemes that provide money purchase benefits (other than just for AVCs) will be required to:
- publish their SIP on a website and inform members of its availability via the annual benefit statement;
- update their default strategy to set out how they take account of financially material considerations including those arising from ESG risks including climate change;
- schemes that are required to produce a SIP will also be required to prepare a separate "statement on member views" setting out how they will take account of the views which, in their opinion, members hold, in relation to the matters covered in the SIP.
The Government is also proposing that from 1 October 2020, schemes that provide money purchase benefits (other than just for AVCs) will be required to:
- produce a report setting out how they acted on the SIP principles and "statement on member views"; and
- publish the report online and inform members of its availability via the annual benefit statement.
The consultation says that the above dates are based on the assumption that the relevant regulations will be laid in Parliament in September or October 2018, but that if demands on Parliament's time mean that the regulations are not laid until early 2019, most provisions will instead have a coming into force date of 6 April 2020.
The consultation states that none of the proposals seek to direct trustees to invest in line with scheme members' wishes. It flags that, as the Law Commission emphasised, taking members' non-financial concerns into account is only permissible if:
- trustees have good reason to think that members hold a concern; and
- adopting an investment strategy that takes account of that concern will not involve significant financial detriment.