Non-financially material considerations

From October this year, trustees of occupational schemes will be required to amend their statement of investment principles (SIP).  The revised SIP must state trustees' policies on taking financially material and non-financially material considerations into account when making investment decisions and on stewardship, which is defined as broader than voting policies. 

In the second of our two-part blog on how to comply with the new statutory requirements, we consider how trustees should formulate a policy on taking non-financial matters into account. 

What are "non-financial matters"? 

Non-financial matters means the views of the 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 of the members and beneficiaries of the trust scheme. 

What is the law on taking into account non-financially material considerations? 

This a grey area of the law. The trustees' basic legal responsibility is to exercise their powers for a proper purpose, which is to enable the pension scheme to be used to provide pension benefits to members and their dependants. This usually requires that investment decisions are taken with a view to ensuring the successful financial performance of the assets, with an appropriate balance of risk and return. 

The Law Commission has suggested that trustees can take into account non-financial factors where a two-stage test is met. This test requires trustees to have good reason to think that scheme members hold a concern and to be satisfied that the decision would not involve a significant financial detriment. However, the Law Commission cannot make the law – only the Courts and Parliament can do that – and there is limited support in the existing case law for the Law Commission's test. 

Furthermore, it is not clear what evidence the trustees would need to produce in order demonstrate compliance with the two-stage test. The Law Commission does not explain how many scheme members would need to hold a concern before the trustees acted on it, or how the trustees should determine member views. Neither does it indicate what degree of financial detriment could be considered to be "significant". Indeed, it is arguable that the trustee could never be fully satisfied that there was no financial detriment, since the relative performance of two investments cannot be known in advance. 

In the absence of further regulation, this is fertile ground for future litigation and trustees should proceed with caution. 

Why are the regulations being changed? 

As noted in our previous blog, the Law Commission recommended the change because it was thought that the existing wording was confusing. 

From a practical perspective, what do trustees need to do to comply with the new requirements? 

The trustees will need to amend their SIP to state the extent to which they take non-financial factors into account when making investment decisions. There is no legal requirement to take non-financial factors into account, so the policy could simply state that such factors are not taken into account.  

There is no legal requirement for trustees to seek to obtain the views of members, whether by a survey or other means. The DWP Consultation notes that surveying members may create false expectations if trustees do not intend to act on those views. 

Should trustees wish to take non-financial factors into account when making investment decisions, we recommend seeking legal advice when formulating the policy, due to the lack of clarity in the existing law. 

Further information 

For our complete summary of the new regulations please see here.

For further information on how to comply with the new requirements, please contact Judith Donnelly or your usual AG contact.