New Code Of Practice To Implement Huge Boost For Responsible Investment

The Pensions Regulator has introduced a new code of practice and ‘how to’ guides for trustees of defined-contribution schemes.

Significant progress has been made in boosting responsible investment in the UK with the publication of a new code of practice for trust-based defined-contribution (DC) pension schemes and six ‘how to’ guides to give comprehensive guidance to trustees. The investment governance guide is clear that the schemes’ investment governance arrangements need to be consistent with its legal powers and responsibilities as outlined by the Law Commission’s 2014 report into fiduciary duties.[1] This comes after the Government rejected[2]changing the regulations as was recommended by the Law Commission despite overwhelming industry support.

UKSIF was influential in promoting responsible investment to the Law Commission and has worked with The Pensions Regulator on this project over the past year- with many of our suggestions appearing in the ‘how to guide’ for investment governance. This is a huge boost for responsible investment in the UK and represents the first time the Law Commission’s review has been reflected in regulation or legislation since it was published in 2014.

Specifically, the ‘how to’ guide states that:

·         Trustees should take into account factors which are financially material to the performance of an investment.

·         Where trustees think environmental, social and governance (ESG) factors are financially significant, you should take these into account. Likewise if trustees think certain ethical issues are financially significant.

·         While the pursuit of a financial return should be your main concern, the law is sufficiently flexible to allow trustees to take other, non-financial factors into account if they have good reason to think that scheme members share the view and there is no risk of significant financial detriment to the fund.

On sustainability TPR is clear that since most DC schemes investments will be long-term in nature they will be exposed to longer-term risks. This means sustainability concerns should be taken into account and TPR highlight potential issues including climate change, unsustainable business practices and unsound corporate governance. It concludes that risks of these types could be financially significant both over the short and longer-term.

The ‘how to’ guide also focuses on investment stewardship and encourages trustees to engage with fund managers on their stewardship policies and where appropriate seek to influence them.

Simon Howard, Chief Executive of UKSIF, said: “We welcome The Pensions Regulator’s new code of practice for defined-contribution schemes and specifically the publication of accompanying ‘how to’ guides. The guide on investment governance is particularly welcome and we were pleased to see our opinions have clearly been taken on board by the regulator and at times directly reflected in the wording of the guidance.

This is great news for trustees of DC schemes who have for the first time since the Law Commission’s work in 2014 had their responsibilities clarified by the regulator. As ever, more can be done, and we look forward to working with The Pensions Regulator to ensure trustees of defined benefit schemes also receive the same clarification.”