The DWP acknowledges in its consultation response that pension legislation is currently “confusing and misleading” in relation to ESG. It says, however, that “given the evidence that ESG factors can lead to better returns in the long run, pension trustees may consider ESG factors”.

Consultation response

In September, the DWP responded to its consultation on clarifying and strengthening investment duties. Some material changes have been made to the original proposals.

By 1st October 2019, trustees will be required to update their Statement of Investment Principles (SIP) to include:

(1) information about how financially material considerations including, but not limited to, environmental, social and governance considerations (ESG), are taken into account;

(2) the extent (if any) to which non-financial matters are taken into account; and

(3) policies in relation to the stewardship of investments, including the exercise of voting rights.

Schemes with DC benefits (except where those are derived only from AVCs), will also need to update the SIP for their default arrangement ,and publish the SIP on a publicly available website by 1 October 2019. Looking further ahead, from 1st October 2020 trustees of these schemes will also have to publish an implementation statement describing how they acted on the principles in the SIP.

Note that schemes with fewer than 100 members, and public service schemes, do not need to prepare a SIP.

The DWP has also updated its guidance on reporting costs, charges and other information to reflect these changes. In addition, the Pensions Regulator is expected to produce high level guidance by the end of November 2018.

Background

One of the perceived barriers to ESG investment has been the legal duty on pension trustees to invest in members’ best financial interests. Some have viewed this as a duty to maximise members’ short term financial returns, which could be an issue for ESG.

The Law Commission’s 2014 report on Fiduciary Duties of Investment Intermediaries (quoted in the DWP’s consultation response), concluded that trustees should take into account factors which are financially material to the performance of an investment, such as ESG, whatever their source. In addition, they may also take account of nonfinancial factors but only where a two-step test is met:

(1) trustees should have a good reason to think that scheme members would share the concern; and

(2) the decision should not involve a risk of significant financial detriment to the fund.

Comment

To the relief of some, the suggested requirement in the previous consultation to canvass member views has been dropped. Instead, trustees will be required instead simply to state the extent, if any at all, to which non-financial factors have been taken into account. The consultation response emphasises that trustees have primacy over investment decisions, and whilst they should not rule out the ability to take account of members’ views (as set out in the above test), they are not obliged to do so.

Enforcement, enforcement, enforcement…

“Whilst ‘educate, enable, enforce’ has served us well, our approach to how we regulate is changing and so this no longer accurately reflects how we work”.

So says the Pensions Regulator in its new report, “Making workplace pensions work (TPR Future: our new approach)”. Supervision and enforcement are the overriding themes, and it seems that less emphasis will now be placed on education and employers’ sustainability.

A new supervision team will focus on 25 of the biggest schemes (DC, DB and public service), with one to one attention starting from October. This approach will be rolled out to more than 60 schemes over the next year. Schemes selected for close supervision could be issued with improvement plans if the Regulator establishes particular concerns, and it will engage in regular meetings to review progress.

The Regulator will develop a range of approaches, and supervisory activity will include a variety of interventions that reflect the level of risk identified; everything from letters, phone calls and meetings, to being part of a ‘thematic review’. It will also continue to respond to intelligence-led or eventdriven issues with direct interventions. Overall, about 20-40% of schemes can expect to be subject to some sort of supervisory interaction.

Comment

Having been stung by criticism following BHS and Carillion in particular, it seems that the Regulator has reacted by getting tough. Expect schemes to be ‘named and shamed’ and the Regulator to have far greater involvement in the way (in particular, large) schemes work on a day to day basis.

Vive la Ombudsman?

An efficient, consistent Pensions Ombudsman

In the annual report and accounts 2017/18, the Ombudsman notes a 26% increase in the number of cases accepted for investigation last year. The average timescale for closing cases has halved to five months, and common topics for complaints are transfers (20.5%), failure to provide information or act on instructions (11.8%), and incorrect calculation of benefits (10%).

Consistent awards for distress and inconvenience

The Ombudsman is now introducing fixed amounts for non-financial injustice awards (commonly referred to as ‘distress and inconvenience’ awards), to enhance “transparency, create consistency and manage expectations for all parties to the complaint”.

An award will now usually fall into one of the following five categories:

• nominal (£0)

• significant (£500)

• serious (£1,000) • severe (£2,000)

• exceptional (over £2,000).

Guidance is given as to when a case would fall into each category and what the Ombudsman would look at. The awards are intended as an acknowledgement to the applicant of the inconvenience and/or distress they have suffered. In other words, to remedy the injustice genuinely suffered, not to penalise or punish the respondent for bad behaviour.

However, if a respondent persists in behaviours that make it difficult for members to achieve redress, and causing more anxiety, this is likely to result in a higher award. Additionally, the Ombudsman will not look to ‘rob Peter to pay Paul’. For example, where the award comes out of limited scheme resources and the scheme is underfunded, is in wind up, or is in the process of being transferred to the Pension Protection Fund”.

Comment

The Pensions Ombudsman has made great strides forward, bringing swifter, cheaper justice to many and introducing what will hopefully prove to be a more logical, consistent approach to the way in which nonfinancial injustice awards are given.


Jeremy Goodwin
Partner (Pensions) – Eversheds Sutherland

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