New investment requirements and disclosures
Under the new investment and disclosure requirements, by 1 October 2019, Trustees needed to have updated their Statement of Investment Principles (SIPs) in relation to their policies regarding the following.
- Financially material considerations taken into account in the selection, retention and realisation of investments, including environmental, social and governance factors.
- The extent to which ’non-financial matters’ are taken into account.
- Engagement activities, including the exercise of the voting rights.
Further updates will be required to SIPs from 1 October 2020, for example, extending policies in respect of engagement activities to include other stakeholders, the capital structures and any conflicts of interest. In addition, updates to SIPs setting out policies in relation to how Trustees incentivise, evaluate and monitor fund manager costs over the duration of the arrangement. For schemes with defined contribution (DC) arrangements, all policies are also required to be covered in respect of the default arrangement from 1 October 2020.
The regulations are complex and do differ depending on scheme arrangements and the number of members (e.g. less than 100 members). The DC requirements also apply to relevant schemes, which includes hybrid schemes but not defined benefit (DB) schemes with AVCs.
From 1 October 2020, Trustees will need to produce an annual implementation statement, which will set out how they have acted on the principles set out in their SIP. The remit of this statement will depend on whether the scheme is a DC or DB arrangement.
Additional disclosures are also required in the Annual Report, reflecting the increased policy requirements in SIPs from 1 October 2019 and then again from 1 October 2020, and also reflecting the implementation statements from 1 October 2020.
Online publications
SIPs for schemes with DC arrangements, including hybrid schemes, needed to be published on a publicly available website by 1 October 2019. From 1 October 2020 the DC implementation statement will also need to be on a publicly available website.
DB schemes will be required to publish their SIPs on a publicly available website by the later date of 1 October 2020 and a statement similar to the DC implementation statement, but with a narrower remit, from 1 October 2021.
Next steps
The impact of these requirements depends on the manner in which Trustees have implemented their policies, which could be straight forward or complex. Trustees need to refer to the regulations to understand how the changes will apply to their scheme, taking advice to ensure they are compliant.
We have put together a summary below broadly outlining the key changes and when they come into effect.
Policies currently required in SIPs and disclosures currently required in the Trustees’ Report
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The Trustees’ policies in relation to: |
| 1. | Financially material considerations over the appropriate time horizon of the investments, including how those considerations are taken into account in the selection, retention and realisation of investments. |
| a. | Financially material considerations includes environmental, social and governance considerations (including climate change). |
| b. | Appropriate time horizon means the length of time that the Trustees consider is needed for the funding of future benefits by the investments. |
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2.
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The extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments. |
| a. | Non-financial matters means the views of the members and beneficiaries including 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. |
| 3. | The exercise of the rights (including voting rights) attaching to the investments. |
| 4. | Undertaking engagement activities in respect of the investments (including the methods by which, and the circumstances under which, Trustees would monitor and engage with relevant matters). |
| a. | Relevant persons includes an issuer of debt or equity, an investment manager, or another holder of debt or equity. |
| b. | Relevant matters includes matters concerning an issuer of debt or equity, including their performance, strategy, risks, social and environmental impact and corporate governance. |
Policies required in SIPs and disclosures required in the Trustees’ Report from 1 October 2020
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The Trustees’ policies in relation to: |
| 5. | In respect of 4 above: |
| a. | Relevant persons are extended to include another stakeholder (who has an interest in the issuer of debt or equity). |
| b. | Relevant matters are extended to include matters concerning an issuer of debt or equity, including their capital structure and management of actual or potential conflicts of interest. |
| 6. | The Trustees' arrangement with any asset manager, setting out the following matters or explaining the reasons why any of the following matters are not set out: |
| a. | how the arrangement with the asset manager incentivises the asset manager to align its investment strategy and decisions with the Trustees' policies. |
| b. | how that arrangement incentivises the asset manager to make decisions based on assessments about medium to long-term financial and non-financial performance of an issuer of debt or equity, and to engage with issuers of debt or equity in order to improve their performance in the medium to long-term. |
| c. | how the method (and time horizon) of the evaluation of the asset manager's performance and the remuneration for asset management services are in line with the Trustees' policies. |
| i. time horizon means the time period over which the Trustees evaluate the performance of the asset manager. | |
| d. | how the Trustees monitor portfolio turnover costs incurred by the asset manager, and how they define and monitor targeted portfolio turnover or turnover range. |
| i. portfolio turnover costs means the costs incurred as a result of the buying, selling, lending or borrowing of investments | |
| ii. targeted portfolio turnover means the frequency within which the assets of the scheme are expected to be bought or sold | |
| iii. turnover range means the minimum and maximum frequency within which the assets of the scheme are expected to be bought or sold. | |
| e. | the duration of the arrangement with the asset manager. |
Statements required in the Trustees’ Report from 1 October 2020 (DB and DC) and a statement on a publicly available website from 1 October 2021 (DB). |
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Statements which: |
| 7. | set out how, and the extent to which, in the opinion of the Trustees, their policy in relation to the exercising of rights (including voting rights) attaching to the investments and undertaking engagement activities in respect of the investments (including the methods by which, and the circumstances under which, Trustees would monitor and engage with relevant persons about relevant matters) has been followed during the year. |
| 8. | describe the voting behaviour by, or on behalf of, Trustees (including the most significant votes cast by Trustees or on their behalf) during the year and state any use of the services of a proxy voter during that year. |
Statements required in the Trustees’ Report and a statement on a publicly available website by 1 October 2020 (DC). |
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Where the scheme is a relevant scheme within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations 1996, a statement must be included which must: |
| 9. | set out how, and the extent to which, in the opinion of the Trustees, the statement of investment principles has been followed during the year. |
| 10. | describe any review of the statement of investment principles undertaken during the year in accordance with regulation 2(1) of the Investment Regulations and any other review of how the statement of investment principles has been met. |
| 11. | explain any change made to the statement of investment principles during the year and the reason for the change. |
| 12. | where no such review was undertaken during the year in accordance with regulation 2(1) of the Investment Regulations, give the date of the last review. |
Required in a statement on a publicly available website by 1 October 2021 (DC). |
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| 13. | Describe the voting behaviour by, or on behalf of, Trustees (including the most significant votes cast by Trustees or on their behalf) during the year and state any use of the services of a proxy voter during that year (as for point 8 above). |
Extended to cover capital structure, conflicts of interest and other stakeholders in the statement on a publicly available website by 1 October 2021 (DC). |
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| Covering 9 to 12 above. |
If you would like to discuss the new investment requirements and disclosures, please contact your usual Crowe contact.
