Fresh changes to UK investment regulations will likely be a big challenge for UK pension funds, according to lawyers. 

Laid before parliament yesterday, the new regulations implement the revised EU Shareholder Rights Directive (SRD II). The deadline for member states to transpose the legislation is 10 June.

The regulations require trustees to set out in their statement of investment principles (SIP) “their policy in relation to trustees’ arrangement with any asset manager”, setting out – or explaining why they don’t – matters such as:

  • how the arrangement with the asset manager “incentivises” it to align its investment strategy and decisions with the various policies set out in the trustee’s SIP;
  • 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”; and
  • “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 [other policies stated in their SIP]”.

Trustees can also comply with these rules by explaining why they do not have a policy on certain specified matters. They will have to comply with the rules from 1 October 2020.

The regulations come shortly after the UK’s asset management regulator, the Financial Conduct Authority, adopted stewardship rules for asset managers that also implemented the SRD II. It is the second change to UK pension scheme investment regulations in less than a year. 

Stuart O’Brien, partner at Sackers, said the new regulations would be a big change for most trustees, although perhaps more so for those of defined benefit (DB) schemes.

“Not a lot of schemes are currently doing what the new regulations will require them to disclose a policy on,” he said. “It will be interesting to see whether this prompts a complete sea change in how trustees review and incentivise their managers, or whether this will just provide a list of things that trustees just disclose that they don’t do.”

Duncan Watson, senior associate at Mayer Brown, said: “At a time when trustees are already burdened with numerous compliance and regulatory requirements including in relation to the SIP, these regulations may well be a substantial challenge for some trustees.

“While the matters to be included in the SIP will have to be examined closely, it appears from a practical perspective that trustees will need to assess how best to address these areas – in conjunction with their investment consultants and other professional advisers – and these requirements seem to represent a major change of mindset on the part of trustees and managers.” 

In contrast to 2018 changes to pension scheme investment regulations, the new SRD II-implementing rules impose public disclosure requirements on all pension schemes, not just defined contribution (DC) schemes.

O’Brien said: “Many DB trustees may have breathed a sigh of relief with the [2018] investment regulation changes that they don’t have to report annually against their policy and make it public, but with these changes they’re going to have to do exactly that. This is going to apply across the board, DB and DC schemes.”

Under the 2018 changes, schemes will be required to set out their policy on stewardship and on “financially material considerations,” which the rules state can relate to climate change, other environmental matters, and/or social and corporate governance matters. Additional requirements apply for DC schemes, which from October 2020 must annually publicly report how they implemented their SIP.

A partner at a law firm recently told IPE that pressure groups were writing to trustees following the updated investment regulations to ask them how they were going to deal with the new requirements.

“This can be quite unhelpful for trustees,” the lawyer said. “They can feel under undue pressure.”

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