The UK’s pension fund lobby group has warned against rushing to introduce additional regulatory requirements after an advocacy group reported that many pension schemes had not met new disclosure obligations relating to environmental, social and governance (ESG) matters.

Effective 1 October last year, trust-based defined contribution (DC) schemes with more than 100 members have to have updated their statement of investment principles (SIP) to document their approach to financially material considerations, which include ESG considerations such as climate change.

The SIP has to be published on a website and there is also a requirement to state a stewardship policy.

From October this year, schemes will have to publish statements explaining how their policies have been implemented.

Yesterday, the UK Sustainable Investment Forum (UKSIF) said a review it carried out “indicate[s] large scale non-compliance among trustees, who have mostly failed to publish their SIPs as the ESG regulations require”.

Of a sample of 70, two-thirds of schemes UKSIF believed should have published their SIPs had not done so by mid-November. Among those who did, the policies were “vague and non-committal”, said UKSIF, which is a membership organisation for finance industry entities committed to growing sustainable finance.

It called on The Pensions Regulator (TPR) to carry out a review to investigate levels of compliance in the UK pensions sector and for the government to set up a central registry to host trustees’ policies on ESG issues as many pension schemes did not have websites.

It also said government and TPR should provide trustees with more guidance to educate them about how to manage climate-related financial risk.

Guy Opperman, pensions minister, said he was “very disappointed and very concerned” by the findings.

“UKSIF should pass the information to TPR for it to take swift action against any pension schemes not complying with the law,” he added.

“The new requirements only came into force in October so we should expect disclosure to evolve quickly over the next few years”

Caroline Escott, policy lead for investment and stewardship at the PLSA

Caroline Escott, policy lead for investment and stewardship at the Pensions & Lifetime Savings Association (PLSA), said it strongly urged all schemes to put searchable disclosures online as required under the new regulations.

She also said disclosure was “one part of a complex and evolving process” for trustees.

“The new requirements only came into force in October 2019 so we should expect disclosure to evolve quickly over the next few years,” she added. “Introducing hasty extra regulatory requirements is unlikely to result in any tangible benefits.”

What does the regulator have planned? 

A spokesperson for TPR said the regulator will be “developing a strategy to set out the improvements we expect over a specific time period”.

“This is likely to include steps to identify non-compliance and plans for when we will routinely enforce against the requirements. We may take action ahead of this against schemes where a failure to engage with climate risk and other ESG requirements appears to be part of a pattern of wider governance failings.”

As part of its new supervision TPR was already talking to trustees of major schemes to make sure they were aware of their responsibilities to comply with the October 2019 investment regulations.

The spokesperson also noted the work TPR was doing with government and industry bodies to develop guidance to help trustees identify, assess and disclose their scheme’s exposure to climate risk. The guidance is due to be published for consultation in March.

TPR published guidance on the new SIP requirements for DC schemes in late June last year.

The only way is up?

Stuart O’Brien, partner at law firm Sackers, said UKSIF’s report included “some pretty bruising findings” but that it arguably was not surprising pension schemes had adopted stock wording for their expanded SIPs.

“My sense is that in a lot of cases that was a conscious choice to get compliant by the deadline, but with a view to spending more time developing more comprehensive policies this year and in time for the next SIP update deadline of October 2020,” he said.

“I am hopeful that things will get a lot better this year.”

Simon Jones, head of responsible investment at Hymans Robertson, welcomed UKSIF’s recommendations and said many trustees were “only at the starting point of their journey”.

“We expect they will continue to evolve their approach to climate change investing and develop their policies over coming months and years,” he said.

“Like everyone – politicians included – schemes are at the start of a steep learning curve on ESG matters”

Terry Saeedi, pensions partner at Clyde & Co

Terry Saeedi, a pensions partner at Clyde & Co, expressed a similar sentiment, saying that pension scheme trustees – like politicians and others – “are at the start of a steep learning curve on ESG matters”, in particular with respect to climate change.

“Focusing on granular detail – such as poor publication rates of policies like the statement of investment principles – risks missing the point, while leaving us on the burning platform,” she said.

She also questioned the efficacy of “additional regulatory burdens”, saying supporting pension schemes to put ESG matters at the heart of their investment strategy was a better approach, and that pressure from within the pensions industry, such as the red voting lines campaign developed by the Association of Member Nominated Trustees, and growing activism by members, were also likely to be more persuasive.

Robertson said that by dealing with members’ climate change-related demands now, “trustees may find they foster a more engaged environment with a membership that feels part of the decision”.

UKSIF’s report can be found here.

 

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