Pensions and ESG – the DWP strikes back

1 October 2020

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Regardless of whether it’s one of the recent extreme weather events or one of the many game-changing implications of the Covid-19 pandemic, the events of 2020 have given environmental, social and governance (ESG) investing a sharper and more calculated focus.

In parallel, a raft of regulatory proposals are being introduced across the industry and for trustees of occupational pension schemes, all eyes are on the eagerly anticipated second round of Department for Work and Pensions (DWP) requirements which come into effect from 1 October 2020.

A re-cap on the 2019 changes

New legislation was introduced by the DWP on 1 October 2019 which requires trustees to consider ESG factors in their investment decisions. In particular, trustees are now required to include in their Statement of Investment Principles (SIP) explicit policies in relation to:

  • How they take account of financially material considerations (including ESG factors) in their investment decision making.
  • How they undertake engagement activities and exercise rights that attach to their investments.
  • The extent (if at all) to which non-financial matters (such as members' views) are taken into account in the selection, retention and realisation of investments

That’s not all, because trustees must now publish their SIP on a publicly available website. This means they are now faced with a heightened level of public scrutiny.

Episode two - October 2020

With the 2019 requirements now firmly embedded, the focus shifts to the DWP’s next instalment of requirements. From 1 October 2020, trustees will need to set out in their SIP a range of matters in relation to their arrangements with their asset managers. This includes how that arrangement incentivises the asset manager to align the investment strategy with the trustees’ investment policies (including policies on ESG).

In addition, trustees will be required to publicly produce an implementation statement which must disclose how they have acted on the principles in their SIP. This will force trustees to report on the implementation of their ESG policies, engagement activities and voting.

This statement must be included in the first annual report and accounts produced after 1 October 2020. This is about more than ticking some boxes and inserting some new words in the SIP. This is about making sure trustees are in a position to meaningfully challenge their investment advisers and asset managers and demonstrate that they’re taking ESG considerations seriously. If they can’t demonstrate this, then trustees run the risk of facing criticism from both the Pensions Regulator (TPR) and scheme members not to mention reputational damage and legal challenges. The stakes have well and truly been raised.

Contract-based pension schemes aren’t off the hook either. New requirements were introduced for Independent Governance Committee’s in April 2020 to report on their firms’ ESG policies. On top of that, there is a proposed amendment to the UK Pension Schemes Bill which will align pension schemes with the goals of the Paris Agreement accord as well as the EU’s ambitious Sustainable Finance Action Plan which is set to propel sustainability into the heart of the financial advice process.

Reading between the various lines, it’s clear that both regulators and policymakers are determined to use pension assets to support a sustainable future.

About the author

Ryan Medlock

Senior Investment Development & Technical Manager

Ryan’s journey with Royal London began back in 2008 after starting his career in compliance with Norwich Union. As an Investment Proposition Manager, Ryan contributed to the growth and development of Royal London’s Governed Range before moving to Aberdeen Standard Investments for a stint in the Strategic Client’s relationship team. Ryan returned to Royal London in 2018 with a focus on exploring adviser angles amongst complex regulation and investment themes. Ryan is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Ryan holds the IMC qualification. Ryan is particularly proud of the fact that he finished 952nd in the 2008/09 edition of Fantasy Premier League.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.