Articles - Further changes to SIP requirements for trustees

On 6 June 2019, the Government introduced further regulations which will extend the disclosure requirements for trustees of defined contribution (DC) and defined benefit (DB) schemes in relation to their Statement of Investment Principles (SIP) and annual reports. Most trustees will have already prepared for the amended disclosure requirements that have been applied from 1 October 2019.

 By Guy Plater, Head of Investment, London at XPS Pensions Group

 These were set out in regulations issued in September 2018 and affect trustees of all occupational pension schemes that are required to produce a SIP (those with at least 100 members) who will be required to prepare or update it to include their policies in relation to:
 • financially material considerations over the appropriate time-horizon of the investments, including how they are taken into account in investment decision making (financially material considerations include environmental, social and governance (ESG) factors);
 • the extent to which non-financial matters are taken into account in investment decision-making;
 • the stewardship of investments, including the exercise of voting rights associated with, and the undertaking of engagement activities in respect of, those investments.

 These policies must also be included in the annual report.

 The June 2019 regulations have been introduced to implement certain requirements of the EU Shareholder Rights Directive II. They extend further the disclosure and stewardship requirements for both DB and DC scheme trustees in relation to their SIP.

 New information to be included in a SIP from 1 October 2020
 From 1 October 2020, trustees of all schemes that are required to produce a SIP must include (or explain why they have not included) their policies on the following:
 • how their arrangement with their asset manager(s) incentivises them to:
 align their investment strategy and decisions with the trustees’ investment policies set out in the SIP;
 make decisions based on assessments of medium to long-term financial and non-financial performance of an issuer of debt or equity;
 engage with such issuers of debt or equity to improve their performance in the medium to long term.
 • how, and over what time horizon, the evaluation of the asset manager’s performance and remuneration is in line with the trustees’ investment policies;
 • how the trustees monitor portfolio turnover costs; and
 • the length of the arrangement with the asset manager.

 The trustees’ stewardship policy must also be expanded from 1 October 2020 to include how and when they would monitor and engage with an issuer of debt or equity about their capital structure and management of actual or potential conflicts of interest.

 Extension of requirement to publish SIP online
 From 1 October 2019, there is already a requirement for trustees of ‘relevant schemes’ (broadly, most DC schemes) to publish their SIP on a publicly available website, free of charge, and signpost members to it in their annual benefit statement. From 1 October 2020, the new regulations extend this requirement to trustees of DB schemes that are required to produce a SIP.

 Additional requirements for default investment arrangements
 There is already a requirement for trustees of relevant schemes, regardless of their size, to produce a separate SIP covering their default investment arrangement.

 Since 1 October 2019, this must include the trustees’ policies on financially material considerations and non-financial matters in respect of that default arrangement. Furthermore, where the relevant scheme has at least 100 members, this SIP must include the trustees’ policies on the stewardship of investments in that arrangement.

 Extension of implementation statement
 From 1 October 2020, there is a requirement for trustees of relevant schemes to include an implementation statement in their annual report, which broadly sets out:
 • how, and the extent to which the SIP has been followed during the year;
 • any review of the SIP that has taken place during the year, with subsequent changes explained, or if there has been no review, the date of the last review.

 All other schemes that are required to produce a SIP will also now be required to include an implementation statement in their annual report and, by 1 October 2021, to publish on a publicly available website. The implementation statement will cover:
 A. the voting behaviour during the past year, including the most significant votes cast, and stating whether any proxy voting has been used;
 B. the extent to which the policies in their SIP on the exercise of voting rights, stewardship and engagement activities have been followed during the scheme year.

 TPR’s updated guidance
 The Pensions Regulator (TPR) has updated its guidance on DC investment governance to incorporate these changes. This provides further guidance on stewardship and the scope of ‘financially material considerations’, and also clarifies what the implementation statement must include.

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