UK: Changes To The Requirements For The Statement Of Investment Principles

Last Updated: 11 September 2019
Article by DLA Piper

Two sets of regulations have been made over the last year which amend the legislation relating to the Statement of Investment Principles (SIP) and disclosure.

Regulations were made in September 2018 amending the information to be included in the SIP and introducing additional requirements for certain schemes to publish their SIP and produce an implementation statement. Another set of regulations followed in June 2019 (which were made to implement provisions of a European Directive) requiring further information to be included in the SIP and making further provision in relation to publication of the SIP and reporting on how certain investment matters have been addressed. For some provisions the position is complicated by the fact that the June 2019 regulations make amendments to the September 2018 regulations.

Under the two sets of regulations there are a number of different deadlines and requirements, depending in some cases on the type of scheme. It is important for trustees to understand which requirements and deadlines apply to them. In this Pensions Alert we provide an overview that brings together a timeline of the key requirements contained in the September 2018 regulations and the June 2019 regulations.

Types of scheme

Some of the new requirements only apply to "relevant schemes" and some only apply to schemes that are not relevant schemes. A relevant scheme means a scheme which provides money purchase benefits (although this is subject to certain exceptions including schemes in which the only money purchase benefits are attributable to AVCs). This means that hybrid schemes which have a DB section and a DC section from sources other than AVCs will be relevant schemes unless they fall into any of the other limited exceptions.

In this Pensions Alert we use the term "relevant scheme" as it is defined in the legislation and we use the term "DB scheme" to mean a scheme that only provides DB benefits or only provides DB benefits and money purchase AVCs.

Changes with a relevant date of 1 October 2019

Changes that apply to all schemes required to prepare a SIP

By 1 October 2019 trustees of all schemes required to prepare a SIP will need to update their SIP so that it covers their policies in relation to:

  • financially material considerations over the appropriate time horizon, with financially material considerations defined as including but not being limited to "environmental, social and governance considerations (including but not limited to climate change), which the trustees of the trust scheme consider financially material";
  • the extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments; and
  • the exercise of the rights (including voting rights) attaching to the investments, and undertaking engagement activities in respect of the investments including the methods and circumstances for monitoring and engaging with certain "relevant persons" (such as an issuer of debt or equity) about "relevant matters" (such as the performance and strategy of an issuer of debt or equity).

The legislation also requires these policies to be included in the Annual Report for the scheme. Whilst this requirement comes into force on 1 October 2019, given that schemes have to prepare their Annual Report within seven months of the end of the scheme year, in our view this means that trustees will have to include these new policies in the first Annual Report that they prepare on or after 1 October 2019.

Changes that apply to relevant schemes

By 1 October 2019 trustees of relevant schemes will have to make their SIP publicly available on a website, free of charge. The legislation also requires them to inform scheme members of the availability of the SIP via the annual benefit statement and therefore trustees will need to ensure that statements issued after the SIP has been published include this information.

Trustees of relevant schemes are also subject to a requirement to include additional information in their SIP about the default arrangement and this will need to be updated to include their policies on financially material considerations and non-financial matters. Trustees of relevant schemes with 100 or more members will also have to update the SIP for the default arrangement to include the trustees' policy on the stewardship matters referred to above. The SIP for the default arrangement will have to be updated by 1 October 2019.

Changes with a relevant date of 1 October 2020

Changes that apply to all schemes required to prepare a SIP

By 1 October 2020 trustees of all schemes required to prepare a SIP will need to update their SIP so that it includes their policy in relation to their arrangement with any asset manager. This policy must address specified matters, or explain the reasons why they are not set out, including how the arrangement incentivises the asset manager to align its investment strategy and decisions with the trustees' investment policies, and how the 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.

The policy in relation to arrangements with asset managers will have to be included in the Annual Report for the scheme and, given the timing requirements for the Annual Report, in our view this means that the trustees will have to include this policy in the first Annual Report that they prepare on or after 1 October 2020.

As set out above, amendments have been made to the requirement for policies on stewardship so that by 1 October 2019 trustees will have to update the SIP to include their policy on the exercise of the rights (including voting rights) attaching to the investments, and undertaking engagement activities in respect of the investments including the methods and circumstances for monitoring and engaging with certain "relevant persons" about "relevant matters". The regulations made in June 2019 make amendments to the definition of relevant persons and add capital structure and management of actual or potential conflicts of interest to the list of relevant matters. The policies will have to include these points by 1 October 2020.

Changes that apply to relevant schemes

The policy in relation to arrangements with asset managers and the additional information in the policy on stewardship will also have to be included in the SIP for the default arrangement for relevant schemes with 100 or more members by 1 October 2020.

The legislation includes provision which comes into force on 1 October 2020 requiring trustees of relevant schemes to produce an implementation statement as part of their Annual Report. Issues to be reported in the implementation statement include: how, and the extent to which, the SIP has been followed during the year; any review of the SIP undertaken during the year; and any change made to the SIP during the year. The June 2019 regulations add a further requirement for the implementation statement to report on voting behaviour by or on behalf of the trustees during the year. The implementation statement will also have to be published.

Whilst the provisions relating to the implementation statement come into force on 1 October 2020, the legislation does not expressly set a deadline for producing that statement. However, given that the implementation statement must be included in the Annual Report, in our view the deadline for the Annual Report will also apply to the implementation statement. This means that the first implementation statement should be produced in time to be included in the first Annual Report produced on or after 1 October 2020.

In terms of timing for the publication of the implementation statement, the September 2018 regulations do not set out a specific deadline and therefore we think that trustees should publish the implementation statement once it has been included in the Annual Report. It is also worth noting, as set out below, that the June 2019 regulations contain a specific deadline of 1 October 2021 for the publication of certain information.

The legislation also makes provision for the trustees of relevant schemes to inform scheme members of the availability of the implementation statement via the annual benefit statement. Trustees will therefore need to ensure that statements issued after the implementation statement has been published include this information.

In the section below about DB schemes we note some additional information to be included in the Annual Report about stewardship and voting behaviour. It is worth noting that this requirement applies to all schemes required to prepare a SIP and not just DB schemes. However, it seems to us that this repeats information that will already be included in the implementation statement for relevant schemes and therefore it is not necessary for this information to be set out twice in the Annual Report.

Changes that apply to DB schemes

By 1 October 2020 trustees of DB schemes will have to make their SIP publicly available on a website, free of charge.

Provisions of the legislation which come into force on 1 October 2020 require trustees of DB schemes to include information in their Annual Report about how their policy on stewardship has been followed and describing the voting behaviour by or on their behalf during the year. As for other provisions described in this Pensions Alert, in our view, the deadline for the Annual Report will also apply in relation to producing this information. This means that the first report on these matters should be included in the first Annual Report prepared on or after 1 October 2020, although trustees should also bear in mind the deadline for publication below.

Changes with a relevant date of 1 October 2021

The June 2019 regulations include transitional provisions which expressly set out deadlines for certain information to be made publicly available on a website. These provisions include that by 1 October 2021:

  • trustees of DB schemes will have to publish their first report on how their policy on stewardship has been followed and describing voting behaviour; and
  • trustees of relevant schemes will have to publish information in their implementation statement on voting behaviour and how the additional matters in the stewardship policy have been followed. Whilst this provides a longstop date for the publication of certain information contained in the implementation statement, in practice we expect that trustees may want to publish all of their implementation statement at the same time even if that means publishing this information in advance of 1 October 2021.

Regulatory Guidance

On 27 June 2019 the Regulator published an updated version of its guidance on investment governance for DC schemes which incorporates information on these regulations. This covers matters such as: consideration of environmental, social and governance issues; identifying and assessing whether the financial factors of the investment plan are material or not; non-financial factors and seeking members' views; and matters which might be included in the implementation statement.

The Regulator has not yet updated its guidance for DB schemes to reflect the new requirements and therefore trustees should bear in mind that further information may follow to assist them in relation to how to comply.

In relation to publishing the SIP and other information, in September 2018 the DWP updated its statutory guidance about reporting on costs and charges so that it also covers the requirements for trustees of relevant schemes to publish their SIP and implementation statement. The guidance looks at matters to which trustees should have regard and, for example, states that the information should be published in a manner which allows for the content to be indexed by search engines and that it should not be necessary to enter a user name or password to view the information. Whilst this guidance has not been updated to refer to the requirements for DB schemes to publish their SIP and report on stewardship and voting behaviour, we expect the same principles to apply.

Action points for trustees

Trustees should identify which requirements apply to their scheme and the relevant deadlines, and liaise with their advisers and consult with the employer in order to update their SIP. At the appropriate time, they will also need to produce information to be included in the Annual Report and publish their SIP and other information on a suitable website.

In particular, with the first deadline of 1 October 2019 fast approaching, trustees should ensure that their SIP will be updated in time, and trustees of relevant schemes should ensure that the SIP will be published in time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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