Responsible investment guidance for UK pension pools on hold for now

Guidance will now factor in new government regulations

A plan to develop responsible investment guidance for the UK’s eight new local government pension scheme (LGPS) pools has been temporarily put on hold following the government’s announcement of an update to regulations around fiduciary duty.

The Local Government Pension Scheme Advisory Board (SAB), which helps coordinate technical and standards issues, had been working on guidance for the funds, which have a combined asset base of £259bn (€291bn).

This has now been halted for the time being after the Department of Work and Pensions (DWP) introduced an update to fiduciary duty regulations last week.

Instead, the SAB is working to incorporate the DWP’s amendments into the statutory guidance
on Preparing and Maintaining an Investment Strategy Statement, published by the Department for Communities and Local Government (DCLG) ‒ now the Ministry of Housing, Communities and Local Government (MHCLG) ‒ in July 2017.

Under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, a scheme is required to have an Investment Strategy Statement which sets out “how social, environmental or corporate governance considerations are taken into account”.

In 2017 guidance the department states that schemes may take non-financial factors into account “where they have good reason to think that scheme members would support their decision”.

In contrast, the DWP’s changes to fiduciary duty emphasised the “long-term financial risks and opportunities” presented by ESG considerations, and addressed the “misperception” that these issues were a matter of “personal ethics, or optional extras”.The Scheme Advisory Board will decide whether to recommend any changes to the statutory guidance at the next meeting of MHCLG ministers, scheduled for October 10.

“Just to be clear, we have not abandoned the RI guidance.”

As a statutory guidance, the MHCLG guidance has a higher level of compliance than any issued by the SAB ‒ including the RI guidance.

SAB Secretary, Bob Holloway, told RI: “Just to be clear, we have not abandoned the RI guidance. It will continue to publication, hopefully by early next year.”

While the changes in regulations announced by the DWP are aimed at trust-based pensions funds and not statutory schemes like the LGPS pools ‒ which are regulated by The Pensions Regulator ‒ Holloway said the Board “has always been keen to replicate legislation applying to trust-based funds where appropriate”.

The RI guidance is under the purview of the Board’s Investment, Governance and Engagement sub-committee, and a draft version has been put forward for consideration at least since May 2017.

Contract-based schemes are the other most common legal structure for pensions in the UK and are regulated by the Financial Conduct Authority (FCA). For these schemes, a consultation on new guidance to incorporate “evaluating ESG considerations, including climate change” and “members’ ethical concerns” is due to take place in the first quarter of 2019.