Statements of investment principles: what is changing?

On 1 October 2019, the first of two sets of changes relating to schemes’ statements of investment principles took effect.  The second set of changes will apply from 1 October 2020.  In this article, we look at what is changing, and at what trustees need to do.

What changed on 1 October 2019?


The SIP of a DB or DC scheme with 100 or more members must now state the trustees’ policy in relation to:

  • Taking account of “environmental, social and governance considerations (including but not limited to climate change), which the trustees … consider financially material” over “the length of time that the trustees … consider is needed for the funding of future benefits by the investments of the scheme” when making investment decisions;
  • Taking account of “the views of the members and beneficiaries including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life of the members and beneficiaries of the … scheme” when making investment decisions; and
  • “The exercise of the rights (including voting rights) attaching to … investments … and… undertaking engagement activities in respect of the investments …including the methods by which, and the circumstances under which, trustees would monitor and engage with relevant persons about …performance, strategy, risks, social and environmental impact and corporate governance”.

For the trustees of all DC schemes or sections, including ones with less than 100 members, there are also new requirements for the SIP for the default arrangement.

DC scheme trustees also have other duties: publishing the SIP on a publicly accessible website; preparing and publishing (from October 2020) on a website an ‘implementation statement’ to confirm the extent to which, for example, the policies in the SIP have been followed; and signposting members to website information.

What will change on 1 October 2020?


In 2017 an EU Directive (widely known as ‘SRD II’) made a number of changes to the original Shareholder Rights Directive in order to “encourage long-term shareholder engagement and … enhance transparency between companies and investors”.   EU member states had until June this year to transpose those changes into national law and The Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019 now require that, by 1 October 2020:

  • The trustees of DB or DC schemes with 100 or more members must update their SIP (and any DC default SIP) to include their policy in relation to a number of points concerning their “arrangement with any asset manager”. The policy must cover five points, including: (i) “how the arrangement … incentivises the asset manager to align its investment strategy and decisions with the trustees'” wider investment policy (for example, on the kinds of investment to be held and on ESG); (ii) “how the method (and time horizon) of the evaluation of the asset manager’s performance and the remuneration for asset management services are in line with the trustees'” wider investment policy; (iii) how the trustees monitor “portfolio turnover costs” and the frequency with which assets are bought and sold; and (iv) the length of the arrangement with the asset manager. If any of the five points are not covered, the trustees’ policy must explain why.
  • The trustees of DB or DC schemes with 100 or more members must update the part of their SIP relating to engagement activities / stewardship to reflect the fact that the list of ‘relevant persons’ to engage with has been extended and the list of ‘relevant matters’ that they need to consider engaging on will now include “capital structure [and] management of actual or potential conflicts of interest”.
  • The trustees of DB schemes with 100 or more members must publish their SIP on a website so that it is “publicly available free of charge”. (This will bring DB schemes into line with DC schemes, which must do this from 1 October 2019.)

In addition, by 1 October 2021:

  • The trustees of DB schemes with 100 or more members will need to include in their annual report, and publish on a website so that it is “publicly available free of charge”, both a statement as to how they have complied with their (updated) policy on the exercise of voting rights and engagement activities / stewardship over the last year, and a statement about how they have exercised voting rights in the last year (“voting behaviour by, or on behalf of, trustees (including the most significant votes cast by trustees or on their behalf) during the year and state any use of the services of a proxy voter during that year”); and
  • The trustees of DC schemes will need to include in their annual report / annual ‘implementation statement’ (and so publish online) both details of how they have complied with their (updated) policy on engagement activities / stewardship, and a statement about how they have exercised voting rights in the last year.

What do trustees need to do?


Trustees should already be compliant with the 1 October 2019 changes.  They now need to understand how the 2020 changes will apply to them and start working to achieve compliance.

Trustees will need to take investment advice.  They might also need to take legal advice.  The Pensions Regulator has issued guidance for the trustees of DC schemes and for the trustees of DB schemes (although, in practice, DB scheme trustees are likely to find parts of the DC guidance helpful too).  The Pensions and Lifetime Savings Association has also issued a guidance note on ESG and stewardship.

Open Trustees comment


These changes are part of a series of developments intended to improve transparency around investment and oversight of scheme investments.  They confirm the importance of pension scheme trustees: understanding and giving proper consideration to environmental, social and governance (ESG)  factors in investment strategy and decisions; and playing a stronger role in the oversight of scheme investments.

The changes are also accompanied by a wider recognition of the importance of environmental risk.

The Pensions Regulator, the Prudential Regulatory Authority, the Financial Conduct Authority and the Financial Reporting Council recently issued a joint statement in which they welcomed the government’s July 2019 green finance strategy.  In the statement, the Pensions Regulator confirms that “[c]limate change is a risk to long-term sustainability pension trustees need to consider when setting and implementing investment strategy, while many schemes are also supported by employers whose financial positions and prospects for growth are dependent on current and future policies and developments in relation to climate change”.

The potential impact of climate change on employer covenant was mirrored by the Employer Covenant Practitioners Association, which responded to the joint statement by confirming that “[s]cheme sponsors’ businesses in some sectors are already being affected by both the transitional risks of the move to a lower-carbon economy; and weather-related events”.  The Association urges covenant advisers to “make sure they consider fully the implications of climate change in their work ” … (and “specifically … comment on potential transitional risks if these are relevant; and, where practical and appropriate, physical risks such as weather events”) … “and for sponsors and pension trustees to give proper consideration to such matters in their deliberations”.

The Pensions Regulator is also part of an industry working group on climate change, and plans to consult on guidance for pension schemes on “climate-related practices across governance, risk management, scenario analysis and disclosure” (that is, guidance on Task Force on Climate-Related Financial Disclosures for pension schemes) as part of a new governance code.

2 October 2019